This article first appeared in The Edge Financial Daily on March 16, 2020

KUALA LUMPUR: What a week for equities! Markets across the globe tumbled, losing some 10% of their value in just five days as concerns over the Covid-19 pandemic and oil price crash intensified, with Wall Street ending its decade-long bull run.

More and more, investors are being spooked by the bear market narrative. At home, the FBM KLCI has declined by 15.4% since the start of the year.

Volatility has, meanwhile, become a prevailing theme. Having lost over 18% between last Monday and Thursday, the Dow Jones Industrial Average gained 9.36% last Friday, hinting towards a potential rebound for the regional markets today.

How should investors treat equities now? We speak to managers and analysts on how to navigate this current storm — whether to use an umbrella or to stay indoors, to dry your clothes now or wait for the sun.

It is a trading market

Some see the convergence of the pandemic and the oil price crash as a once-in-a-lifetime investment opportunity, with the view that shares are as cheap as they get in the current range.

“The market will continue to be very volatile,” a senior analyst quipped. “This is currently a trading market,” he said, pointing out to the big swings — both down and up.

When contacted, PMB Investment Bhd chief executive officer (CEO) Najmi Mohamed said whether an investor should stay invested depends on the amount of time willing to be spent observing the trends.

Pointing to the 2008 crash, Najmi sees a market rebound after it hits a certain low. “While markets are likely to remain weak in light of the ongoing global sell-off, we would be positioning in rebound plays on weakness.”

“Active trading and discipline will be of importance in this kind of market,” said Najmi, who oversees RM1.2 billion of funds under management.

“If you don’t have the passion and risk tolerance to do so, you should forget about the market and come back when the dust settles,” Najmi said.

Take profit, average down

Consider an investor who has both the passion and risk tolerance. There is bound to be some gainers and losers in the existing investment portfolio — and further risk and opportunities ahead.

Many pointed out that cash is king during periods of uncertainty and suggested dumping shares to hoard cash.

However, Areca Capital Sdn Bhd CEO Danny Wong Teck Meng said it is “too drastic and too late” to walk away from the market entirely now, considering the losses to be booked and the opportunities to be missed.

“You should be selling when the market was at its peak, not when it is at a low,” said Wong, who oversees RM1.59 billion of funds under management.

“If you have lost 30% in counter A but there is an opportunity for similar or bigger gains in counter B, then it makes sense to switch your portfolio,” Wong said.

TA Securities head of research Kaladher Govindan agreed that it is too late for investors to sell now to cut loss.

“We suggest investors to average down on their lost stock position, or consider accumulating other undervalued stocks,” said Kaladher.

PMB’s Najmi concurred. “For the loss-making ones, we believe you should take a rational approach and question yourself if the selling is overdone and consider to average down the position if the stock is undervalued.”

Najmi also suggested taking profit on stocks with stretched out valuations.

“We believe the counters with stretched valuation will be the first to suffer price correction as the market came off from a multi-year bull run,” said Najmi. “When times are tough, we should always go back to fundamentals.”

Do not predict the bottom, accumulate slowly

In preparing for the bargain hunting, Areca Capital’s Wong said the fund management outfit has a ratio of about 30% cash to hunt for bargains presently.

Wong recalled the time when Areca Capital upped the cash ratio to as high as 50% around the peak of the 2008 financial crisis, and accumulated stocks to an eventual equity ratio of 90%. In the two years of 2008 and 2009, Areca Capital outperformed the KLCI with a net gain percentage in the high teens, he said.

He advised against trying to predict when the market will actually bottom. “We don’t know when is the best time to enter. So long as we see deep value we start to accumulate, maybe from now until April,” said Wong.

Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng concurred on the notion not to acquire shares in one go. “I think investors should spread out their buying to achieve diversification on their entry points,” Ang said.

Go long, buy cheap, seek dividend and cash

Generally, a bad market provides an opportunity for investors with strong holding power.

Areca Capital’s Wong suggested accumulating stocks which are not affected by the current headwinds, but with a good cash position and dividends.

“Stay disciplined and stay focused on the long-term prospects. It will surprise you,” said Wong.

Phillip Capital’s Ang, meanwhile, said investors should hold onto their positions or be prepared to start picking up stocks for long-term investment.

“This looks like a technical recession to me which presents a good window opportunity to accumulate stocks that are fundamentally good,” Ang said.

Among sectors worth looking out for are utilities and banks for steady dividends, healthcare due to the ongoing pandemic uncertainties, as well as technology counters for their long-term growth prospects. An investor can also look into past records to see which companies or which sectors outperform during the bad days (see table).

Still far off the bottom?

How long it will take before the dust settles is really anybody’s guess. Pundits are largely anticipating downward pressure to dissipate when the Covid-19 outbreak slows and the components of the global economy resume business as usual — with many analysts pointing out to a recovery in the second half of the year.

Additionally, recovery also hinges on the balancing of the supply-demand mechanism in the crude oil market. Analysts pointed out that in the past, it took about one year before Opec and countries allied to the oil cartel reviewed their positions when a price war blew up.

However, pundits opined that Saudi Arabia and Russia may come back to the negotiation table as early as within the first half of this year as they themselves are not spared from the negative impact of the oil price in the current range of US$35 (RM150) per barrel.

Comparatively, during the 2008 global financial crisis, the KLCI lost some 45% of market capitalisation from the peak in one year, before bottoming out.

In the 1997 Asian financial crisis, it took more than 18 months for the benchmark index to hit the bottom, shredding off 79% of market capitalisation in the process.

Over the last one year, the KLCI has lost 20% of its market capitalisation to its current level of 1,344.75 (see chart).

“With all the bad news coming out in one go, we think that the bottom for the FBM KLCI is around 1,300 points,” TA’s Kaladher said. “This presents a good buying opportunity. In fact our advice to clients is to start accumulating when the index hits 1,320.”

But of course, it is not an apple-to-apple comparison, as the current conundrum is set on the back of an already weak global economy, hit by the double whammy of the Covid-19 global pandemic and the second oil price crash in a span of just five years.