Monday 30 December 2013

Year in review

As the year 2013 draws to a close, we revisit some of the major events, domestically and globally, that had an impact on our stock market. In particular, there are several notable contrasting – perhaps worrying – trends that divide the five months from the rest of the year.

The first few months of 2013 was marked by pre-election jitters. This was most notable amongst local retail investors, whose participation dropped to just 16% of the average daily traded value (ADV) in 1Q13. Total volume traded averaged little over 1 billion shares daily. The 13th general election, held May 5, was one of the most keenly fought in the country.

RM18 billion foreign fund inflows into market from Jan-May
Interestingly, whilst domestic retail investors were sitting on the sidelines, foreign investors were pouring money into the market. From January to May, nearly RM18 billion of fresh monies were invested in local stocks. We attribute this as part of a global phenomenon. Extremely loose monetary policy and aggressive quantitative easing programme in the US and to a certain extent, the eurozone, created vast liquidity. With interest rates in the developed world at historic lows, yield hungry investors were swarming emerging markets, including Malaysia.

Foreign fund inflows helped absorb selling pressure from local retail investors. The FBM KLCI ended flattish for the year-to-date on the eve of the general election.

Post-election catalyst for retail investors
The subsequent win for the ruling coalition party, albeit by a smaller majority, rejuvenated local investors. Share prices jumped in the ensuing relief rally while volume was also sharply higher as monies on the sidelines were finally put back to work. Retail participation rose to 23-24% of ADV in 2Q-3Q13.

By this time, however, the global investing environment had taken another turn – triggered by the US Federal Reserve’s suggestion that it would soon be pulling back on the US$85 billion a month bond-buying programme. (After holding off tapering in September, as widely expected, the Fed finally made the decision to cut back on its bond purchases in December)

Hot money outflows from June
Fears of an imminent tightening sent global shares and bonds reeling. Yields, which are inversely correlated to prices, jumped sharply higher almost overnight.

Emerging market stocks were hit particularly bad on fears of hot money outflow. Countries with current account deficits, such as Indonesia and India, faced the brunt of the selling.

In June, for the first time this year, foreign fund flows into Bursa turned negative. Between June and November, fund outflows totalled RM13.7 billion. Over the same period, foreign shareholdings in the stock market fell from a peak of 25.2% in May to 23.6% by end-November.

Still, the local stock market stayed surprisingly resilient despite this selling pressure, thanks to, we believe, local institutional funds stepping in.

The ringgit, however, weakened – from a high of 2.93 to the US dollar in mid-May to 3.33 at end-August – after Fitch Ratings downgraded the country’s outlook to negative from stable – before recovering slightly to the current 3.28.

Fiscal consolidation and subsidy rationalisation
The threat of a ratings downgrade could have been the final nudge for the government to put its house in order. Both the budget deficit and public debt levels had ballooned in the past few years.

The subsidy rationalisation plan, put on hold because of the election, resumed with a 20 sen per litre hike in petrol prices in September. This was followed by removal of sugar subsidies in Budget 2014, which also saw a definitive timeframe for the implementation of the long-delayed goods and services tax (GST), in April 2015. In addition, the government raised real property gains tax to 30% for disposals within three years and banned the use of Developers’ Interest Bearing Scheme (DIBS), effective January 2014.

In December, an average 15% electricity tariff hike, effective January 2014, was announced. The tariff increase took into account a reduction in gas subsidies by RM1.50 per mmbtu.

More subsidy removals are likely on the cards next year.

Despite the threat of further fiscal consolidation and inflationary pressures that would hurt domestic consumption – and continued foreign fund selling – the FBM KLCI rose steadily to hit fresh all-time record high levels in December. Notably though, these gains were had on thin volumes. The number of shares traded dipped to just 1.2 billion shares daily, on average, in December (up till the date of writing, December 19).

Barring a major reversal, the local bourse is looking to end the year as one of the best performing markets in the region.

Corporate earnings yet to catch up with share price gains
On a more worrying note, corporate earnings growth has lagged. In fact, earnings results have roundly disappointed for the past two to three years, growing only in the low single digits annually – despite relatively robust GDP growth. As a result, our valuations are now among the highest in the region.

Most market analysts are forecasting stronger growth for 2014, which could be the underlying factor driving share prices higher of late. Certainly, there were signs of earnings stabilisation in the latest 3Q13 results reporting season – but cost pressures may yet result in renewed deterioration going into 2014.

In terms of sectors, construction and property stocks were among the best-performing in the market, so far this year. This is unsurprising given increased government spending on infrastructure, including the MRT project, under the Economic Transformation Programme.

Demand for properties has also been quite robust, thanks to liquidity and low interest rates, at least until recent cooling measures. On the other hand, the plantation index fared the worst. Plantation earnings were weakened by depressed crude palm oil prices that prevailed for the better part of this year. 

In summary, our stock market – at least the headline FBM KLCI – fared very well in 2013 despite volatile and uncertain global developments. Going into 2014, however, investors may do well to take heed of the less positive trends that have emerged towards the later part of this year, some of which could take a turn for the worse.

Source : Bloomberg

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