Do you dare to buy on this few month?
Statistically is a bad month.
Written by Surin Murugiah
Monday, 07 September 2009 11:07
KUALA LUMPUR: A year on since the Lehman Bros collapse last September that sent global economies and equities into a tailspin, investors once again enter a two-month period notorious for stock market volatility and meltdowns.
Questions abound as to how stock markets would fare this year, as the September and October periods have to some extent left punters significantly traumatised, albeit over many decades.
Will the ghosts of September and October past make a return visit? Historically, the stock market crashes in 1929 and 1987 happened in October, while September came into play in the aftermath of the terrorist attacks in New York in 2001.
MIDF Research head Zulkifli Hamzah said the months of September and October had notorious historical significance, as most meltdowns in the past had occurred during this period.
He said that last year, the KUALA LUMPUR COMPOSITE INDEX [] fell 7.4% and 15.2% in September and October, respectively.
“Part of this is attributable to psychological factors, as most market meltdowns in the past had occurred during this period. The smart money will be nibbling at opportunities during this time. Sentiment should gradually improve thereafter, until the end of the year.
“Somehow, a confluence of factors operates to create an ‘October jinx’, elevating risk aversion,” he said.
Nonetheless, this time around, much has happened since last September. Among them, the US welcomed a new president; the Congress party in India won a sweeping election and locally, Malaysia saw a new prime minister taking office. Equity markets responded to each event differently.
Wall Street appeared sombre when Barack Obama was sworn in, the Mumbai Sensitive Index was suspended an entire trading day after surging more than 17% when Congress won, and the Malaysian market benchmark welcomed Prime Minister Datuk Seri Najib Razak with a positive but less-than-enthusiastic closing.
But the psychological effect of the past could already be starting to play a hand this September in determining market movement, as evident from the muted retail participation in the local market.
It is becoming more difficult for market observers to accurately predict patterns, as global events shape equity markets and no stock market is spared the effect of any bad news for long.
While most agree that world equities and economies have made significant recovery since the Lehman Bros collapse last year, they said the extent of the recovery cannot be fully measured, nor can they gauge the financial recovery of punters who got burnt last September.
Last Friday, the Dow Jones industrial average climbed 96.66 points, or 1.03%, to end at 9,441.27. The Standard & Poor’s 500 Index gained 13.16 points, or 1.31%, to 1,016.4. The Nasdaq Composite Index rose 35.58 points, or 1.79%, to close at 2,018.78.
US stocks fell the most in two months last week, led by financial and energy companies, amid concern banks have surged more than their earnings prospects warrant and lower oil prices.
There is also a chronic absence of any long-term plan to prevent a similar meltdown in the future, they said.
Jupiter Securities head of research Pong Teng Siew said the collapse of Lehman Bros last September signalled the start of the worst phase of the global financial crisis, although several monetary plans had already been put into motion by then.
“Since then, some of the measures taken especially by the US Federal Reserve have helped the recovery but I am not sure if enough has been done to prevent a recurrence,” he said.
Asian markets tumbled last Sept 16, in tandem with plunging stocks on Wall Street after Lehman Bros announced on Sept 15 that it would file for bankruptcy.
Lehman Bros’ failure came about when the collaterals it posted were seized and sold; this drove asset prices down, inflicted massive losses on other institutions and created fear as institutions became wary of dealing with each other.
The stage for the ensuing nightmare had actually been set much earlier in June 2007 when news broke that two Bear Stearns hedge funds speculating in mortgage-backed securities were melting down.
Terms like subprime mortgage woes, global recession and financial meltdown gripped the US, Europe as well as Asia then, as institutions such as AIG, Royal Bank of Scotland, Bear Stearns and Lehman Bros signalled distress.
Pong said he did not expect equity markets to suffer significantly over the next few months as there was plenty of liquidity to support them, but expressed concern that the excessive liquidity “pumped like steroids” glossed over other serious underlying issues.
“Locally, asset and property prices are holding nicely; interest rates are still relatively low and banks are still lending.
“But it is a mixed bag as at the other end of the spectrum, export sectors that cater to US demand, especially consumer products, are still suffering. Some of these sectors might take up to five years to fully recover,” he said.
Pong said the excitement over an increase in manufactured products like semiconductors or electronics might not accurately represent the actual demand, as buyers could merely be replenishing low inventories after having exhausted stocks.
“Will the orders continue or stop? This would be a question asked by chipmakers or those in the electronics sectors,” he said.
As it is, MIDF Research’s Zulkifli said daily trading volume was already getting thinner on Bursa Malaysia, averaging about 500 million units and was still dropping. Last Friday, the FBM KLCI closed 5.08 points higher at 1,178.74 with 609.28 million shares done.
Investors may also want to square their position prior to the long Hari Raya break, to avoid exposure to global market risks, he said.
“However, this is expected to be transient, as there are conscious efforts to rejuvenate the equity market, beginning with the relisting of Maxis,” he said.
On the recovery of the equity market since last September, Zulkifli said that locally, much of the gains had returned to those who bore the brunt of the 2008 meltdown.
He said this was based on the fact that the local unit trust industry did not suffer a debilitating redemption last year.
“In 2008, total units in circulation in the unit trust industry rose 15.7% although total net asset value of the funds declined by 20.7%. In the first quarter this year, the units in circulation continued to increase albeit by a marginal 1.1%.
“On this evidence, Malaysian investors, as a result of their holding power, have to a large extent smarted the market meltdown. This, in my opinion, is one of the most important factors supporting the market this year,” he said.
Zulkifli said the local market was still missing out on the flow of global liquidity to the region and this was expected to remain Bursa Malaysia’s Achilles heel for the rest of the year. “The net effect of this is that any upside would be capped,” he said.
He said while the reasons included lack of liquidity and governance issues, these same reasons did not deter them from flocking to the market in 2007 and early 2008.
Moreover, since the 2007/08 rally, Malaysia had made much progress in addressing the various concerns, he said.
“This time around the issue has to do with relative valuation and the intensity of recovery. Maybe Malaysia is not offering a ‘bombed out’ valuation as compared with other markets such as China, Korea and Indonesia.
“The rate of recovery in earnings in Malaysia is also slightly out of pace with regional peers. In addition, the domestic pump-priming spending has not filtered to the big-cap listed companies on Bursa,” he said.
Zulkifli said there was much value in Malaysia in small and mid caps and this was a segment that investors should pay heed to.
Inter-Pacific Research Sdn Bhd research head Anthony Dass said regional bourses had improved from the trough in mid-September 2008 until now, adding this was due to improving global economic conditions.
He said signs were emerging that a recovery was underway, with some evidence of greater manufacturing activities in China, Europe, UK, Japan, Mexico and the US.
He said Inter-Pacific Research remained overweight on emerging markets as well as US small- and mid-cap stocks, adding that emerging market stocks still have growth potential
On the local scene, Dass expected the FBM KLCI to remain range-bound despite the second quarter 2009 (2Q09) results outweighing 1Q09 results.
“We expect economic recovery to be long drawn. If that holds true, while the worst of negative revisions may have passed us, the earnings upgrade cycle and growth trajectory will be gradual.
“Also, we think the ‘easy money’ has fuelled the market valuation. Looking ahead, what is needed is ‘real growth’, which will take time,” he said. This is worrying, especially if the investors’ patience wanes. Should this happen, it will result in renewed risk aversion, Anthony added.