State Of Global Economy
The US Economy: US interest rates are expected to stay low for a long time … making sure that monetary policy continues to provide support the economy needs until Fed begins to see growth, sustained growth and jobs. It may consider additional steps to boost US economy if an already softening outlook took a turn for the worse. Risks that inflation might slide lower and were worried about a deflationary spiral. Lending conditions remain tight due to many bank balance sheet riddled with troubled loans. Play down fears about economy slipping back into a double dip recession but a moderate paced recovery. Unemployment remains high.
The Federal Reserve took a small but significant step to counter a weakening U.S. economic recovery, saying it would use cash from maturing mortgage bonds it holds to buy more government debt. The move could herald more aggressive monetary policy easing if more signs of a slowing economic recovery emerge. Should the outlook continue to worsen, the Fed will likely initiate a new round of asset purchases.
Economic data continues to point to a US economy that is struggling, but slowly recovering. One noticeable bright spot continues to be corporate earnings. As a sign that improvements in corporate earnings have been broad-based, all ten sectors of the market are showing positive gains for the first time since the second quarter of 2007.
The Japan Economy: Japan’s deflation is tightening its grip on its economy. Prices have fallen for the 17th successive month in Japan, and with debt to GDP levels heading towards 200% Tokyo has few policy options left. A strong yen is not helping its exporters too.
The China Economy: Signs of slowdown have emerged in China’s economy with manufacturing output falling and GDP growth decelerating to 10.3% in 2Q2010 from 11.3% in 1Q2010. Latest HSBC China Manufacturing PMI showed activity falling to 49.4 in July 2010 from 50.4 in June 2010, the first contraction since global financial crisis.
Pessimists now worry that China growth is losing momentum and concerned that a major slowdown or a hard landing in China will drag global economy down with it into a double dip recession. Optimists however pointed out that current slowdown as a healthy development and sees a moderate slowdown not a double dip. It is a beneficial to long term sustainable growth. Despite slowdown in manufacturing, the demand side statistics remain positive. See as a natural return to normal growth.
The BOC said it will stick to a relatively loose monetary stance in 2H2010 with an emphasis on implementing policy flexibility.
Speculation that China may cut banks' reserve requirements in the next two months (Sept – Oct 2010) as part of a modest loosening of monetary policy. The National Association of Financial Markets Institutional Investors (NAFMII), a body which comes under the People's Bank of China (PBOC), said the central bank would mainly rely on open-market operations for its fine-tuning of policy in the third quarter 2010.
There is the possibility that it will cut the deposit reserve ratio. With an economic
slowdown, 'maintaining growth' will again become a priority in macro-economic controls. China has increased the proportion of deposits that banks must keep in reserve three times in 2010. A cut would be a powerful signal from Beijing that it was leaning towards policy relaxation — and it would also come as a surprise.
On the foreign exchange market, China’s move to cut its US dollar peg was about flexibility instead of appreciation and its ultimate goal is full convertibility. China main concern is about domestic inflation than exchange rate and a slowdown in China economy gave it no reason to sharpen its yuan rise.
The Eurozone Economy: Too early to call the end of the eurozone crisis, but signals are growing that Europe may have turned a corner in its struggle to restore financial stability but long term risks remain.
Meanwhile Ireland's financial headache worsened after Standard & Poor's cut its credit rating. Concerns over the final bill for purging Irish banks of bad debts clocked up in a decade-long property binge have pushed Ireland back to the centre of the European debt crisis and it is viewed as the second riskiest euro zone country after Greece.
France has revised downwards its economic growth estimates for next year from 2.5% to 2%. Ireland’s debt rating has been downgraded and even the UK’s better GDP numbers are the result of construction and inventory rebuild and are unlikely to survive the blast of cold budgetary air still to come this winter. Only Germany motors on with second quarter growth of 2.2% powered by rising exports. But even Germany will falter if its major export markets start to stagnate.
All the major economies in the Northern Hemisphere are introducing tremendous austerity measures to drive down deficits.
France has said it will do “whatever it takes” to cut its deficit. In the UK a spending review is underway, with possible cuts of up to 25% forecast in most government departments.
The Asia-Ex Japan Economy: A slowdown in economies of China and US and the Eurozone will put brakes on growth in Asia. Robust domestic and trade within Asia should continue to support emerging Asian economies and enable them to grow strongly for 2010 and 2011. However, without a further leg up in the final demand in Europe, China and US, the pace of recovery in exports in Asia is likely to slow dramatically.
