Global capital markets roiled towards the end of last month and continued into February. The selldown unsurprisingly began in the US markets and before long the financial flu spread to equity markets across the globe.
The Dow Jones Industrial Average closed at 24,640.45 points on Feb 13, down 6.8% from 26,439.98 points when the slump started on Jan 29.
Back home, the FBM KLCI closed at 1,834.93 on Feb 14, down 1.9% or 35.59 points from 1,870.52 on Jan 29.
According to MIDF Research, international investors withdrew RM1.75 bil net of local equities in the week ended Feb 9, wiping off about 92% of the net inflows worth RM1.92 bil accumulated in the previous three weeks.
It was the first weekly attrition in seven weeks and the highest since the August 2013, the year of the 13th general election.
Ironically, it was good economic news which sent the US equity markets in a tailspin. Better-than-expected unemployment data and wage growth prompted concerns that inflation is picking up faster and fears the US Federal Reserve (Fed) might respond by raising interest rates at a quicker pace.
The recent market activity has caused many investors to question whether the ongoing performance is a necessary correction or a sign that equities are heading towards a bear market. Many are also wondering how to react to the ongoing volatility. Should investors follow the footsteps of international investors in exiting the market, or should they just stay put?
After speaking to some fund managers and financial research analysts, FocusM highlights eight steps investors can take in the current market environment.
1. Don’t panic over recent selldown
The recent selldown will have understandably spooked investors. However, as it stands, the current economic fundamentals for global growth remain good, say analysts.
“Last week’s correction will probably be shortlived … we are in a period where the global economy is picking up. As economic data from various markets start to come in, I think investors will feel more confident as the data continue to be on the positive side,” says Affin Hwang Asset Management’s portfolio manager Lim Chia Wei.
Wong does not see any events that would suggest another crisis or justify this kind of volatility
Areca Capital CEO Danny Wong echoes a similar view. “Fundamentally, I do not see any events that might suggest another crisis is coming or that would justify this kind of volatility.”
He says the selldown was because equities “ran up too aggressively” rather than an issue over fundamentals. He reckons a correction in the 10% range is acceptable given the 30% gain seen in the US markets.
OCBC Singapore chief economist Selena Ling says “there appears to be sufficient economic fundamentals supportive of another relatively benign year.”
She highlights upside risks – such as US tax reforms and jobs which could spur the US economy, sustained upside economic surprises from eurozone economies, and increased capex investments by corporates – as positive signs.
2. Don’t rush to unwind equity positions
When markets fall, the natural instinct is to quickly unwind positions to avoid incurring losses. However, investors are advised to refrain from acting hastily.
In fact, Areca’s Wong advocates a “do nothing” strategy, particularly if you are a long-term investor who invests based on fundamentals. “Hold on to your investments unless your positions are not based on fundamentals or speculative in nature,” he argues.
iFAST Sdn Bhd research analyst Tan Wei Yine also cautions against panic selling because it could translate into “selling low, buying high”.
Tan cautions against panic selling because it could translate into ‘selling low, buying high’
“The worst thing investors can to do is to sell off due to panic and, when the markets improve or rebound, they have to re-enter the market.
“So do not react to the recent volatility before doing some analysis of your investments and their underlying fundamentals,” he says.
In fact, the recent market correction may have actually made it a good time to enter the market, opines OCBC Bank (M) Bhd vice president (wealth management research) Michael Lai.
“We were actually underweight on equities up to now, and since the market selldown happened, we have moved into a bit more of an aggressive stance,” he explains.
Lai says he had been concerned over the valuations which he described as simply too high. “We had some concerns over the valuations and so we were not too bullish up to now … It is good that the market has corrected. Now is the opportunity to pick up equities that are in a correction phase,” he adds.
3. Reassess and diversify your portfolio
The saying “do not put all your eggs in one basket” holds true in investing. Investors should build diversified portfolios based on their risk profiles and investment goals and horizons.
iFAST’s Tan sees it as a good time for investors to reassess their portfolios and decide if they are still investing based on their risk profiles and goals, or have diverted to merely chasing returns. The latter makes investors more vulnerable to corrections like the current one.
“If the recent correction has caused investors to feel very jittery, it may be because they have taken too much risk. So they must reassess to make sure their portfolio risk has not extended beyond their risk appetite. Investor risk profiles should not change according to market sentiments,” he says.
