Every ten years, some believes, the stock market will witness a bull run. Does the Malaysian market have the ingredients to turn that into a reality today?
But one thing is clear: if there's going to be a sustainable buzz in the market, foreign interest is paramount
WHO, having experienced the heady days of 1993, can forget the magnificent euphoric days of the super bull run? Two blinks of an eye and a decade later, it is 2003.
Along with the many wishes for good health and prosperity this Chinese New Year, many Malaysians – consciously or subconsciously – are likely to be hoping for the ram to be transformed into the rampaging bull.
What is the likelihood of that happening?
First, the bad news.
Many claim that the super bull was a once in a lifetime occurrence, the likes of which are unlikely ever to happen again for a long, long time.
Now, the good – a number of the same factors that were in place in 1993, are present today; psychologically also, northwards is the only likely direction for the market at this point, if not for the lingering fears of war in the Middle East.
Putting the US-Iraq conflict which is dampening interest in stock markets aside, K&N Kenanga head of research Seow Choong Liang feels a market run “is only a question of when, and how much.”
He says the Kuala Lumpur Composite Index (CI) is trading at fairly similar levels now to mid-1993; but since the Malaysian economy has expanded over the years, the comparative level of the index now is even lower than 10 years ago.
Many believe the government's newly established RM10 billion Valuecap fund can act as a real tonic to the market, creating liquidity and interest. Some estimate its real and psychological influence may even raise the CI by 100 to 200 points. (The Kuala Lumpur Stock Exchange was trading at about 636 when the formation of Valuecap was announced on Jan 10 to the general public.)
But one thing is clear: if there is going to be a sustainable buzz in the market, foreign interest is paramount.
Analysts who have lived through the super bull maintain it was the foreigners' big bucks that ramped it up initially.
“The country's reserves went up by RM28 billion, most of it from short-term foreign stock investors,” Seow says.
An analyst who has been in the industry since the late 80's says the breath and depth of trading volume then – with blue chips leading the way – was so great, and stretched for a period of more than six months “there was no way it could have been dressing.”
“You need foreigners to come in by the truckloads. Blue chips must run on high volume and so convincingly that people then buy the second and third liners,” she says.
1993 was magical year when foreign funds caught their first glimpse of emerging markets and fell madly in love. Malaysia was one of those promised lands, and the enamoured foreigners were generous in their affection, helping push daily trading values in excess of RM1 billion.
From about July when the CI was hovering around the 600-plus mark, the market ascended smoothly and steadily, charting new heights. It scaled to the 1,275 mark by the end of 1993, and the mad headiness culminated early in 1994 on Jan 5, when it shimmered to a dizzying, all time high of 1,332 points.
The novelty of first love has worn off over time, and a renewed affair with Malaysia is unlikely to possess the same passion and intensity.
“Well, the foreigners are slightly more upbeat about Valuecap and the market now, but not terribly excited,” says the head of research at a foreign investment bank. “They worry that Valuecap may move certain stocks above their fundamental values.”
Even if foreign funds are no longer underweight but neutral on the KLSE, the pool of investible stocks on the exchange is still very small in terms of liquidity and market capitalisation.
Many institutional investors think the country has far too few institutionalised stocks in Malaysia, or those where the controlling shareholder does not own more than 51 per cent of the company.
“It's hard coming up with new ideas because they've already got all the (blue chips) stocks. Even if they want to do stock picking, what to buy?” asks the research head.
A fund manager observes the market was not very efficient last year, sliding 7 per cent when the real economy grew by at least 4 per cent. The government is apparently concerned over the prolonged market depression and initial public offerings debuting below their offer prices.
In the past, companies such as Malaysia International Shipping Corp Bhd (MISC) listed at very low price earnings (PEs), the fund manager says, attracting the interest of foreign funds.
“People normally come in when the market is cheap, but companies these days are listing at too high PEs. People want to make money, and when they can't they shy away from the market.''
Others observe that major shareholders of some companies continue to list for the wrong reasons, off-loading their shares as soon as the moratorium period allows for it. “What does that say of the company?” asks an observer.
And while much has been done with regard to better corporate governance, there are still mutterings among some foreigners – several government construction contracts being awarded on negotiated deals and a cumbersome disclosure rule.
“They still find the paper work and having to declare every account a hassle,” an analyst says, adding, “They're also unhappy there is no short-selling.”
Yes, 1993 was very much a different ball game.
Not only was it the “glorious period” before the days of capital controls, Clob (Central Limit Order Book), and fixed currency peg, but margin accounts were freely available, the contra position was T+7 (versus T+3 now), stocks were allowed to go limit up three sessions in a row without being suspended from trading, and scripts were easily transferred to finance margin accounts.
“For another super bull-run, the market needs themes, stories, and there were so many of them then,” says the analyst. There were the emerging Tiger stories, 8 per cent growth for a number of years, and strong foreign direct investments.
And yes, there were also the corporate bigwigs, many of whom were cheerfully loose-lipped about their corporate plans, spurring further speculative interest in their companies; these days, company officials have become far more tight lipped, even on the slightest matter, for fear of invoking a KLSE query.
In the early nineties, corporate earnings were also in a different league. Young blue chips were offering 20 to 30 per cent growth at that time, sustainable for three to five years. With maturity, robust growth has weakened to an average of 15 per cent, and globalisation means foreign funds mark the Malaysian market and companies against others in the region.
Kenanga's Seow says while the stock market was a bubble in 1993, it was a bubble in low quality counters since the blue chips were not chased up as much. “The bubble was more in the second and third liners and when the devastation came, it affected them the most,” he says.
During the bull-run, caution was thrown to the wind. It mattered not that companies weren't making money. They only had to assure that they had the potential to turnaround.
But once the deafening euphoria had died down and grand promises remained unfulfilled, investors, some common sense having been restored, took off their rose tinted glasses and re-looked the companies.
The market corrected fairly sharply in 1994, but even then on the whole continued to hold up reasonably well – that is until 1997. The Asian financial contagion and the government's implementation of capital controls resulted in foreign funds, which had maintained a weighting in Malaysia all along, to desert in droves.
Since then, many overtures have been made to attract them back, such as the modification of capital controls and more recently, a dialogue with the funds on how the Malaysian market can be improved.
But until foreign funds re-discover Malaysia – and there is no reason to believe they won't if there is money to be made – Malaysians may have to lead this time.
A technical chartist believes that current market chart patterns are similar to those of 1992-1993. “The longer that it trends sideways, the higher it goes when it breaks out,” he says.
Bullish signs have emerged, says the chartist, who is projecting the immediate term or first stop for the CI at the 730 to 738 mark.
Most market watchers believe the economic fundamentals are in place, and that the ingredients are there for a run. But when and the magnitude of it is anyone's guess.
Malaysians will have to be incredibly lucky to see the CI sprint anywhere close to 1,300 points, but after four years in the doldrums, even a half sprint would do wonders for flagging market morale.
Maybe it will be as Seow says: “It's when you have low expectations that the possibility of an upside is better.”
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