Tradeview: (Tradeview 2020) Why is KLCI Bursa Stock Exchange Trading At Record High Volume?

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These are amongst the many questions that I received from my readers :

1. Why is the KLCI stock exchange making new record high in terms of trading volume?
2. Who are trading and who are the net buyers?
3. Are we in a bull market?
4. What should we do?

I will attempt to give a reasonable explanation and answer to all of the above questions. Data and numbers will give us the answer we are looking for should we make a reasonable inference and hypothesis from it. Have a look at the data below :

15 May 2020 : Volume 9.3 billion, Value RM 3.9 billion

14 May 2020 : Volume 7 billion, Value RM 4.1 billion

13 May 2020 : Volume 9.7 billion, Value RM 5.2 billion

After making a record high volume and value on Wednesday, 13 May 2020, the market once again return to a high volume and value on Friday, 15 May 2020. The last time the stock exchange hit such high volume and value would be back in August 2014. At that point, KLCI was making fresh record high and KLCI reached 1892 points. Where are we today? We are at 1403 as of Friday.

If you look at the volume from 13th May to 15th May, the volume fluctuate from 9.6 billion to 7 billion then back to 9.3 billion. But what is most interesting is the value. The value has been diminishing from RM5.2 billion to RM3.9 billion. This is despite the KLCI index closing at higher 1403 points on Friday compared to 1397 points on Wednesday.

Logically, if your trading volume rises, your trading value should rise as well not fall. This shows the trades have moved from high value stocks to low value stocks. Or in layman terms, from first liners to third liners. In such situations, it would only mean one thing, funds are less active buyers (especially foreign funds) and retailers have taken over as net buyer. Well, I am sure some of the readers may not agree with me. Some may argue I am just making a general assumption. Thankfully, I have facts to show the data :

This is from April 2020 statistics :

From both data above, it shows local retailers have overtaken the Bursa KLCI stock exchange as the largest participants in the market in terms of value and volume traded. What is even more interesting, foreign funds have been selling non-stop, local institutions appear to be playing a supporting role (support the market) BUT retailers are net buyers.

My question to all now, is this not a dangerous signal? Are retailers outwitting local funds, foreign funds and understand the market better than them in terms of investing in the share market? Why are Foreign funds selling endlessly, local funds are merely supporting and retailers buying non-stop?

Based on our findings and research, we have come to the following conclusion on why KLCI Bursa is hitting record high volume.

1. The record low interest rate environment following BNM rate cut to 2%

This has spurred retailers to move their savings / fixed deposit to equities market in search of higher returns. We saw the 12 months Fixed Deposit rate by Public bank is currently 2%. As a saver, many would not want to put their savings in the FD for a meagre 2% return and rather move the funds into equities which may give 4-5% dividend yield. With KLCI having beaten down badly in 2020, many think buying low is safe as value has emerged from stocks which would ordinarily be expensive in terms of valuation to consider a good investment.

Risk: However, I believe this batch of investors of prudent fundamental investors are the minority. Many punters or inexperience investors who are speculating in penny stocks with poor earnings & track record (ex - Ageson, Ho Wah Genting etc)

2. 6 months loan moratorium by BNM & I-Lestari EPF Scheme

The BNM policy’s objective was to alleviate individuals and businesses from lack of income due to Covid-19 and MCO lockdown. With the 6 months window of breathing space, individuals and businesses has no loan repayment obligations to be made. This cause the surge in liquidity / money supply into the market for disposable use or investment purposes. We do not believe that BNM’s purpose of doing so is to encourage businesses & retailers to use the money which would otherwise be used for loans repayment to speculate in the share market. Additional withdrawal of EPF funds is for the people to get through MCO and potential unemployment. The additional funds was not supposed to be used for the share market. However, this is the byproduct or side effect of the economic policies when the M2 increase in the economy as a whole.

Risk: This is akin to using 6 months of borrowed money to speculate / invest in the share market. Should the market plunge again, those who are caught will lose money and face even greater challenge in repaying their loan obligations. Future savings in EPF for old age will also dwindle.