He adds that investors wanting to diversify should consider asset classes or instruments less susceptible to higher interest rate risks as the global economy is moving to a higher interest rate environment.
Now is the opportunity to pick up equities that are in a correction phase, says Lai
Tan recommends adding local short-duration bonds as an option to guard against interest rate risk and protect against currency risk given the strong ringgit/weaker US dollar.
OCBC’s Lai suggests investors look into unit trusts as they allow for diversification across asset classes, regions and risk levels.
“If you like to see less of the volatility that might come from a single asset class investment, I think unit trusts stand out as one possible option for investors,” he says.
4. Avoid gold, be cautious on cryptocurrencies
Gold has long been known as a safe-haven investment and many flock to the precious metal in times of risk and uncertainty. However, analysts do not believe this is the time for such a move as the market is experiencing volatility instead of significant economic risk.
“Gold does not usually do well when there is not a lot of systemic risk in the system,” explains Lai. So while it is fine for investors to include gold for diversification’s sake, the metal is unlikely to be the primary driver of your portfolio, he says.
Tan is also ambivalent on the upside prospects of gold despite the current market volatility. “We think the market is in a correction period and the economy is actually painting a very decent picture … this means it is not very supportive of gold prices,” he notes.
Gold prices, he explains, usually rise when there is volatility caused by structural obstacles to economic progress, which are not faced by the current global economy.
On the other end of the spectrum, analysts also caution investors when dipping their toes in new-age investments like cryptocurrencies.
Affin Hwang’s Lim advises investors to avoid cryptocurrencies like Bitcoin because they do not have global governmental support. “I do not believe people should go into them (cryptocurrencies) because most governments will not support them. It will be hard for them to do well without that support.”
Areca’s Wong says investors should instead invest in the technology behind cryptocurrencies. “The real value lies in blockchain technology, which means investing in a software company or one that uses blockchain to create a product is a worthwhile investment.”
5. Monitor US economic data
The recent bout of volatility was set off after the US released better-than-anticipated economic data which spiked fears that the Fed might quicken the pace of rate hikes.
Most economic data being released will be supportive and positive for future economic growth, but investors should keep an eye on US inflation data which will have a correlation to the pace of interest rate hikes.
“If interest rates are too high, they become a hindrance to companies," says Lim
“In 2017, there was economic recovery that was not too strong nor weak. Too strong recovery will push inflation higher and cause the central bank to raise rates faster. If interest rates are too high, they become a hindrance to companies as they affect their interest expenses and cost of borrowing,” Affin Hwang’s Lim explains.
iFAST’s Tan believes equity markets can continue to perform well so long as it has a good idea of the Fed’s thinking. He notes that benchmark rates were hiked thrice last year but the capital markets did well nonetheless. The same should happen this year so long as there are no surprises by the Fed.
6. Watch developments in China
Chinese markets also caught the US markets’ correction flu just like many of its peers across the globe. The Shanghai Composite Index closed at 3,199.15 points on Feb 14, down 9.19% from 3,523 points on Jan 29, the day the US markets started slumping. It will likely exacerbate this upcoming Chinese New Year festive period as investors look to take some profit.
Overall, China’s growth outlook still looks positive in line with global growth expectations (which also remain good), says iFAST’s Tan.
“As of now, Chinese equities are still providing investors a decent opportunity to seek capital growth. The recent market selloff could be a good opportunity for investors who want to gain exposure to the equity
market,” he adds.
However, Tan cautions it will be necessary to monitor Chinese economic data, including retail sales, manufacturing Purchasing Managers’ Index (PMI) as well as import and export numbers, especially for businesses exporting to the Chinese market.
OCBC’s Ling believes the world’s second largest economy should continue its soft economic landing this year as it is still on its economic transition process, including financial deleveraging and environmental policies. That said, it is necessary to keep an eye on the pace of these efforts, she says.
“Should China try to accelerate the deleveraging process, this could also be a source of market volatility in 2018.”
7. Expect volatility to persist
Volatility is an ever-present feature of the capital markets, but little was evident last year. Hence, investors can expect volatility to be more pronounced simply because it was “unusually low” last year, says Affin Hwang’s Lim.
While it is almost impossible to predict how long or significant volatility will be moving forward, most expect it to continue until at least the next US Fed monetary policy meeting.
The Federal Open Market Committee (FOMC) will meet on March 20-21, when it might choose to raise the benchmark rate for the first time this year.