The Middle East Economy: Troubled state conglomerate Dubai World has invited creditors to a July 22 2010 meeting to offer details on its multi-billion dollar debt restructuring, the first session to include all lenders since December 2009. Dubai World plans to sell its prized assets over a period of eight years to generate as much as $19.4 billion to pay off creditors burned by its overambitious expansion.
The Malaysia Economy: In general, the slowing growth of Malaysia’s exports is due not only to the tapering off of the low-base effect from 2009, but also the softening of real demand from other countries such as that of major advanced economies, which recently adopted fiscal austerity measures to rein in their rising debt levels, and China, which recently implemented tightening measures to curb inflation and mitigate the risk of asset bubbles.
These are actually favourable measures that can help placate volatile financial markets to ensure medium- to long-term growth… their immediate effects (on trade) are a one-off event as the need for these measures will be fully understood over time.
On the other hand the diversification of export markets has worked well in sustaining Malaysia’s trade growth. Intra-regional trade among members of Asean as well as other Asian economies, especially China, should be the way to go... trade is a very important source of growth to the Malaysia economy and this is a structural issue; sources of growth for any economy cannot just change overnight.
Nevertheless, Malaysia’s robust domestic demand at present (Aug 2010) – supported by a healthy labour market, easy credit and an accommodative interest rate environment – can sustain the country’s recovery momentum.
While the Government’s fiscal stimulus spending has waned, the multiplier effects of those measures are still working through the economy, hence supporting domestic demand.
The ringgit’s strength is mainly driven by the interest rate differentials. The unexpected move by BNM started the trend of capital flow into the region, making the ringgit one of the first beneficiaries of funds from the sluggish Europe and US markets looking for higher returns..
On the effect of the strong ringgit on Malaysia’s trade dependent economy, the rate of ringgit appreciation could be a concern. In particular, the continuous strengthen of the ringgit, could hit exporters hard given the recent subsidy rationalization by the government.
Expectations of weaker economic growth momentum in 2H2010 could see BNM maintaining the OPR at 2.75% for the next 9 to 12 months (Aug 2010 & Beyond) , while other regional countries could see higher interest rates going forward.
With the OPR held steady, the ringgit’s movement against the dollar may be capped for the rest of the year (2010). Barring any unforeseen circumstances, expecting the ringgit to maintain its current level (Aug 2010), with the topside at 3.20 to the US dollar and strengthening to 3.10 by end year (2010).
Meanwhile the announcement by Malaysia's central bank that it would allow offshore settlement in ringgit of trade in goods and services triggered speculation that Bank Negara Malaysia (BNM) may allow offshore trade in its currency.
The Industry Trend Of Malaysia
The Palm Oil/Biodiesel Industry: If the weather problems and commodity rally continue, rising CPO prices may provide a major re-rating catalyst for the plantation sector and the local bourse. Valuations wise, share prices of plantation stocks (July 2010) are still holding up, trading at PERs in the high teens and up to almost 19 times for the big caps. With Malaysian plantation big caps stuck at current levels (July 2010), it will be difficult for the valuation gap to narrow unless Singapore listed plantation counters move higher.
The Oil & Gas Industry: Evidence of a slowdown in the US economy is turning up in oil markets as demand stagnates in the world’s most voracious petroleum consuming nation. While energy traders complain that stock markets are steering oil markets – not supply and demand fundamentals – the same factors affect both. The US economy, which is an important part of the share of the world market for crude, is slowing down and the world is reacting to it … falling crude oil prices.
The Timber Industry: Timber stocks, the darling of investors for much of the early 1990s, have fallen out of favour over the last decade (2000s). Falling demand and prices, Japan’s prolonged recession and environmental concerns have all taken their toll, turning investors away from the commodity that had earlier created untold wealth. Nevertheless the worst may also be over for the timber sector, although the recovery will likely be gradual.
The Properties & Housing Industry: BNM’s plan to cap the loan to value ratio for mortgages is likely take effect on Oct 2010. Malaysians developer are also bracing themselves for the real capital gains tax to be adjusted back to a graduated scale of 5% to 30%, with the highest tax in the first year of purchase. Currently (2010), the RPGT is fixed at 5% for the first five year and no tax after that. The expectation is that the sliding scale could be re introduced in Budget 2011 now (Sept 2010) that the recession is over. The objective of the RPGT has always been to restrain excessive speculative in property. The implementation of IFRIC 15 in Malaysia was earlier scheduled for July 2010, but has since been delayed to January 2012.
