November 29, 2021

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Where Do Retail Investors Go From Here?

For a large part of 2021, the net buyers of the local stock market have been retail investors. Foreign funds are mostly net sellers with some net buying spree on occasions. Local institutions on the other hand have been a consistent net seller for almost every day since the start of the year. There is a transfer of shareholdings from local institutions to retailers and I am particularly concern with this phenomenon. It goes without saying for the stock market to go up, retail investors strong buying momentum alone is not able to push the index upwards. There must be complementary support by local institutions or foreign funds. 

Into the 3rd month of 2021, retail investors participation are still very high although last year many analysts have reckon that post loan moratorium, the stock market would see retail investors participation dwindling. Even in the shortened month of February 2021, in terms of value, local retail investors dominate 36.5% against other categories whilst the volume stands at a whopping 45%. This essentially means out of 10 trades, 4-5 of the trades are conducted by retail investors. I believe there are many reasons why this is happening amongst which :

1. ISinar EPF withdrawal (30% of members withdrew)

2. Investors who enjoyed good returns from the stock market in 2020 is bullish that 2021 would be the same

3. Record opening of accounts in 2020 spilled over to 2021

4. Proliferation of social media and "Gurus" advocating the ease of making money from the stock market

5. Low interest rate environment

6. New breed of investors - fearless millennials 

When everyone is talking about the stock market, it is usually a sign of a vibrant & "hot" market.

When everyone is justifying future earnings of companies with lofty valuations, that is a sign of the market overheating.

When everyone is talking about loss making penny stocks and justifying speculating it on the basis that "I know it is not a weak company, but I will get out first", the market is fleshing red signal. 

There are two views which are polar opposite today in the stock market :

One side is bullish, believing this is the potential start to a super bull cycle as it was in 1920s - know as the roaring 20s. This side of of the aisle believe that the current financial system is flushed with liquidity from central banks' monetary policies, new growth phase is in the horizon due to recovery & reopening from Covid-19's economic damage in a 2020 and advancement of technology such as 5G, AI, IoT, EV & RE would be the engine for growth for the next decade.

Another side believes that the "bull" is tired, it has overran its lifespan since 2009 and despite multiple steroids (QE, rate cuts) the market is long overdue for correction. Those on this side of the aisle do not think 2020 Covid-19's Great Lockdown, is remotely considered a crash because the stock market made a quick V-shaped recovery. 

It is very hard forecasting the stock market overall direction. Macroeconomics is complex and there are confluence of factors that shapes the direction of global economy. Time spent on studying or predicting market crash in my humble view is an exercise of futility. There is no point being obsessed over it as no one can make a call with certainty. However, there are various indicators in the stock market which we as investors should take cognisance of.

1. Is the index trading at reasonable valuation levels ?
2. How are the corporate earnings?
3. Who are the main participants in the stock market?
4. Is it easy to find good companies to invest in at a reasonable valuation?
5. Would the liquidity or ease of credit starts to tighten?

From my observations based on the 5 questions above, unlike this time last year 2020 where I made a confident call to deploy cash to enter the stock market, I am far from confident today. On the contrary, I am worried and am taking a prudent approach. Although I do not believe there will be market crash in the near term, I believe a correction is in the horizon. A crash and a correction is vastly different. In addition, my view is more skewed towards the KLCI Bursa. The recent corporate earnings actually provides much needed insight and for those who actually studied the results in detail, they would realise many companies especially small and mid cap stock share price have far exceeded its earnings or value.
In addition, many private placements are related to these penny stock rallies where majority are loss making but somehow private placement were done for the purposes of new venture or business expansion. This is probably in part due to Bursa increasing the private placement mandate from 1o% to 20% of issued share of the listed company. A deeper analysis would tell you that majority of th companies are doing badly require capital injection but doing it via private placement due to the "hot retail sentiment". This is a faster, quicker more efficient fund raising method than a rights issue or loan or raising bond. Share price are played up prior to announcement of private placement to make it enticing for private placement subscribers.

There are many more reasons behind why penny stocks are being manipulated but if anyone, retail investors are the most susceptible to these syndicates and operators play. Retail investors with their hard earned money should avoid getting caught up with the penny stock frenzy before it is too late. 

Food for thought:

Are Research Analysts’ Reports Worth Their Salt?
Should Investors Take Off Their Gloves?


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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.