November 29, 2021

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The Trinity Of The Stock Market

Pix Source : Bloomberg

Entering the second half of another less than stellar year, FBM KLCI hit a 52 weeks low of 1502. Our local bourse has been underperforming regional peers. Year-to-date KLCI is down more than 10%. In fact, KLCI's peak in the past 1 year was 1684. It would no doubt appear that our local stock market has gone through a correction. To ensure there is no confusion, a correction is a range of 10% and a crash is more than 20% from peak level. Interestingly, through the year I have highlighted many times through the year of the importance of conserving cash and that a correction this year is highly likely. Although our stock market has been lethargic, that being said, I believe this is a matter of correction due to the three prong macroeconomics headwinds our country is facing - politics, pandemic and social issues. Our Covid-19 cases have hit a daily record of high of 11,079 as of Tuesday and the cumulative cases broke above 800k (2.5% of our population).

They always say the stock market is a near term barometer of the economy outlook. In my view, it is to a large extent a reflection of market confidence. Market confidence can be further segregated to business confidence, consumer confidence and investor confidence. With all three confidence at a demoralising level, there is no doubt that the stock market has been on a downtrend. Above and all else, it dictates the fund flow into and out of the stock market. In terms of stock market participants, there are mainly 3 buckets namely, local institutions, foreign investors and retail investors.

Based on the MIDF's latest fund flow report for the first half of 2021, local institutions and foreign investors were net sellers of Malaysia equities at RM 4.08 billion and RM 3.81 billion respectively. Retail investors is the only net buyer of the three key market participants and have been net buyers at RM 7.9 billion. What is more alarming is that foreign investors have sold RM 2.45 billion in the second quarter of 2021 alone and it is the 13th consecutive quarter of selling. The only bright side is that foreign investors have been net buyers of our local bonds to the tune of RM 7.05 billion. Otherwise, the impact to our forex is unfathomable.

Of course, foreign funds fleeing our local stock market is not a singular event unique to Malaysia as it appears that our neighbours such as Thailand and Philippines are suffering the same fate. The similarity between all three countries would be them facing Covid-19 resurgence and their government has been unable to contain the pandemic despite multiple lockdowns and measures imposed towards curtailing movements of citizens and businesses. This is clearly a manifestation of low foreign investors' confidence towards a government's mismanagement of the country and economy. Over the week, Daniel Moss of Bloomberg even wrote a scathing piece of Op-ed which went viral. The gist of which is if Malaysia regress continues on this path, it would be towards becoming a failed state. Bloomberg is also not the first news outlet to report such a negative piece. Fitch Solutions has highlighted multiple times as well on the issue of governance and economy of Malaysia.

Suffice to say, it is imperative for the stock market to have at least 2 out of 3 of the key market participants as net buyers in order to trend upwards. Unless and until either one of the local institutions or foreign investors show net buying pattern, the market will remain in doldrums. At this rate, retail investors is not able to prop up the market further amidst the pandemic, repeated lockdowns and political uncertainty. They simply cannot be the sole buying force in the stock market. Otherwise it is a case of throwing good money after bad.

It is never easy to invest in a market when there are so much policy uncertainties. Even in a situation of a bad policy, investors can easily arrive at a rational decision, which is to not invest. Flip flops on the other hand affects the visibility of earnings and ordinary course of business which moves the economy. If local institution is not taking position, what more foreign investors? All that's left at the end of the day would be retail investors speculating the market hoping for a way out of their current predicament. The trinity of the stock market must maintain a healthy equilibrium and not lopsided in order for it to return to some semblance of normalcy. Retail investors ought to pay more attention to fund flow otherwise one's investment journey would be an endless series of average downs or cutting losses.


Author of "Once Upon A Time In Bursa", link to book please click HERE or MPH Bookstore

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