The Construction Industry: The RM36-billion mass rapid transit (MRT) is expected to drive the construction sector, once it is approved and takes off. The probability of it being approved is high. The MRT project also ties in with another anchor market theme – government land sales. The 10th Malaysia Plan (10MP) tabled in June 2010 has at least set the foundation for the rollout of key projects. There is emphasis on upgrading the country’s transportation system with projects including seven new highways, LRT extensions, MRT and southern double tracking worth a total of RM71 billion.
The Steel/Aluminium Industry: The global market demand for steel is expected to be flat in the third quarter 2010 after the MEPS global steel price fell in July 2010 for the second consecutive month. MEPS (International) Ltd, a leading consultancy company operating in the steel sector worldwide, said the threat of higher iron ore costs, in the July to September 2010 period, prompted steel buyers to build up inventories in the second trimester. The build up was a hedge against the steelmakers imposing increased selling values for finished products.
The Water Services Industry: Selangor Mentri Besar Tan Sri Khalid Ibrahim has given its consent for the Langat 2 water treatment plant to be built in the state, however the Selangor government said the transfer of raw water between both states should in fact be delayed until the restructuring of the water industry in Selangor was completed. PAAB is hoping to complete its planned acquisition of water assets in Selangor by the end of the year (2010).
The Telecommunications Industry: Intel is facing a bitter blow as it becomes increasingly clear that future, fourth-generation high-speed mobile phone networks are going to be based on long term evolution (LTE) technology, rather than WiMax, the standard backed by the world’s largest chipmaker.
The Shipping/Logistics Industry: As at Aug 12 2010, the BDI stood at 2,437 points which has steadily been on the increase since it closed at a 52-week low of 1,700 points on July 15 2010. It is the continued strong demand for iron ore that is the reason for the BDI’s current upward trend. However, critics say the near-term outlook (Aug 2010 & Beyond) for charter rates is expected to remain bleak, which means that the rally will be brief. While most agree that the third quarter 2010 will continue to be unfavourable when it comes to charter rates, the situation should pick up towards the end of the year (2010).
The Regulated Assets - The Power Industry: The Energy Commission (ST) has awarded the concession to develop the first block of the 1,000 MW coal-fired power plant to Tenaga Nasional Bhd (TNB), the focus will be on a possible tender for the second block of an almost equal-capacity power plant in Malaysia.
The present scenario (2010) points to the fact that the energy sector in the country will lean more towards coal-based and less of gas over the medium term.
The question now (Aug 2010) is, with the 2,000MW expansion of coal-fired power plants within the next five years (2011-2015), what will happen to the first-generation independent power producers (IPPs)? Nevertheless, industry observers believe the power plants operated by the first generation IPPs will unlikely be decommissioned. They believe the agreements with these IPPs will likely be renegotiated at a more equitable rate to TNB, resulting in the lifespan of 1st generation IPPs’ power plants be extended beyond the expiry date.
The Rubber/Rubber Glove Industry: The glovemakers are currently (Aug 2010) facing several headwinds, with a combination of high latex prices, a strong ringgit, large capacity expansion plans and fears of a slowdown in demand affecting sentiment for the sector.
The Electronic Industry: Global sales of semiconductors rose to US$25.2 billion in July, up 37% from July 2009 when sales were at US$18.4 billion. The latest sales data showed the July 2010 sales were up 1.2% from June 2010's US$24.9 billion. The SEMI said the three-month average of worldwide bookings in July 2010 was US$1.83 billion. The bookings figure is up 5.9% from the final June 2010 level of US$1.73 billion, and is 220.4% above the US$571.8 million in orders posted in July 2009.
The Automotive Industry: Proton Holdings Bhd wants consolidation in the auto industry. Its management feels a merger especially with Perodua, will bring about economies of scale, healthier margins, lower costs and the ability to compete better in a globalised marketplace. But Perodua’s response to the idea has been less than encouraging. But the Malaysian Automotive Association (MAA) president has poured cold water on the need to consolidate the local automotive industry as most car companies, with the exception of Proton Holdings Bhd, are operating well above capacity.
The F&B Industry: Industry observers are expecting a number of F&B players to seek M&As more aggressively. In fact, the protection and expansion of market share remains the top priority for F&B companies. But aside from market share, the other driving reason for F&B companies to seek acquisitions is to secure raw materials supply in an environment of volatile commodity prices and to protect precious margins.
