Thursday 28 Mar 2024
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A global sell-off in stocks and bonds could mean a much-needed correction for Bursa Malaysia, which has been overvalued for some time now.

It is reported that some US$2 trillion worth of global equities and bonds have been wiped out since the last week of April, ushering in the month of May and the adage “Sell in May and go away”.

In fact, local and regional indices were trading at 52-week highs in the last days of April before trending downwards.

Across the region, the Nikkei 225 fell 4.4% from a high of 20,187.65 points on April 23 to close at 19,379.19 last Friday while Hong Kong’s Hang Seng Index dropped 4.2% from an April 28 high of 28,442.75 points to close at 27,577.34.

At home, the benchmark FBM KLCI was down 2.69% from a 1,862.80-point high on April 21 to close at 1,807.65 last Friday. Similarly, the FBM Emas, FBM Emas Syariah and FBM Top 100 have declined over 2.5% over the last three weeks.

But what market observers are waiting for is a potential correction among the small and mid caps as the FBM Small Cap Index slid 2.7% over the last three weeks to close at 16,571.03 points last Friday. Small caps rallied 72% over an 18-month period and the index peaked at a 17-year high of 19,338.10 last August. The months of October and December last year saw a marked selldown but the index clawed its way back.

gan_cap44_1066According to a fund manager, the market should be taking a breather, considering the new highs it has scaled since last year. “The Malaysian market has been expensive for a while now and we expect investors to take profit when valuations are high. We are also short of catalysts for further upside at the moment.”

The FBM KLCI is trading at a price-earnings (PE) multiple of close to 16.5 times while the FBM Small Cap Index is trading at 12.6 times.

“Malaysia’s small to mid caps have had a good run. This year, there might be another pullback [following two pullbacks last year], which is not unexpected,” Pacific Mutual Fund Bhd executive director and CEO Gary Gan tells The Edge. He notes that small to mid caps are also more volatile.

He expects the FBM KLCI to end the year at between 1,800 (3.06% downside) and 1,850 points (0.38% upside). “It is still overvalued and some quarters argue that the market is dominated by institutional buying, which is supporting it at its current level,” he says, adding, “How investors react to political issues might play a bigger role in the stock market this year.”

According to Gan, the key factors that have played on investors’ fears and sentiment this year are the implementation of the Goods and Services Tax in April, the halving of global crude oil prices and growing political unrest stemming from 1Malaysia Development Bhd’s (1MDB) debts and other corruption cases, not forgetting calls from some quarters for Prime Minister Datuk Seri Najib Razak to step down.

Within the corporate arena alone, there have been investigations in the last 12 months by the Malaysian Anti-Corruption Commission into various companies, for example, Tanjung Offshore Bhd and Icon Offshore Bhd.

The Securities Commission Malaysia also recently charged corporate officials like Datuk Seri Stanley Thai (APL Industries Bhd) and Datuk Ramesh Rajaratnam (Malaysian Merchant Marine Bhd) in separate insider trading cases.

The good news is, says a market observer, local regulators appear to be taking a tougher stance on wrongdoers recently. He adds that 1MDB’s RM42 billion debt and its risk of default have likely already been priced in by investors.

Head of research at Kenanga Investment Bank Research, Chan Ken Yew, tells The Edge that the broader market could see a correction in the future. The research house is expecting the FBM KLCI to average 1,820 points this year — still 0.7% higher than last Friday’s close of 1,807.65.

“Malaysia is a defensive market with decent dividend yields but stacked against other Asian markets, its valuations are too high and it is not as attractive as the others,” says a trader.

According to a March 31 FTSE Bursa Malaysia Index series monthly report, the benchmark index has an average 3.19% dividend yield while the FBM Small Cap Index has an average yield of 2.28%.

In contrast to the bellwether’s 16.5 times PE, Singapore’s Straits Times Index straddles a PE multiple of 15.3 times while Japan’s Nikkei 225 has a PE ratio of 21.3 times and the Korean Kospi Index, 19.1 times.

A case in point, even when foreign funds flow into Asian markets, Malaysia is rarely the first to reap such gains. In the two weeks to April 24, Asian markets saw a spike in money inflow with foreign buyers pouring some US$8 billion into the stocks, according to MIDF Amanah Investment Bank Research’s latest fund flow report. But the funds largely concentrated on technology-heavy markets like Taiwan and South Korea, which attracted US$2.6 billion and US$1.64 billion respectively.

“Foreign investors bought RM163.3 million [of Malaysian equities] on a net basis in the week ended April 24 but it was the lowest in six weeks. Foreign presence on Bursa eased suddenly during the week,” says MIDF head of research Zulkifli Hamzah.

That said, Pacific Mutual’s Gan believes fundamentals will not be the only influential indicators of stock markets in the longer term. “Everything is no longer based on fundamentals. In a global liquidity stimulus schematic, valuations and earnings might not always correlate. The Malaysian market may be overvalued but we will still see money pouring into risky assets like stocks because of economic stimulus and a low rate environment. People are still willing to put in their money despite a huge run-up in prices previously,” he observes.

fbm-klci_ftse bursa-msia-emas-index-chart_cap44_1066

This article first appeared in Capital, The Edge Malaysia Weekly, on May 11 - 17, 2015.

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