The correlation of between the FBM KLCI and US Dow Jones Index

By Ranjit Singh


THE US market has always been a dominant factor in predicting the direction of the local market. However, the COVID–19 pandemic has changed this equation.

The Dow Jones Industrial Average (DJIA) which had a market capitalisation of US$8.33 tril (or equivalent to RM34.4 tril) as of Dec 31, 2020, is simply too big to ignore in terms of market economics. The adage that the “world catches a cold when America sneezes” best describes the symbiotic relationship between the US market and world markets.

Since the pandemic become widespread around the globe in March 2020, the DJIA had a sharp correction which saw it falling to around the 19,000 points level. However, the correction was short lived. The Dow recovered as the US government put in a slew of measures to rejuvenate the economy including injecting massive stimuli into the economy.

What has been baffling to analysts and economists is that despite the ill effects of the pandemic, the Dow continues its meteoric rise. It recorded its all-time high on April 16, 2021 at 34,200 points.

Some pundits have attributed this phenomenon to the expectation that the US economy was on the recovery path and investors were confident with the navigation of economy by the Biden administration.

Another factor that has provided a shot in the arm for the Dow was that corporate earnings were recovering although not to pre-pandemic levels. This has also prompted investors to enter the market.

However, the FBM KLCI which has remained range bound between 1550 and 1650 points currently clearly has not been following the Dow which has been registering new highs very often recently.

The FBM KLCI recorded its highest level at 1,896 points in in July 2014.

Foreign funds which are crucial to ensure that the Malaysian market is on an upward trajectory have been net sellers in 2021. Since March 2021, foreigners have sold RM1.17 bil worth of Malaysian equities compared to RM5.21 bil worth of stocks in 2020.

The local retail market has absorbed this amount which witnessed the volume traded on the FBM KLCI reaching its highest ever levels in 2021.

The current ultra-low interest rate environment around the world has also provided an impetus to the rise in stock market indices. Bank Negara Malaysia (BNM) has kept its overnight policy rate (OPR) steady at 1.75% during its last four policy meetings.

The low interest rate environment has prompted investors to enter the market as the banks interest rates were just not appealing.

As in any purchase, the maxim ‘caveat emptor‘ or buyer beware is applicable. Investors should exercise caution in investing in an environment sector where risks are aplenty as the economic rebound from the pandemic is still fragile.

Previously, investors could take a cue from US markets to make their investment decisions but as the FBM KLCI is more loosely corelated from its US peer, this is not the case anymore. They must be more inward looking and studying the fundamentals of the companies they plan to invest in. This has never been more crucial.

Investors must exercise caution when investing in a market which is flushed with liquidity. The recent penny stock rally in the Malaysian market, which is based more on speculative reasons, is a case in point where the rally in a few counters is not based on company’s fundamental strengths.

Although, the valuation of some Malaysian companies seems stretched now, value can still be found by the discerning investor. However, investors must separate the ‘chaff from the wheat’ and have the financial muscle to ride out the volatility in the market.


Ranjit Singh is the manager of corporate monitoring for the Minority Shareholders Watch Group (MSWG).

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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