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.
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https://www.tradeview.my/2021/03/tradeview-2021-where-do-retail.html
