Thursday 28 Mar 2024
By
main news image

This article first appeared in Capital, The Edge Malaysia Weekly, on January 18 - January 24, 2015.

asian-stock-markt_cap36_Tem1093_theedgemarkets

ANDREW Roberts, head of European economics at the Royal Bank of Scotland (RBS), told his clients in a note on Jan 12 that they should sell everything except high quality bonds as the year is going to be “cataclysmic”.

While it may seem like a dramatic statement, “dramatic” is an appropriate word to describe the performance of stock exchanges worldwide so far this year. It is estimated that US$1.6 trillion worth of equities have been wiped out from the global stock markets to date, only two weeks into the new year.

On the first trading day of the year, the Shanghai Shenzhen CSI 300 Index triggered its circuit breaker after falling more than 7%, resulting in market mayhem worldwide. The Hang Seng Index fell 2.68% while the Shanghai Composite Index plunged 6.86%.

The Standard & Poor’s 500 fell 1.5% and Dow Jones Industrial Average closed 1.47% lower on Jan 4. The FTSE 100 Index decreased 2.39% on the same day while Deutsche Bourse DAX plunged 4.28%.

The heavy selling seen in Chinese stocks also affected the FBM KLCI, which fell by 39.14 points or 2.31% to 1,653.37 points on Jan 4. As at last Friday, the local benchmark index has fallen 3.78% since the start of the year to 1,628.55 points. Other regional stock markets are also mired in losses.

After going through a year of distress in 2015, some are hoping 2016 will be a better year for Asian stock markets. UOB Kay Hian is forecasting that the FBM KLCI will end the year at 1,750 points while Affin Hwang Capital has a year-end target of 1,793 points.

UOB Kay Hian expects the benchmark index to trade between 1,630 and 1,810 points throughout the year, with the former being the trough.

However, the fact that the stock market did not have a promising start is worrying and may be a sign that things will get worse. Some say it was the worst start for the global stock markets since 2000.

From the start of the year to last Friday, the Hang Seng Index has fallen 10.92% to 19,520.77 points — the lowest level in a year. Similarly, the Shanghai Composite Index has seen a negative performance, plunging 18.03% to 2,900.97 points. In Singapore, the Straits Times Index fell to its lowest level in one year last Friday at 2,630.76 points.

The worst start for stock markets in 16 years was triggered by poor economic data from China as well as the gradual depreciation of the renminbi. The weakening Chinese currency points to a weaker performance by the world’s second largest economy.

“It is coming to a head whereby investors are dumping stocks for fear of a rapid devaluation of the renminbi,” says Pong Peng Siew, head of research at Inter-Pacific Research. “Investors have to deal with the impact of the gradual devaluation of the renminbi.

“Worse still if the [Chinese] central bank allows the currency to drop overnight … there will be havoc in the stock market. That is what happened back in 1994,” Pong tells The Edge.

In 1994, China undertook sweeping currency reforms by unifying its two different exchange rates — the ofcial and swap market exchange rates — and devaluing the official rate by 50% to 8.70 to the greenback.

Some economic scholars opine that the devaluation led to a downward pressure on other Asian currencies, which appeared to have been overvalued at the time given the influx of foreign capital. Hence, they believe the devaluation of the renminbi, to a certain extent, played a role in the 1997/98 Asian financial crisis.

Since 2005, China has opted for a managed floating exchange rate regime, allowing its currency to float against the US dollar. The renminbi trades within a band set by its central bank, the People’s Bank of China. The band started at 0.3% in 2005 and has gradually increased over the years.

In August last year, China increased the trading band to 2% from 1.5%. This led to a rapid fall in global currencies and stock markets. During the month, the ringgit depreciated 9.8% against the greenback — the steepest of all the months last year.

Much of the concern over China’s economy was caused by the Caixin Manufacturing Purchasing Managers’ Index (PMI). The index stood at 48.2 in December, lower than November’s 48.6, indicating a contraction in China’s manufacturing sector.

This, in turn, may signal a further slowdown in demand from both the local and international markets, as China is the largest trading country in the world. Its PMI has been below 50 since February last year.

As at last Friday, renminbi traded in Hong Kong — an offshore market for the currency — was valued at 6.6169 to the US dollar while that in the onshore market in mainland China was 6.5852. A year ago, offshore renminbi was traded at 6.2183 while the onshore currency was exchanged at 6.2141.

In that famous warning to investors, RBS’ Roberts said the world is in a currency war, with global disinflation turning into global deflation as China finally realises what it needs to do, which is devalue the renminbi — soon and sharp.

“We think investors should be afraid. This terrible cocktail means investors should now be thinking about getting a return of capital, not return on capital,” Roberts said, comparing the market mood with that of 2008 before the collapse of Lehman Brothers.

In Malaysia, however, some analysts and investment bankers are still optimistic. They say the bearish market sentiment is temporary and there are a lot of undervalued stocks with strong fundamentals to invest in.

“There are so many undervalued companies. Look at the export-oriented companies — they are valued at below net tangible assets. There are a lot of opportunities for bottom picking now,” says an equity investment officer with CIMB Investment Bank Bhd, who declined to be named.

He adds that a weaker ringgit will attract more investments and buyouts, especially from Chinese companies.

China General Nuclear Power Corp bought Edra Global Energy Bhd for RM9.83 billion in November last year.

On Dec 31, 2015, 1Malaysia Development Bhd announced that a consortium, consisting of Iskandar Waterfront Holdings Sdn Bhd and China Railway Engineering Corp (M) Sdn Bhd, bought a 60% stake in Bandar Malaysia for RM7.41 billion.

This is in addition to the billions pumped by Chinese companies into the Malaysian property market over the last three years. The Chinese are also lobbying hard to win the Kuala Lumpur-Singapore High-Speed Rail project.

“Politics and sentiments aside, I really think that China will continue to invest in Malaysia. We should not underestimate that,” says the banker. “The stock market will continue to be volatile, and it will be the survival of the fittest among investors.”

Affin Hwang Investment Bank Bhd opines that the current weakness in the stock market is temporary. In a report dated Jan 14, it says the stock exchange may drift lower but it is time to be a contrarian and accumulate quality stocks.

“We anticipate that the Chinese New Year rally will start soon. As such, the current weakness in the market should be seen as temporary and stocks may rebound strongly anytime soon.

“We opine that the current bearish sentiments are largely due to external factors and are short term in nature,” the investment bank states in the report.

Analysts and fund managers have their own opinions based on their calculations and projections. However, it is becoming clearer that the global economy is showing signs of a slowdown — apart from China, other major markets such as Japan and the European Union are still in the doldrums.

Crude oil prices have slipped below US$30 per barrel and analysts say a US$20 per barrel price is not too far away. Malaysia, being a net oil exporter, has been badly affected by the low crude oil price environment.

Under these conditions, should investors still hold on while praying for the stock market to recover, or should they head for the exit with all their money as suggested by RBS’ Roberts?

asian-stock-markt_chart_cap36_Tem1093_theedgemarkets

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share