Whither Stock Market?

The stock market witnessed a nerve-wrecking fall over the week. But investors can find comfort in that Malaysia’s fundamentals remain intact, writes TEE LIN SAY.

FAST and furious, aptly describes the selling of equities that took place in the market over the week. The key barometer, the composite index (CI) retraced 96 points to end the week at 1,191.55 points.

As of Thursday, the Dow closed at 12,861 points, only 0.03% higher from the start of the year. The main culprit is lingering credit fears in the US or what others dub as financial worries “made in USA”.

In Malaysia, one of the most battered would be stocks with high foreign shareholdings. Most market pundits say the broad-based play which everyone has enjoyed earlier in the year may be fading but what would be strategic at this point is to look at some of the choice picks that are undervalued.

If one were to look back, historically, market crashes in the US are followed by significant rises. The US has witnessed five market crashes precipitated by the oil embargo in the early 70s, the escalating rate rises in 1987, the Russian debt default in 1998, the dot-com bubble bursting in 2000 and the terrorist attacks on Sept 11, 2001.

Even so, it can be forgiven if investors are still feeling jittery. For isn't it a mass-scale approach in the market place that when stocks are soaring to record levels, investors are more eager to dive in to catch the rise but only far too less eager to fish when it hits its lows? That can largely be attributed to a single and most powerful factor in the marketplace – sentiments.

Even as much of the economic fundamentals of Malaysia remains sound, observers reckon that such optimism is being offset by worries in US, which has led to the global contagion currently unfolding; nearly every market has been pummelled.

Foreign funds in their bid to increase their liquidity are selling, hence the steep plunge in Asian markets. In times of a financial market shakeout, emerging markets are always the first to bear the brunt as foreigners flee to reduce their risk premium.

In search of answers

“At times like these, people look to see what went wrong, and search for all sorts of excuses. There is more selling than buying. And when it is hedge funds that are selling, it can be quite merciless,” says one research head.

The silver lining is that most market observers feel that it is a matter of time before the market recovers. Whether the triggers are internal or external, the stock market has always prevailed and risen higher after the catastrophe.

Valuation wise, stocks have never been in better positions. There’s nothing fundamentally wrong with the economy or the market – its external factors that are the issue now, and when this is the case, (which ever direction the market is heading), its most certainly at frenzied pace.

Prudential Fund Management Bhd correctly points out that it is easy for investors to lose sight of the bigger picture. “Most investors are so caught up in the credit concerns that they forget about the bigger picture, ie growth fundamentals remain strong,” it says, adding that subprime loans are a relatively small part of the US mortgage market (it provides these facts: The US residential real estate market is worth US$17 trillion; the residential mortgage market about US$10 trillion; and the subprime market about US$1.2 trillion).

It is for this reason that the fund management company says that this is probably why the Fed seems to believe that the issue will not cause a systemic crisis and that the process is a healthy one removing past excesses. “Hence, we remain bullish on the market.”

Areca Capital Sdn Bhd chief executive officer and executive director Danny Wong is still positive on the market over the 3 to 6 month period: “More so than before ... valuations wise, a lot of the stocks are trading at very attractive levels.”

Unpredictable forces

“What is happening now is purely driven by external factors. This will not affect earnings. I think it would be safe to look at cash rich companies with good earnings growth. For instance, some property companies have launched projects and have recorded high take up rates. Their unbilled sales is sustainable for over a year,” he says.

Yet, scouring for clarity in a market beaten down to unexpected lows has been hard coming. Most analysts and fund managers are non-plussed by the extent of the global contagion on equities and appear to prefer to keep their forecasts to themselves. “I don't think even the experts can tell you what to expect now, because they don't know. Nobody knows. People are anxious and are looking to reduce their positions,” says a research head.

But there's consensus that the markets will remain volatile for as long as the uncertainties over the US economic data and subprime mortgage woes persist.

“The US subprime problem is not a simple issue. It affects borrowers who do not have good credit ratings, I think the problem will drag on for awhile. I don't think this is anywhere near a global recession, but more of a temporary setback,” says an analyst, adding that while he sees a lot of value in Malaysian stocks at these levels, the sentiment appears to have been beaten down.

“The way markets are falling, it would appear as if there is expectation of bad news. Global markets are trying to deal with it, and of course, emerging markets which are considered more speculative, will always be more brutally hit,” he adds.

Wong says that what is going on now is beyond fundamentals. Currently, price movements of financial assets are driven by a combination of risk appetite and liquidity flow. However, ultimately the intrinsic value of the underlying financial assets will prevail and move the under-valued price to its real value. Therefore, he suggests that now may be an opportune time for investors to accumulate good value stocks.

Bet on long term

Clearly too, most market pundits are more eager to bet on the long-term outlook of the market – which is probably a wise move.

“We remain bullish on the market over the longer-term ... a buoyant economy for an early election ... rollout of projects under 9MP, expansionary fiscal budget, growth in the Iskandar Development Region and Northern Corridor Economic Region is likely to gather pace. Besides, more tax cut is expected in the next budget,” says Prudential Fund.

Wong echoes such sentiments: “For long-term investors, this is the advice. Tighten your belt through this roller coaster ride. Be prepared to go through the ups and downs and at the end of the day, you will benefit from better value.”

“If investors remain calm, and look back in the past 10 years, you will see that every year, there is always this sort of turbulence for about one or two months. But what happens after that? The market always goes higher. Whenever there is a dip, there is always a rebound,” he says.

Macquarie Research in a note on Aug 10 says that strong domestic growth drivers offer upside amid regional volatility.

“Nothing has changed China’s external imbalance. The renminbi needs to strengthen and that means growth will remain strong and shift toward the domestic sectors. For the rest of Asia, it means export demand will be boosted and currency appreciation will remain intact,”

It adds that Malaysia’s macroeconomic ranking remains at No. 1 in Asia, given its strong domestic demand underpinned by the RM200bil Ninth Malaysia Plan, and expected currency appreciation.

Furthermore, the ringgit also took a breather in the second quarter and early third quarter, and is set to resume its appreciating trajectory.

“On both a price earnings ratio and EV/EBITDA (enterprise value to earnings before interest, depreciation, tax and amortization basis), Malaysia is now cheaper. Whereas three months ago Malaysia was the second most expensive market after Singapore on both metrics, it is now cheaper than India, China and Japan,” says Macquarie.