The Gaming Industry: The two percentage-point betting duty hike is viewed as a negative development for the gaming sector as it will crimp the earnings of the number forecast operators (NFOs). Overall, the development negatively as higher betting duties lead to immediate earnings dilution.
The Financial Industry: The announcement by Malaysia's central bank that it would allow offshore settlement in ringgit of trade in goods and services triggered speculation that Bank Negara Malaysia (BNM) may allow offshore trade in its currency.
Market Commentaries
The months of September and October have over the years been viewed with trepidation by stock market investors all over the world for historical reasons.
From the Wall Street crashes in October 1929 and October 1987, as well as the panic selling between September and October 2008 following the failures of several large banks, the two months have remained a nagging thorn in the minds of investors and dealers alike.
Given the current (Aug 2010) global uncertainties, is the local stock market headed for gloom or will it be Sweet September 2010?
While agreeing that the September-October period often spelt gloom for the local bourse, many were optimistic that stocks on Bursa Malaysia Securities would fare well in Sept 2010.
While the past may not predict the future, the high degree of statistical significant patterns cannot be ignored. As investment is not a perfect science, the probability of a gain or loss in a particular month in the past can still be used as an additional guide, especially during periods where one becomes uncertain of the market direction.
Investors thinking of selling should hold till the early part of the year like January or February. Those who are uncertain when is the best time to invest may want to wait till August-October to accumulate stocks. For whatever reasons, many of the major financial mishaps seemed to happen during this period.
For those who intend to invest for a short period, December to February will probably provide the optimum period to maximise return without risking the investment for an excessive period.
Meanwhile market valuation is always relative. Benchmarked against earnings and GDP growth, the multiples were still low as 2010 was a rebound from a low base.
Most leading Malaysian firms, led by the big banks, posted robust growth in profits in the three months ended June 30 2010, with quite a few exceeding forecasts.
But a surge of funds flowing into the market in recent months (July-Aug 2010) means stock valuations on a price/earnings basis are not getting any cheaper. In fact, stocks remained expensive compared to their historical price/earnings ratio (PER) average.
The stronger trading values of the top 100 stocks on a one-month and three-month basis suggests that investors are already looking beyond the relatively expensive 2010 PER valuation.
A research house calculated that local stocks are priced at 16.7 times based on projected earnings of 2010. This was higher than the post Asian financial crisis mean PER of 16 times and one-year forward PER value of 15 times. The firm’s forecast put the PER for 2011 at 14.7 times and a normalised earnings growth of 14.5%.
Moving into 2011 when a lot of parameters had normalised, similar multiples would be a bit stretched for the equity market, a situation that applied to all markets in the region.
From a cross-section perspective, the Malaysian market is certainly not on the cheap side. Then again, earnings growth for Malaysian stocks still lags behind regional peers such as Indonesia, Hong Kong, China and India.
All considered, comparing one market to the other on the basis of earnings multiple was always a tricky exercise, as every market had its own characteristics and was backed by different sets of fundamentals.
For example, the FBM KLCI reflected a preponderance of weight for the banking and plantation sectors, as opposed to Korea which was dominated by technology and semiconductor stocks.
The underlying force moving markets in the region remains global liquidity. Estimate is that global liquidity parked in Asian equity is higher now (Aug 2010) than what it was before the 2008 crisis.
The good news for Malaysia was that since early July 2010, there had been a slow but gradual buildup of foreign investment in equity. This was partly due to the overall upbeat sentiments globally towards equity and the fact that Malaysia had seen its country rating upgraded by several global investment houses.
Expects investors to remain on guard for fear of a possible “double-dip” recession underpinned by the weak economic data rolling out from the US, uncertainties in euro, lull in the Japanese economy and the risk for emerging markets overheating, and potential asset bubbles burst is flaring.
Do expect the KLCI to take a breather, but the retracement is unlikely to be severe. The September-October period has always been associated with a spike in risk aversion although things could be different for 2010 as the correction could be earlier.
While a correction would be good for the market, the downward correction would be limited, after looking at the structure of the participation, primarily supported by local participation. Also with Budget 2011 to be announced in 3Q, possibilities for a pre-budget rally remained high.
Meanwhile the domestic bond market, especially the government bonds segment, is better than the equities, with yields falling since the start of the year (2010). Generally in the region, there is much more foreign interest in the bond market than in equities.