More importantly, it will also give the Fed a chance to telegraph its view on the US economic recovery and indicate its stance on the pace of future rate hikes, says iFAST’s Tan.
“Should the Fed come out more hawkish than the market expects, then the jittery conditions will likely persist for some time. Conversely, if the regulator takes the current economic progress and wage growth in stride and does not change its tone of the quantum and frequency of the hikes, then the market should show relief,” he adds.
8. Capitalise on new market features
A slew of moves to improve the vibrancy of the local bourse were announced recently. These include allowing intraday short-selling to improve liquidity by attracting more retail investors. While not all are suitable for different types of investors, those looking to trade should benefit from the liberalisation rules.
Short-selling was in the past opened to only a select group of licensed brokers or proprietary day traders as it was viewed as highly speculative. It is now accessible to all, although the Securities Commission will still regulate activities.
“The idea is to attract more retail investors back into the market, which in turn will help create some volume and velocity,” explains Areca’s Wong. However, he believes current reports saying ‘naked short-selling’ will not be allowed will somewhat temper excitement.
He feels the new short-selling rules will benefit professional and skilful traders. “This should be the area for professional traders who have indepth understanding and follow the market closely.”
Other moves to boost market participation include the liberalisation of margin financing rules, the creation of a new category of traders called “trading specialists” who can trade on their own accounts, as well as removal of stamp duty on mid-small cap stocks for three years effective March.
Steps are also being taken to enhance trading activity through a volume-based incentive programme. To lure new investors to the market, first timers will be given a six-month waiver on trading and clearing fees.
Bucking the trend
A number of counters escaped unscathed when the FBM KLCI fell 2.71% or 50.7 points to 1,819.82 points on Feb 9 from 1,870.52 points on Jan 29.
Sixty-nine counters saw price gains with 78 unchanged. Interestingly, the biggest gainers were mostly penny stocks.
Sibu-based Pansar Bhd was the biggest gainer rising 26.26% or 13 sen per share to close at 62.5 sen on Feb 9 from 49.5 sen on Jan 29. Stockbrokers believe the run-up was due mainly to the company’s private placement which will be completed on Feb 14.
FSBM Holdings Bhd’s share price rose 20.51% to 23.5 sen from 19.5 sen, on the back of low trading volume of 77,600 shares.
Likewise, gainers Aturmaju Resources Bhd and SKB Shutters Corp Bhd, also had low trading volumes of 258,400 and 63,100 respectively.
Metronic Global Bhd gained 10% or 0.5 sen to close at 5.5 sen, while Eversendai Corp Bhd and Wellcall Holdings Bhd rose 6% and 5.44% respectively.
Kenanga Investment Bank Bhd recently issued a target price of 74 sen on Eversendai, while Inter-Pacific Research Sdn Bhd issued a buy call on Wellcall with a target price of RM1.70.
Banks, construction companies top picks
Amid the current volatile market, fund managers and analysts remain bullish on the banking and construction sectors.
iFAST Sdn Bhd research analyst Tan Wei Yine is positive on the banking sector as banks have undergone restructuring to lower cost and strengthen their balance sheets.
He says banks will also gain from the recovery of consumer demand, especially with retail consumption increasing in tandem with signs of loan growth recovery. “This is good for banks and, on top of that, they are benefiting from the overnight policy rate hike, so their net interest margin is better moving forward,” he adds.
Areca Capital CEO Danny Wong prefers the construction sector, which is mainly backed by infrastructure projects introduced under the 11th Malaysia Plan, which will last until 2020. “If you are into construction, the main players are IJM Bhd and Gamuda Bhd. They will have a fair share of economic growth,” he says.
Pansar, formerly known as PWE Industries Bhd, was listed on Bursa Malaysia following a corporate exercise in 2010 with the injection of Pansar Company Sdn Bhd and Pansar Engineering Services Sdn Bhd.
For its second quarter ended Sept 30, the company posted higher net profit of RM2.5 mil from RM867,000 a year ago, while revenue rose to RM97.06 mil from RM84.8 mil.
Its managing director Datuk Tai Hee is instrumented in transforming Pansar from a hardware and building product distributor into a total solution provider. He also sits on the boards of over 20 companies engaged in diverse businesses.
Tai, along with Pansar chairman Datuk James Tai Cheong @ Tai Chiong, are the major shareholders with a combined indirect stake of 71.79%.
