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IT has been just two months since the global market rout in March, but now a rosy picture is being painted going by the surge in retail participation, with trading volume reaching a record high and a strong rebound in the benchmark FBM KLCI to above 1,400 points.

The question is, are investors too optimistic about market prospects? Are they taking on too much risk?

Retail participation started to rise in February and it became more obvious in March after the market sell-off.

For perspective, the local bourse’s retail participation rate last year was 24.5% of total market value traded — the highest in the last five years, according to Bursa Malaysia. In April, retail participation was 32.08% of total market value traded.

As a result, the local bourse has seen a 76% surge in daily trading volume, which averaged 4.42 billion shares (from February until now) compared with 2.51 billion shares for 2019.

Last Monday, trading volume hit a record high of 11.21 billion shares.

Hong Leong Investment Bank (HLIB) head of research Jeremy Goh opines that investors are taking on too much risk given that the risk-reward profile does not look to be compelling anymore.

“The low (for the FBM KLCI) was 1,219.72 points on March 19. From there, we have rebounded by more than 15%. If you look at the past bear markets, such as the global financial crisis, dotcom bubble and oil glut in 2014 and 2016, the rally was 11% to 13%. [The current rally] has definitely surpassed those levels.

“Fundamentally, in terms of the risk-reward profile ratio, [we] wouldn’t be buying at the current levels … I wouldn’t say [it] is overvalued, but if you see the current-year earnings, valuations do look a bit on the high side. Even if you take into account some of the recovery in the next few years, valuations are still on the higher end,” he tells The Edge.

Goh says the local market will probably see a W-shaped trajectory this year and that there could be a correction soon after the recent rebound.

Panic selling easily triggered

Rakuten Trade head of research Kenny Yee concurs. He says the market is susceptible to another correction as the prevailing negative news has overshadowed positive news.

He believes panic selling can easily occur in the current market as it is mostly driven by liquidity without great fundamentals.

“The only way I can see solid footing [in the market] is the emergence of a vaccine and when Covid-19 is eliminated. Right now, it’s like standing on one foot and it can fall anytime,” Yee adds.

As the upward trend in the market has outpaced fundamentals, he advises investors to exercise caution.

Risks may also emerge when many in the investing fraternity are focusing mainly on the same stocks, warns TA Securities chief investment officer Choo Swee Kee.

“Too much money going into a narrow scope of stocks — that’s why investors have to be cautious. Share prices have gone up a lot and may be way beyond their fundamentals.”

In the past week, oil and gas and glove stocks, as well as their warrants, dominated the active list on Bursa. Investors have been chasing stocks of glove makers as demand for gloves rose on the back of the Covid-19 pandemic while O&G stocks rebounded from their March lows.

The energy index, which tracks O&G stocks on Bursa, has declined 33.94% to 819.80 points year to date (YTD), on the back of the oil price slump.

The index hit an all-time high of 1,300.83 points in January last year when the crude oil price breached US$70 a barrel.

Despite heightened trading interest in the sector, most O&G stocks have underperformed YTD, with Sapura Energy Bhd registering a 63% slump in its share price.

The share prices of both Bumi Armada Bhd and Velesto Energy Bhd have also skidded 56.6% YTD.

Meanwhile, the rise in glove manufacturers’ share prices has helped the healthcare index become the star performer on the local bourse.

Loss-making Careplus Group Bhd has been the most actively traded glove counter with a YTD gain of 490.6%.

Besides glove manufacturers, the index also tracks the share prices of pharmaceutical companies and hospital operators.

Rakuten’s Yee expects the active retail participation to continue after the steep sell-off in March and also because of the current low interest rate environment.

“With the closure of the Genting casino and numbers forecast operation, many retail investors are moving into the share market. Bear in mind that during the bull run in the mid-1990s, retail and institutional participation was 50% each. At one time, retail participation was even higher than institutional,” he adds.

Areca Capital Sdn Bhd CEO Danny Wong says it is no surprise to see such a high trading volume as there are a lot of penny stocks in the market.

“My view is always long term and this is not a bull market, just a small rebound from a low. Our year-high is still 1,700 points and now [the FBM KLCI] is only 1,400 points, so it’s not a very crazy market. Investors see value after the sell-off. As long as investors know what their risk-tolerance levels are, it’s okay; just don’t chase the same stock when it is up so much.”

Short-term play, high trading volume to persist

While analysts have warned about market volatility, retail investors are trying their luck to make more profits in a “smart” way, according to JF Apex Securities head of research Lee Chung Cheng.

“They are going for short-term trading. They don’t blindly chase stocks that have gone up much. They will take profit after a surge.”

Lee expects the high trading volume scenario to persist.

“It’s thematic and news flow driven … investors get excited and just buy. They don’t tend to look at the fundamentals but are more sentiment-driven.

“In the short term, as long as market sentiment is there, I think the high trading volume can still be sustained, driven by market liquidity and the US Fed policy to rescue the economy. The negative news has more or less been discounted,” he says.

However, as the key index keeps going up, he says risk will be higher and the market may be subject to a correction later.

“With the results and economic data coming out, people might be holding back and there could be a market correction in the third quarter, but it will not be a crash. I don’t see the stock market going back to the mid-March levels.

“If you want to trade, look for short-term trading bets. If you are a long-term investor, then wait for a market correction and look for stocks in the consumer and healthcare sectors, which are more defensive in the longer term.”

He believes the local market will still be supported by retail investors and local institutions, as foreign funds are unlikely to make a comeback anytime soon, given the current political situation and low crude oil prices.

Foreign funds have offloaded over RM11 billion worth of local equities since the beginning of the year.

The new norm in equity market

Calling it a strategic and tactical move, Areca’s Wong sees active equity trade as the new norm.

“When yields of low-risk investment tools are at all-time lows, investors have to readjust their investment portfolio. Equities are liquid, yet give that same kind of risk profile. This is the new norm,” he explains.

Retail investor Tan Khee Boon says the Movement Control Order (MCO) has allowed him to explore the stock market.

“I opened a trading account during the MCO period and started to learn stock-picking. Most of the stocks look cheap and right now I have a few stocks in my portfolio.

“O&G is definitely my favourite sector for the time being as oil prices will eventually rebound to more reasonable levels. Of course, I have been monitoring glove stocks, but the rally was too fast and I’m afraid of being trapped,” he says.

In tandem with the active retail participation, Rakuten Trade has recorded a surge in account openings during the MCO period. More than 11,000 new accounts were activated, of which more than 64% were during the first phase of the MCO period alone.

In addition, 20% more trading value was seen by the company in March than in February.

The question is whether this trend can be sustained.


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