The increase in funds from abroad has been steady and substantial in Malaysia. Then influx of foreign funds into the region, reflects a structural shift, where sovereign risk levels are perceived to have declined compared with some developed economies.
Asian economies, which have done well from a macroeconomic and policy standpoint, continue to benefit from the perception of relatively lower risk.
Interest is growing in regional bond market including Malaysia’s as foreign funds seeks shelter in government bonds amid uncertainties at home.
According to industry observers, there is a mix of foreign money flowing into the region, with pension, hedge and index tracking funds all looking at assets in emerging assets.
Foreign funds are flocking to fixed income instruments instead of equities partly because of the liquidity factor.
Furthermore the fragile recovery in the US economy has raised concerns about the world’s economic health. It is thus natural for fixed income instruments, particularly government paper, to become the preferred investment alternative. The inflow of foreign funds is due to declining country specific risks. The most relevant investment platform to be driven by this factor would be government bonds.
This allows investments to leverage macroeconomic and sovereign risks changes rather than company specific risks which relate to equities.
Carry traders are said to be back in actions as they can borrow cheaper funds is USD or euro and park the money in Asia where interest rates are relatively higher. The strengthening of regional currencies against the US dollar also increase the appeal of assets in Asia as foreign exchange gains could further boost investment returns.
Technical Analysis
The market has been up for three consecutive week, posting handsome gains and many people see no reason to go against the tide apparently, with the prevailing trend still painting a positive pictogram, the underlying tone staying upbeat and the latest US data showing the world’s largest economy appearing not in great risk of falling back into recession.
However, investors should take note that all the bulls are of the same species and their typical behaviour is, after a solid rally, they need to pause at certain point for air and recharge to gain new strength. If not, they will find it very difficult to beat the stronger and pivotal upper resistance barriers going forward.
In short, it is about time the market consolidates and it may come about as soon as this week, judging by last Friday trading pattern, where sellers dominated the floor.
Technically, indicators are bullish and at the same time overbought, suggesting any pullback should be interpreted as an opportunity for investors to accumulate more.
Initial resistance is expected at the 1,450-1,452 points band. The next objective would be to fill the 1.490-1,497 points gap and to challenge the all-time peak of 1,524.69, established on Jan 14, 2008.
Current support has been adjusted slightly upward again to 1,420-1,423 points range, followed by the 14-day simple moving average (SMA) of 1,405.40 points and the 1,400-points psychological level.
The lower floors are pegged at the 21-day SMA, 50-day SMA, 100-day SMA and 200-day SMA, at 1,389 points, 1,357 points, 1,336 points and 1,311 points respective
Undermining Factors
1. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Sovereign Debt Crisis … Stabilizing);
2. Volatile Foreign Exchange Market (Speculating Further Strengthening Yuan);
3. Rising Commodities Prices & Threats Of Commodity Inflation;
4. Fear Of Deflationary Threat (Developed Economies);
5. Fear Of Inflation Threat (Emerging Economies);
6. A US Dollar Crisis;
7. Policy Tightening & Implementing ‘Exit’ Strategies In The Course Of 2010 As Economic Recovery Becomes More Firmly Established (Uncertain Due To Unsustainable Global Economic Recovery And Strength Of The Economic Recovery And Corporate Earnings Recovery)
8. Unwinding Of US Dollar/Yen Carry Trade;
9. Trade War Between US & China (Protectionism)
Unpredictable Risks/Surprises
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease –
4. Financial Crisis – PIGS Sovereign Debt Crisis
5. Major Social And Geopolitical Upheaval –
Equity Strategy: Easing Malaysia Political Uncertainty, Global Financial Crisis Stabilizing … Transition From Recovering To Expansion, Strengthening Commodities Prices, Moderating Inflation, Earnings-Driven Re-Rating Cycle, Strengthening Ringgit, Tightening Monetary Policy & Withdrawal Of Stimulus Measures …Global Recovery Face Headwinds … Expecting To Be Volatile …!