3. FOMO - Fear Of Missing Out

This issue is the same globally. When the market went through sharp rebound due to the large stimulus package by US Fed and Central Banks around the world to mitigate against the impact of Covid-19, the share market started to rebound. Investors who was worried about missing out this long awaited recession quickly set up trading accounts and rush into the market. This is like a stampede, where people are charging ahead in herd mentality without any sense of rationality moving with the flow. It is a vicious cycle. This stampede will only result in one outcome - blood. Speculative mania are signals of irrational exuberance which in effect are warning signs to all of us.

Risk: What happen when the music stops? I think you all know the answer to that
5. Extended Duration of MCO Lockdown And Lack of Income

The extended period of lockdown imposed by the government which was almost 8 weeks long meant many people were sitting home doing nothing. Businessman could not run their business. Employees would have more free time compared to having a fixed hour day job. Like many who have picked up cooking or baking as a healthy pastime, the time on hand allowed people to explore the possibilities of the share market. Additionally, the lack or fall in income has resulted in businessman and those affected to speculate in the share market hoping to make money to cover for shortfall and daily expenses.

Risk: Once the lockdown is over and all sectors are running, people would return to their daily jobs and have less time for the share market. This would result in reduction in participation in the market consequently downtrend.

6. Closure Of Casino, 4D Betting House and Various Vice-Businesses

The closure of the above mentioned premises means there are absolutely no opportunity to gamble. This consequently resulted the funds from this segment of the economy to flow into the share market. This in effect has turned the share market into a legal gambling arena. After all, punting and speculating in the share market based on hearsay and tips are no different from gambling right?

Risk: This segment of money would eventually flow out as well once things are back to normal

7. Proliferation of Syndicates, Misleading Articles and Fake News

Due to the interest in the share market, we have observed a spike in nonsense promotional articles by unknown authors, rise in market cyber troopers / keyboard warriors, fake deals and news announcements by listed companies with poor track record and earnings. All for the purpose of pushing the share price of the stock and manipulating the market via pump and dump operations. Even syndicates appears so obviously unlike before, where it was more subtle.

Risk: Many inexperience and new investors who are in the market will unknowingly suffer substantial losses. In fact, when you look at August 2014 KLCI record high volume, many were penny stocks being played up. Many names are no longer to be seen today such as Sumatec, PDZ, it looks grossly similar to what it is today.

8. Regulators Have Halted Short Selling and Margin Call

To be very frank, this is one of the decisions we are adamantly against. Free market forces are there for a reason. It is to ensure equilibrium exist. Having short selling will allow the market to function more efficiently and in fact reduce the ability of syndicates to conduct pump and dump operations. When the market is one way, not both ways, the tendency for it to go higher is there. However, if there are huge opposing force (short sellers), they function to clear the market of its inefficiencies hence resulting in a more reasonable and less speculative market. Also, without the fear of being forced into margin call, those who are using margin facilities will not worry and when the market continues upwards trend, their margin facility grows allowing them to push more funds into the same upwards direction without fear of the repercussion of margin call. That is extremely unhealthy.

Risk: Once short selling and margin call is reintroduce, the impact will be greater than before as the market is filled with greater inefficiency waiting to be corrected.

Our Advice To Readers :

We are not suggesting all to stay away from investing in the market. We are also not saying there is no value stocks to invest. In fact, there are many good companies with good dividend yield and strong track record worth our consideration should we are prepared to hold for the long term horizon. This is also the best opportunity to build a portfolio of stocks with recurring dividends / income. These are many blue chip names which we are familiar with be it banks, consumer sectors, insurers and what not which are too expensive in the past to invest. Today, value has emerged for collection. Sadly these are not the stocks being invested by retailers.

On the contrary, it is the lousy speculative stocks with poor track record that is hogging the limelight today. Thematic plays have taken over news flows and fake misleading postings by syndicates are also being widely circulated and shared across platforms It has even come to a point where dubious MOU and deals are being announced by companies to Bursa. There was 1 day last week, I remembered reading 3 separate listed companies venturing into healthcare PPE / Covid testing kits business. In just 1 day. And what was common between these 3 companies? None of them had good track record, experience or ability to be in this field.

I am not bothered if funds or syndicates lose money. What pains me are ordinary people and retailers who are inexperience and new in investing losing their hard earned money in this extraordinarily trying times. Do be careful and not let greed take over your sense of rationale.