Thursday 17 October 2013

How will the stockmarket react to the coming Budget?

Into the last trading week before the presentation of the Malaysian Budget on 25 October, the question that begs an answer is whether I should invest more into the capital markets (shares and bonds), stay with my current portfolio or reduce my exposure.

Let’s start with where we are, with a chart of the FBM Kuala Lumpur Composite Index below. The market has done fairly well gaining by 9% in the last 12 months and 25% over the last 2 years. However, in comparison to other markets, we have generally underperformed.

In terms of valuations, the market is trading at approximately 16.84 times prospective PER with a 3.12% dividend yield. It is reasonable and not demanding in comparison to its historical data.

*Source: Bloomberg Daily Index Prices

*Source: Bloomberg Monthly Index Prices [Base = 100 @ 14 Oct 2011; Last date = 14 Oct 2013]

Predicting what the stockmarket will do is voodoo science. Indeed, one of the three winners for this year’s Nobel Prize in Economics, Eugene Fama, is best known as the father of the Efficient Market Hypothesis. The belief that all information are already fully incorporated into the stock price.

Nevertheless, for us practitioners, we live on the belief that there is a price discovery process and markets do become irrational. This line of thought is in tune with the other winner of this year’s Nobel Prize in Economics, Robert Shiller.

Even Fama provides for the possibility of making a buck out of the stockmarket, noting local risk factors as a cause of differential portfolio returns.

Ultimately, your investment choices are uniquely yours. It is about the risk you are willing and able to take. Putting all your money into a bet on whether the market will go up or down will be truly unwise.

This week in the Trade Wise column of The Edge, I share my views on the immediate outlook for the Malaysian stockmarket. It reflects my choices and my risk and reward trade-offs. Not necessarily yours.