This article first appeared in The Edge Financial Daily, on May 9, 2016.
KUALA LUMPUR: The well-known trading adage, “sell in May and go away”,
comes to mind when one considers the performance of the Malaysian stock
market at the start of this month, which saw its first week skidding to
1,649.36 points, which was 1.4% or 23.36 points lower than the previous
week’s 1,672.72 points on April 29.
Similarly last year, May was not a good month for the local equities
market. It fell 3.89% that month when the ringgit declined against the
US dollar, as crude oil prices slumped, and 1Malaysia Development Bhd’s
(1MDB) woes hogged the headlines.
But the saying does not always ring true, at least not in the case of
the FBM KLCI. According to Bloomberg’s statistics, the benchmark index
gained in May 2011 (+1.52%), May 2012 (+0.64%), May 2013 (+3%) and May
2014 (+0.1%).
Still, based on the current technical indication, Malacca Securities Sdn
Bhd’s technical analyst Loui Low Ley Yee thinks the selling may not be
done yet this year.
“This is because the index now is below its 200-day moving average
(suggesting a downtrend), which is quite similar with what happened last
year,” he told The Edge Financial Daily over the phone.
However, after the recent selldown that led to the index falling below
1,650 points, he is looking for a mild recovery in the immediate next
two weeks, with resistance seen at 1,670 and 1,700 levels. Nevertheless,
he thinks the market is likely to trend lower in the next two months.
He is not the only one. By and large, investment managers are
pessimistic about the market’s outlook due to lacklustre corporate
earnings expectations, as the local currency heads south. First-quarter
gross domestic product is also not anticipated to outperform, while the
1MDB default issue hovers over the market like unwelcome haze.
On the external side, oil prices, and whether the US Federal Reserve
(Fed) will hike interests for the second time since it was last raised
in December last year, remain uncertain.
As such, negative factors are expected to linger until July. Chris Eng,
the head of research of Etiqa Insurance & Takaful, believes the
market will continue to slide and end lower by then, compared with the
current level.
“The index is definitely vulnerable towards the mid-1,500 points, and
the technical structure does not look strong without another sharp
drop,” said James Lau, investment director of Pheim Asset Management
Asia, which manages assets worth over US$250 million (RM1 billion).
Lau, who described 2016 as a difficult year, also said corporate
earnings downgrades are “inevitable” as key economies remain
unresponsive to even negative interest rates.
“Looking for catalysts now is like looking for clear skies through the
thick haze that has become a daily feature,” he said in an email reply
to The Edge Financial Daily.
Jason Lee Wei Chung, chief investment officer of equity at Libra Invest
Bhd, is also of the view that there is no catalyst in sight, and does
not consider valuations are cheap yet.
“Currency and oil price movements will be the main drivers for the
market in the short term; corporate earnings will be the drivers in the
longer term,” he said in an email.
His views are echoed by KAF Investment Funds Bhd fund manager Tan Gan
Leong, who described the market direction as “random” and “volatile” in
the near term. It will also look closely for cues from the Fed’s Federal
Open Market Committee meeting in June, he said.
But in terms of valuation, he differed: “I would say the market as a
whole is fairly valued now, considering the current challenging business
environment.” He also pointed out that if one breaks up the components
of the FBM KLCI, it would be difficult to see strong growth from any
particular sector.
To him, the financial sector (that is, the banks), which has the largest
weightage in the FBM KLCI, has been very selective with the loans they
give out as they are trying to improve their asset quality. Meanwhile,
he noted that the plantation sector is seeing higher crude palm oil
prices being offset by lower production.
“Sell in May and go away” is a saying framed by ebullient fund managers
in the northern hemisphere as they prepare to head for the Greek islands
with the beckoning of summer.
Or should it be make hay while the sun shines?
To Lau, May is a fertile time, with many rich pickings, especially with prices retracing as they are doing now.
“So, we are not going away. We are staying,” Lau said, even as he conceded that catalysts are nowhere in sight.
“One should look beyond the immediate horizon. I mean, commodity prices
have surprised so many on the upside. For example, how many would have
anticipated steel or iron prices to rally more than 40% from their lows?
Short-term recoveries like these are still possible in other sectors or
stocks that are currently finding the floor,” he said.
He also cited stock-specific recoveries like CIMB Group Holdings Bhd, Tenaga Nasional Bhd and Press Metal Bhd.
In terms of the sector that is worth watching, Lau said there is a
chance that plantation would break out from its long-holding pattern and
surprise on the upside.
With the US dollar/ringgit volatility continuing in 2016, he said, there
is still some wind left in export-based companies. However, concerning
stocks that are “bombed out” — for instance, certain technology and
property stocks — he is selective.
Lau noted the low export growth and commodity prices are vunerable to
the ringgit’s volatility, causing Malaysia’s trade to not improve much
lately.
“Be patient and expect disappointments. Don’t equate disappointments
with failures. Sometimes, rewards come later. Let time do its wonders,”
he said.
However, Eng advised caution. “We have no sector and stock pick. We will
revisit the market as it falls further,” said Eng, who downgraded the
outlook for the utility and plantation sectors when the market reached
its recent high of 1,727.99 points on April 15.
Meanwhile, Lee said Malaysia is very much a stock picker market, though
he also felt that picking stocks is quite hard at present. Sector-wise,
he favours construction, services and education.
Libra Invest likes services companies such as Scicom (MSC) Bhd, which is
expected to deliver strong earnings growth of over 20% to 30% per annum
in the next few years in all their business segments, foreign student
visa applications, and business process outsourcing. It said the company
also has a strong balance sheet, with a 3.5% dividend yield.
As for Tan, he remained bullish on consumer staples, with top picks
including Dutch Lady Milk Industries Bhd, Ajinomoto (Malaysia) Bhd and
Cocoaland Holdings Bhd.
“I like them because of their strong pricing power, which is reflected
in the high gross margins they enjoy,” Tan said, adding that the
combination of low commodity prices and strong pricing power should
continue to drive their earnings.
In addition, Tan said these companies have strong cash-flow generation
ability, and do not require intense capital reinvestment to sustain
their earnings.
“It is also worth noting that these three firms are in a net cash position,” he added.
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