Recession – Recovery – Growth/Expansion – Boom – Burst
(Uncertain As Whether Current Ongoing Correction Signals The Start Of A Negative Trend Reversal Or A “Belated” Mid-Cycle Correction In An Extended Bull Market)
a. Timing Is Crucial In Equity Investment: When is the best time to invest? January? or February? When is the time to avoid the market? May? or October? And when is the optimal period to be in the market so as to maximise return?
b. Malaysia/China/US Equities Outlook by Capital Dynamics … dated Aug 2010;
c. The Ringgit Outlook by Morgan Stanley …Ringgit Is Headed For A Period Of Consolidation (From Sept 2010) May Advance 1.8 percent To 3.09 By The End of June 2011 And To 3.05 by end-2011;
Do China-Based Companies Deserve A Better Valuation! … Aug 2010;
d. The Trend Is Imminent As Indicators Released By Most Countries (Aug 2010) Thus Far Are Pointing them Towards That Direction But …;
e. Indices Show Optimists In Malaysia Are Still Outnumbering Pessimists In Malaysia As At End Of Second Quarter Of 2010;
f. First Time Since Nov 2009 That Foreigners Are Net Buyers. The Net Inflow In June 2010 Is The Highest Since October 2009;
g. Despite Apparent Low Expectations Of Reform, The Question Is Whether The Market Can Further Rerate Without Being Accompanied By Strong Upward Earnings Revisions;
h. Malaysia Equities Outlook as at July 2010:-
i. Economic Outlook;
j. A “Belated” Mid-Cycle Correction In An Extended Bull Market;
k. The Key Catalysts For The Private Sector In 10MP Including …;
l. Case For Stronger 4Q2010;
m. Market Could be Catalysed By …
n. Where Are The Global Economy/Equities Now? (Refer To Special Report)
o. State Of China Monetary Policy as at May 20 2010 (Refer to Special Report)
p. How vulnerable Are We! (Refer to Special Report)
q. Special Report - What Is NEXT After The EU/IMF Emergency Loans To Greece 2.0 (Refer To Special Report)
r. State Of Global Monetary, Foreign Exchange & Fiscal Policy (Refer To Special Report)
s. State Of Global Economy (Refer To Special Report)
a. Timing Is Crucial In Equity Investment
Timing is crucial in equity investment. This is especially so as the stock market is very cyclical. A good entry point will allow one to buy at a few percentage points lower and sell at a few percentage points higher than average investors.
When is the best time to invest? January? or February? When is the time to avoid the market? May? or October? And when is the optimal period to be in the market so as to maximise return?
From average monthly performance of countries, it is clear from the peaks and troughs of the monthly returns that the markets were cyclical. Strong gains and losses in certain months happened repetitively over the years, indicating there were visible trends which may be useful for future investment guides.
December Was The Best Month
On a month-to-month basis, December was the best month to invest as it provided the best average return of 3.9% based on the KLCI since 1980. Over the past 30 years, 80% of the time December ended up as a positive month, which means that there is only a one-fifth chance that you may lose money in December. As such, investors who intend to invest in the market should plan ahead.
The strong performance in December was also depicted in the Singapore, Hong Kong and US markets. In all the four markets, December was the best month. Other than Bursa Malaysia, the other markets showed more than 70% chance of making money in the month of December. In terms of absolute return, December happened to be the best-performing month for Singapore and Hong Kong. In the case of the US market, the pattern was slightly different as the gain in December was moderate. The gains in April and November beat that of December.
The coincidence of a strong December performance could be due to a global phenomenon whereby the strong performance of a major market, most likely the US, led to improved sentiment in other markets. One possible explanation could be due to the year-end window-dressing activities to boost the market for fund valuation or for performance purposes.
January Effect
January was an average month in the US, both in terms of probability and absolute return. January Effect was described as the possible tax effect whereby investors sold their shares before year-end and reinvest again in January to minimise tax liability. In the US and in many other developed countries, realised capital gains from share disposals are taxable.
Investors in Malaysia, Singapore and Hong Kong are fortunate as capital gains are generally not taxable and hence there is no need to do such tax planning. Nevertheless, January’s performance was above average with the Malaysian market, showing slightly better gains than that of the other two markets. Another possible explanation for the January Effect in the Far East is that bonus and increment in January provide additional liquidity to support the market during the month.
Recently, the January Effect has been getting less obvious in the US. For the last 10 years, January has even started to show losses in the US. The Malaysian market recorded as high as 69% chance of making money in January with an average gain of 1.8% in the month. For the past 10 years, the only year where January did not end in positive territory was in 2008.
Chinese New Year Rally
Chinese New Year normally falls in February and this auspicious month has provided “good luck” to punters in the past, especially in Malaysia where the percentage of positive month was 67% and the average gain in February was a strong 3.3%. The Singapore and Hong Kong markets also did quite well in February. The strong performance in that month was partly due to exceptional gains in the Februarys of 1987, 1991 and 1998.
