This article first appeared in Capital, The Edge Malaysia Weekly on November 19, 2018 - November 25, 2018

JUST as investors were about to breathe a sigh of relief after an ugly October, which saw most stock markets worldwide in the red, US shares extended their slide as Apple Inc and bank stocks dipped. The tech stock rout, as well as woes at Goldman Sachs Group Inc — amid reports the Malaysian government is seeking a full refund of all fees paid to the investment bank for arranging billions of dollars of deals for 1Malaysia Development Bhd — hit Wall Street.

As US stocks fell, Asian markets tumbled in tandem and Malaysia was no exception. The FBM KLCI fell below 1,700 points for the third time in the last one year. In fact, the equity benchmark index has hovered below the 1,700-point level for only 25 trading days out of the 213 so far this year. The FBM KLCI has lost 0.84% so far this month, closing at 1,694.21 last Thursday.

According to Inter-Pacific Securities research head Pong Teng Siew, the decline seen in the US market is expected to continue, affecting sentiment in the local market.

“I think if you look at most local fund managers, their allocation for cash and bank deposits has increased. In fact, I think about half of them have increased their holdings in cash,” he tells The Edge. Pong  is bearish on the US market and while he sees a continuation of the downward trend, he says some intermittent rallies can be expected along the way.

“I do not expect the bottom to be found soon unless Wall Street falls below its previous low. When that happens, there might be a possibility that we have hit bottom,” Pong says.

Indeed, a look at US benchmark indices shows that despite the sharp correction seen over the last few weeks, they remain at lofty levels compared with a year ago. For example, the Dow Jones Industrial Average may have fallen by 4.98% in October alone, and has been relatively flat so far this month, but it is still up 10.3% from a year ago.

Similarly, the S&P 500 Index lost 6.83% and 0.25% in October and the first 11 trading days of November respectively but is still sitting on a one-year total return of 7.4%. Tech-dominated index, the Nasdaq Composite, also recorded a one-year total return of 7.59% despite losing 9.16% in October alone and another 2.21% so far this month.
 

Local funds sitting on cash could provide support in continued selldown

A look at local equity funds shows that most of them have increased their cash holdings. For example, Affin Hwang Select Opportunity Fund had a cash level of 25.4% of its assets under management (AUM) as at Sept 28 this year. In comparison, the fund’s cash holdings stood at 21.7%, 7.3% and 6.1% in July 2018, July 2017 and July 2016 respectively. Similarly, AmMalaysia Equity Fund had 16.4% in cash in September, 12.2% in October 2017, 13.5% in October 2016 and 11% in October 2015.

However, Pong acknowledges that given that emerging markets have seen foreign selling for a while now, it is likely that the local market could remain relatively stable at the current level. but he cautions that a meltdown on Wall Street could lead to a second round of foreign selling.

Rakuten Trade Sdn Bhd vice-president of research Vincent Lau agrees with Pong that investor sentiment has been relatively negative but points out that with most funds inclined to hold more cash, it is likely that the local market will be supported by local institutional investors in the event of a further correction on Wall Street and, subsequently, on the home front.

“It is true that the sharp correction seen on Wall Street has hurt investor sentiment, especially in the local market. However, most local institutions have anticipated a correction amid the uncertainties surrounding the US midterm elections, the Federal Reserve’s rate hike and the trade tensions between America and China. This is why we are seeing more funds holding cash and defensive counters. So, I think any weakness would prompt local institutions to buy into the market and give it some support,” Lau says.

He adds that most of the negatives have been priced in and investors will shift their attention to the upcoming meeting between US President Donald Trump and President Xi Jinping of China.

“I think if the meeting does not escalate the tension between the two economies, it will be good enough for the market. Any good news or positive tweets by Trump would be a good sign for the market,” he says.

Pong however cautions that it may be too early to expect anything concrete from the meeting later this month.

“I really doubt a solid agreement can result from a sideline meeting at another major gathering [of world leaders]. The differences between the two countries go quite deep. It would be hard to expect things to improve just by having one meeting,” he says.
 

Attractive values emerging in local market

According to Areca Capital Sdn Bhd CEO Danny Wong, the local stock market is cheap at the moment after the selldown in emerging markets since March.

“It’s at a good value. Emerging markets, including the local stock market, are cheap now. At this level, I would deploy my money into investment,” Wong says when asked about the increase in cash holdings by some local fund managers.

He says that while the decline in US stocks could hit investor sentiment, the buying opportunities amid attractive valuations will see investors coming back into the market.

He notes that most emerging markets have seen heavy selling and the developed markets are seeing sharp corrections due to high valuations at two standard deviations above the average.

“Foreign funds will eventually look at developing countries and emerging markets for value. And Malaysia, as a reformed country with a relatively more stable political landscape than countries like Argentina, Turkey and Indonesia, for that matter, will benefit when foreign funds return,” Wong says.

He explains that even if the earnings of listed companies remain flat, they are still cheap at current valuations. Most of the uncertainties and negative perceptions about a new, inexperienced government have been laid to rest now that Budget 2019 has been announced.

Lau agrees with Wong’s view on opportunities to accumulate at current valuations, adding that some exporters could also benefit from the weaker ringgit.

Pong, however, believes it is a bit too early to buy into the market, saying that the odds are stacked against investors picking the right stocks in the current environment. “I think even if you are very good at picking stocks, you would find it hard in such an environment.”

A fund manager with a local asset management company agrees with Pong, saying that the differential movement between commodities and stocks is a sign that the economy is slowing.

“If you look at commodities, oil, palm oil, most of their prices are under pressure. If the economy is good, demand should be able to support the supply of these commodities but this is not the case. And to make matters worse, the US stock market is still trading at a lofty valuation despite the recent correction. If Wall Street were to suffer a meltdown, I believe we will also be affected,” he says.

Brent crude has fallen by more than 20% from its peak to its current price of US$66.43 per barrel while crude palm oil is trading close to RM2,055 per tonne after falling 21.2% since the beginning of the year.
 

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.