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The stock exchange operator explained that typical features of past bubbles prior to a crash included frenzied inflows without regard to valuation, rife optimism about future profits, large share issuance by new companies and unchecked price momentum.

KUALA LUMPUR: Bursa Malaysia Bhd dismisses the possibility of an equity bubble burst despite retail investors’ enthusiastic recent stock market rally, noting the absence of "typical features”.

The stock exchange operator explained that typical features of past bubbles prior to a crash included frenzied inflows without regard to valuation, rife optimism about future profits, large share issuance by new companies and unchecked price momentum.

"These characteristics do not seem to be present currently," Bursa Malaysia told Bernama via an email recently.

Given the recent spike in trading volume on Bursa Malaysia, to an all-time peak of 27.8 billion on Aug 11,2020, some analysts have warned about the likelihood of a market bubble burst amidst the rebound in the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI).

Asked if the high level of retail participation would lead to a greater potential of stock market crash like what had happened in China back in 2015, Bursa Malaysia shrugged off the likelihood.

It said the China Stock Market Crash in 2015 was due to several factors but mainly as a result of investors heavily investing in leveraged instruments using borrowed funds, which subsequently pushed the market up.

"The decline followed efforts by Chinese authorities to rein in heavy speculation of leveraged instruments," it said.

Citing a survey conducted on Malaysian retail investors recently by a key market player, Bursa Malaysia said 37 per cent were short-term trading (within a month) with a certain level of expected returns.

"This indicate that they conduct active trading (monitoring of positions) with continued scepticism in the current environment," it said, adding that the trading dynamics observed pointed towards an opportunistic reaction and bargain hunting as stocks fell to all-time lows at the beginning of the year, triggered by the COVID-19 pandemic.

Furthermore, Bursa Malaysia said the local market was seen to be trading at reasonable valuation multiples.

"While current price to earnings levels of 20 times exceed its longer-term averages due to optimistic earnings expectations, the FBM KLCI is trading at a healthy price-to-book value of 1.67 times, lower than its five and 10 year averages.

"Moreover, the FBM KLCI is currently only marginally above its 50 day Simple Moving Average (SMA)," it added.

According to the exchange operator, the surge in retail participation is not unique to Malaysia as other countries in ASEAN are also experiencing an increase in retail trades in the stock market.

For instance, it said the Stock Exchange of Thailand (SET) saw its retail participants rise to 43.59 per cent year-to-July 2020 from 33.72 per cent in full year of 2019, similarly, the Indonesia Stock Exchange's (IDX) retail investors surged to 62 per cent from January to July 28,2020 versus 55.71 per cent in 2019.

Commenting on that, Malacca Securities Sdn Bhd research head, Loui Low said as long as retailers are aware of the risk involved in the stock market, the current level of retail participation in the local stock exchange is considered healthy.

"Certainly, it is considered to be a euphoric moment for retailers and the market may need to take a pause or consolidation for the uptrend to continue.

"We think it is still healthy as long as retailers are aware of the risk involved in the stock market," he said.

Margin Financing At Healthy Level

Despite observing more liquidity in the stock market as a result of stimulus programmes and packages, such as the Prihatin Rakyat Economic Stimulus Package (PRIHATIN) and National Economic Recovery Plan (PENJANA), Bursa Malaysia dismissed concerns over margin trading in the country, pointing to its current healthy level.

"In Malaysia, margin financing is not heavily utilised by retailers to invest in the market.

"In fact, the level of share margin financing as at July 2020 is about 10 per cent lower than that in 2019, an indication that investors are investing with their own funds," it said.

Nevertheless, Low fears that the issue of margin trading might be another concern, as it may inject more liquidity to the stock market and inflate stock prices to above the companies’ fundamentals.

"And that may not be reflective of the current fundamentals of the companies.

"It is just a speculative mode for the stock market if market participants are chasing share price by ignoring the details of the companies," he said.

Retail Investors Much Savvier Compared To A Decade Ago

In terms of local retail contribution level to simple moving average daily volume (SMADV), Bursa Malaysia said it stood at 35 per cent from January to July 2020, which was relatively low compared to 43 per cent in 1997.

"This is because the quantum of institutional investors was relatively smaller compared to the levels we see today," it said.

Today, it said retail investors are generally much savvier compared to a decade ago thanks to the readily available wealth of information, and are also taking an active interest in learning about investing.

According to the exchange, Bursa Marketplace received over 745,000 registered users since its inception in 2014, of which 90 per cent were new registrations over the last three years.

Its Mirror, Learn, and Trade Platform (MLT) also registered over 28,000 users since its launch last year.

"Investors also seem more prudent compared to before and investing using their funds as opposed to

investing using margin financing.

"The growth in exchange traded fund (ETF) is also an indication that investors are looking to participate in the equity market via safer equity products," it said.

Bursa To Ensure Marketplace Continues To Function In A Fair And Orderly Manner

To mitigate potential excessive speculative activities in the marketplace, Bursa Malaysia said it has in place the necessary infrastructure, rules, processes and robust mechanism to ensure the marketplace continues to function in a fair and orderly manner.

"We continue to closely monitor developments that are taking place locally as well as regionally, and we will also assess our control measures to support an orderly and fair market," it said.

Apart from that, Bursa Malaysia said prudent approach has also been taken in providing market stability during the continued uncertain market environment caused by the COVID-19 health crisis.

"Market management measures such as circuit breakers, static and dynamic price limits are in place and known to participants to manage excessive volatility," it added.

To recap, the bourse operator had introduced several pre-emptive measures to mitigate excessive speculative activities, which included the temporary suspension of short-selling until Dec 31,2020.

In addition, it also announced on July 10,2020, temporary revisions to the existing market management and control mechanism, namely the dynamic and static limits, and the circuit breaker.

"We also conduct real-time surveillance and analysis of all trading activities to detect irregular or abusive trading activities," it said.

Bursa Malaysia reiterated that it will continue to inculcate high standards of conduct among market participants to ensure market integrity, transparency and investor protection.

"Strengthening investor protection through various awareness and education initiatives will empower them to have the ability to ask the right questions and make informed decisions," it said. - Bernama

https://www.thestar.com.my/business/business-news/2020/08/19/bursa-rules-out-stock-market-bubble-burst

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