On the other hand, the US market did not seem to have any affection for the month of February. The Singapore market seems to follow the weaker US market in February than the stronger performance of the Malaysian market.
Sell In May And Go Away
The investment myth “sell in May and go away” seems to apply more to the US market. May was generally a good month in the US but the subsequent months from June to September did not perform as well. However, this myth was ignored by investors in Singapore and Hong Kong as the two markets continued to show gains two months after May, especially in July where the gains were even more pronounced.
August Was Gloomy
The worst month in the past was August. Based on the KLCI, only 33% of the August month ended in positive territory, the average loss in the month was a high 3.05%. The huge losses were due to several crises that happened to fall in August. But when the sky was clear, the gains were not substantial. If we analysed the performance further, the poor August performance happened in each of the past decade, indicating a high degree of certainty in this case.
Similar observations were seen in the Singapore and Hong Kong markets where the probability of a positive month in August was only 40% and 47%, respectively. Although the two neighbouring bourses did better than us in August in the past, the chances of making money in August were still below average. In terms of absolute performance, Singapore suffered a loss of 1.85% in August and Hong Kong fell 1.1% on average during the month.
It is yet to be seen whether history will repeat itself. August is definitely a gloomy month to watch out for.
Optimum Investment Period
What is the optimum period of investment? As there is incremental risk involved for every additional month invested in the stock market, the optimum period will provide the risk and return trade off. Based on analysis of the KLCI, the optimum period was three months where the average return was 0.887% per month.
Although holding stocks for four months may yield a slightly higher return, the incremental risk is higher. The same phenomenon happened in Hong Kong as the pattern of return versus holding period between the KLCI and Hang Seng Index seemed similar. As for the US market, the S&P 500 seemed to suggest a longer holding period of four months. The only market that did not show obvious optimum period of investment is Singapore.
From observation, the best time to be in the Malaysian market was from December to February. That also applied to Hong Kong market. But in the case of the US market, the lack of a February Lunar New Year rally, shifted the period slightly. The S&P seemed to predict the optimum period of investment as November to January.
The Singapore market appeared to indicate two optimum periods — November to February, and April to July.
While the past may not predict the future, the high degree of statistical significant patterns cannot be ignored. As investment is not a perfect science, the probability of a gain or loss in a particular month in the past can still be used as an additional guide, especially during periods where one becomes uncertain of the market direction.
Investors thinking of selling should hold till the early part of the year like January or February. Those who are uncertain when is the best time to invest may want to wait till August-October to accumulate stocks. For whatever reasons, many of the major financial mishaps seemed to happen during this period.
For those who intend to invest for a short period, December to February will probably provide the optimum period to maximise return without risking the investment for an excessive period.
c. The Ringgit Outlook By Morgan Stanley … dated Aug 2010
Malaysia’s ringgit is headed for a period of consolidation as technical indicators signal this year’s (Till Aug 2010) market-leading rally may be running out of steam.
The currency has strengthened 9 percent in 2010 and reached a 13-year high of 3.1238 per dollar on Aug. 23 2010, Asia’s best performance excluding the yen. Malaysia’s economy expanded 8.9 percent last quarter (2Q2010), following growth of 10.1 percent in the first three months (2010), the best quarters in a decade.
The ringgit momentum may be close to exhaustion after moving so quickly. Therefore expects dollar-ringgit to enter a period of consolidation before heading lower in 2011.
The currency reached Morgan Stanley’s end-2010 target of 3.13 “ahead of schedule”. They cited the dollar-ringgit’s deviation from its 200-day moving average and deviations in returns from the average between 1999 and 2010, for their currency outlook.
Morgan Stanley maintained its forecast for the ringgit to trade at 3.13 per dollar by the end of the year (2010). The currency may advance 1.8 percent to 3.09 by the end of June and to 3.05 by end-2011.
Bank Negara Malaysia has raised its overnight interest rate three times to 2.75 percent and eased foreign-exchange controls on Aug. 18 2010 by allowing the use of ringgit to settle cross-border trades.
The central bank has pleasantly surprised the market with its pre-emptive tightening and partial relaxation of capital controls. Valuations are not an impediment for the ringgit to continue to strengthen further” in 2011.
Stock Market Leading Performance Indicator
8 (0-3-Bearish 4-6-Neutral 7-10-Bullish).