FSBM Holdings Bhd
FSBM is a Klang Valley-based company founded by managing director Datuk Tan Hock San @ Tan Hock Ming in 1984 as Talasco Computers Sdn Bhd. Talasco was formerly the sole local distributor of Fujitsu computers.
For its first quarter ended Sept 30, FSBM’s net loss narrowed to RM88,000 from RM310,000 a year ago but revenue fell to RM32,000 from RM2.17 mil.
Tan holds a 14.85% direct and 18.73% indirect stakes in the company.
Metronic Global Bhd
Metronic, incorporated on Oct 22, 2003, was listed on May 24, 2004. The Shah Alam-based company specialises in system integration of intelligent building management systems and integrated security management systems.
It is headed by CEO Vincent Set Hin Fook since Jan 5, 2015. He was appointed a director of a number of listed companies during their turnaround and restructuring exercises.
For its third quarter ended Sept 30, Metronic posted a lower net profit of RM40,000 from RM1.95 mil a year ago on the back of lower revenue of RM6.24 mil versus RM11.08 mil.
Preparing for market volatility
A wave of investors’ fear about inflation risk and anticipated higher US interest rates has sent stock prices tumbling in the Goldilocks economy, pulling down other major stock markets in the region along with it.
Market volatility is expected in the near term, at least until the next Federal Open Committee Meeting on March 20-21. All eyes are on the new Federal Reserve (Fed) chief Jeremy Powell’s acuteness to convince market participants that the strengthening US economy can roar ahead without igniting inflationary pressure.
Interest rates will likely be raised at a measured pace without hurting economic growth too much whilst keeping inflation risk at bay.
Malaysia’s equity market was not spared from the Wall Street’s roller-coaster ride, though the magnitude of market falling was relatively milder than other key regional markets.
It was partly sheltered by the nature of the local market defensiveness and low foreign presence, albeit picking up in interest in late December and early this year ahead of the 14th general election.
The sharp fall in market index was also partially cushioned by the sustained buying interest of domestic institutional funds.
Yet the fear of investors’ anxiety has obscured a fundamental fact about the domestic economy, which ended last year on a strong note, fired by two engines – strong exports rebound and resilience consumer spending – after slowing down in 2014-15.
The economy will continue to grow this year, backed by still steady global growth and further expansion of domestic demand.
Exports are expected to continue expanding, albeit at a more moderate pace from last year’s record levels.
Services, manufacturing and construction sectors are also sustaining their resilient expansion. Jobless rate of 3.3% in December was the lowest since 2015, with better income growth.
Even consumer sentiment has yet to rise to the confidence threshold level of 100 points. Households are still spending discretionary amid coping with rising cost of living and inflation, and businesses are investing whilst managing cost pressures.
Household balance sheet is in decent shape, backed by high financial assets cover over financial liabilities.
Growth in household debt has eased in recent quarters, taking household debt-to-GDP ratio to 84.6% as of Sept 30, 2017 from 89.1% as of end-2015. However, continued containment of household debt is warranted to build a resilient household balance sheet.
It is reckon that a prolonged slump of stock market will eventually weaken economic fundamentals via loss of market confidence, weaken sentiment and wealth destruction. However, the economy is not at high risk of being badly shaken by the recent plunges in global equity markets and domestic market volatility.
This is also premised on the belief that the global economy is in a better shape to withstand market volatility. US policymakers are expected to avoid policy missteps to trigger the country’s economy into an economic downturn.
The Malaysian economy remains on track to expand at a decent rate estimated at 5.1% in 2018, supported by a mildly expansionary fiscal lever and accommodative monetary conditions. The banking system remains strongly capitalised to buffer against share price corrections for pledged securities lending and also cope with large capital flow swing.
Foreign reserves of US$103.7 bil as of Jan 31 will serve to support the ringgit against capital flow volatility.
There should be no ground for complacency. Policymakers and relevant authorities must keep close vigilance on the potential spillover of external market volatility on the domestic economy via trade and financial channels.
The government must demonstrate its firm commitment to rebuild stronger fiscal position and control debt – both direct and contingent liabilities – to allow greater fiscal space to counteract external shocks. Likewise, Bank Negara Malaysia must safeguard financial and monetary stability, including reserving its firepower – or monetary policy – to cushion domestic economy against the threat of global economic slowdown should jittery markets persist.