Overvalued stocks – a call for vigilance

There are still value buys on Bursa Malaysia but the selection is diminishing.

SHOULD it be taken as a warning sign that world stocks are seen as most overvalued in 17 years, as revealed by a Bank of America Merrill Lynch (BAML) survey of fund managers?

Although emerging markets are still seen as undervalued by a large proportion of investors polled, the dominance of major market movements may cast a pall on trading.

On Bursa Malaysia, robust trading with the main index hitting 1,750 points on high volume calls for vigilance.

“Much more caution in stock selection is necessary currently than at the start of the year,” said Pong Teng Siew, head of research, Inter-Pacific Securities.

The main index has raced past the stiff resistance of 1,730 points to breach 1,750 and is said to be poised for further advances as foreign money pours into the market after a dormancy of three years.

There are still value buys on Bursa Malaysia but the selection is diminishing. “This makes it more likely for mistakes in stock selection to occur,” said Pong.

“Trading has become riskier since last week when volume traded reached six billion shares. A near-term peak of sorts may be around the corner.

“However, given the proximity to the quarter close, I think it will gyrate around the 1,750 zone before actually easing off, unless volume traded climbs to seven and then eight billion shares.

“That will allow stocks to rally to even higher levels than last week,” said Pong.

Investors are advised to equip themselves with charting tools which add another dimension to visualising the timing aspects of trading.

“While ‘easy money’ has been made, given the positive change in sentiment, gradual improvement in global and domestic economic conditions and stabilisation in commodity prices, among others, should translate into healthier prospects for investors.

“Value investing will always be value investing so long as one is aware of associated risks and time horizons.

“A relatively ‘hotter’ market like this just makes it easier to exit. But if one has different investment objectives, any time is an opportune time,” said Ching Weng Jin, head of research, Public Investment Bank.

US market most overvalued

Regionally, the US stockmarket is the most overvalued, according to 81% of respondents in the BAML poll of investors managing US$592bil worldwide, said The Sydney Morning Herald (SMH).

A net 44% think emerging market stocks are undervalued, while a net 23% say the same about eurozone equities, according to the survey conducted from March 10-16, when Wall Street’s recent string of record highs had slowed down and the US Federal Reserve raised interest rates.

“Risks include Trumpnomics falling short of expectations, US Fed rate hikes turning out to be more aggressive than guidance and unexpected event shocks or policy missteps that derail global growth,” said Lee Heng Guie, executive director, Socio Economic Research Centre.

“Much higher US interest rates inflicted by an accelerating risk of inflation will push up bond yields, making equities less compelling as an asset class,” said Lee.

But flight from equities not seen yet.

The biggest risk to the equity bull market will come from higher interest rates, said 35% of BAML respondents, rather than weak company earnings (21%).

“A net 36% said the 10-year US Treasury yield would have to rise above 3.5% before a bear market in stocks ensues.

“The yield has risen sharply since mid-2016 but has struggled to rise above 2.5%. The last time it was higher than 3.5% was six years ago,” reported The SMH.

The Fed raised rates recently and plans to tighten further this year.

“But investors are sceptical that growth and inflation will be strong enough to warrant a sustained series of hikes and longer dated yields have slipped as a result,” said The SMH.

Emerging markets trade of a decade?

Stocks in emerging markets cost more than when he first made the call in February last year, but they remain an “enormous bargain”, said Christopher Brightman, chief investment officer (CIO) at Research Affiliates, a sub-adviser to money managers including Pacific Investment Management Co (Pimco), Invesco Ltd and Charles Schwab Corp.

Local-currency bonds in developing nations are also seen as trading at a discount, especially those in Turkey, Malaysia, Indonesia and Mexico.

Emerging markets offer an average yield of 2% after accounting for inflation and offer an additional 2% in pick-up from currency appreciation – attractive numbers compared with next-to-zero yield and an expensive currency in the US, said Bloomberg, quoting Brightman.

Bull market still waiting on Wall Street

“The death of the Republican healthcare reform may not prove to be the knife to the heart of the bull market some had feared, but to keep the Trump Trade alive, investors should temper expectations for the breadth of expected tax cuts,” said Reuters.

“The market believes it raises the probability of a tax cut later this year since Trump is showing more strategic behavior. (It) puts the market a little more at ease,” Paul Zemsky, CIO of multi-asset strategies and solutions at Voya Investment Management in New York, was quoted as saying by Reuters.

Columnist Yap Leng Kuen hopes these hot players are not caught dancing when the plug is pulled.