The KLSE has performed pretty much up to expectations in the past few weeks and although it is still a laggard compared to almost all the other regional markets, is up some 6% for the year to date. What is the outlook for the rest of 2003, now that most of the major uncertainties, both local and international, seem to have cleared. Starbiz chaired by senior editor (corporate) David Chow, organised a roundtable discussion by panellists comprising Surf88.Com.Sdn Bhd chairman Lee Siang Chin, Mayban Investment Management Sdn Bhd CEO and director Amin Rafie Othman, CIMB head of equity markets and derivatives Kok Kong Chin , AmResearch Sdn Bhd executive director Gan Kim Khoon and KAF Research Sdn Bhd director Lucy Ng. The first part of their discussions are presented below.
STAR: The KLSE's performance during the last one and a half months has been pretty good. Since May 2, when the CI was hovering around 630 points, it has gained nearly 50 points. There were some obvious factors for it, but was the degree of recovery expected?
Gan: We have actually been saying all this while that the second half should be a better half for equities as we expect the economy to improve from this second half onwards. In a sense, the rally – which began in the second week of May – was very much in line with our expectations. But I have to admit that the degree and speed with which the market rallied caught us by surprise.
In the space of four weeks, we saw the market recover by 10%. To me, it was a combination of factors that triggered the rally. It was not just the liquidity factor alone which triggered the rally.
Based on statistics, the market or the banking system has had excess liquidity since the early part of 2002.
In other words, the liquidity factor had always been there. Liquidity is good for any market rally, but it is what I would call a hygiene factor for the market rally i.e. – you need it for a rally but it is not the cause of the rally.
You need something else, such as a catalyst, to trigger the inflow of the excess liquidity into the equities market and that I would attribute to factors like the new economic package which had led to the expectation that the package would re-ignite the stalling economic growth or rather further boost economic growth in the second half of this year.
I would also attribute some of it to the inflow of foreign portfolio funds. We actually began to see a net inflow beginning from May after four consecutive quarters of outflow from Q202 to Q103. Now, it has begun to come back again. I think the fact that the Dow has appreciated by some 20% since the middle of March and the Nasdaq has risen by more than 25%, were influential factors as well.
Lastly, there was also a speculative factor in that people were talking of the possibility of a general election to be held in the second half of this year, as opposed to earlier thought that it would only happen in the first or second half of next year. Those are the factors which triggered the rally. The excess liquidity is there as a hygiene factor but it was not the sole reason for the rally.
Rafie: I think Gan has named all the factors. There is not much more to add to that. But at the end of the day, there are several things to be said. One of them – he is right – the recovery was expected. We all expected it. Our base case was for the war to end early and it happened. And our base case for the severe acute respiratory syndrome (SARS) outbreak, was that it was going to be short-term and that it should peak in June but it actually peaked earlier. The catalyst was the contribution of several factors, of which the stimulus package was one.
Two – I think the run-up in the US market cannot be ignored. We cannot ignore this impact because it had been positive, not so much for the local funds but for the foreign funds in particular. Obviously, there was a conscious decision in terms of asset allocation to shift some funds to the emerging markets in Asia. All the emerging markets in Asia have gone up.
Thailand was up 29%, the Philippines 21%, Indonesia rose 20%, Singapore 12%, Taiwan 11% and South Korea, up 7.5%.
Because of that, we are the laggards and because of the laggard effect, there is a catch-up that we can see. I think some foreign fund managers were looking at the laggard factor. This is not anecdotal. I have actually spoken to some fund managers who have been around in the last couple of weeks. And they said they were looking to buy back into the market because they see some value, maybe not into whole sectors but in individual companies. So, I think that's positive as obviously there is pent up demand from the retail side. So, we could see values in terms of turnover – in the first four months, average daily turnover was something like US$60mil to US$98mil and in the last couple of weeks, the daily turnover was in the region of US$160mil to US$170mil, and a lot of that had been retail driven, not institutional.
Another contributory factor is the innovative financing schemes being instituted by the brokers in terms of contra days and margin financing. So that has stirred a bit of interest and at least, there are facilities available.
In addition, some M&A (mergers and acquisitions) activities had been evident in the market which further excited not just institutional but retail participation. At the end of the day, the key is how to excite them – I have always said that the market needed leadership and participation. How do we get both? This retail participation is back, although not in the extent that we would like it to be, but certainly, they are there.
Star: Siang Chin, would you agree with their views, and that retail participation has returned?
Lee: I think Gan has stated all the reasons why the market has moved forward. Looking at it in perspective, Malaysia is still the worst performer. From January to now, we are up only 5.5%. Bangkok is leading with a 27.4% gain and Jakarta up nearly 20%. So, it is not really surprising when our market did pick up. The volume was partly created by hedge funds and a lot of intra-day traders and dealers who churned up the volume. I think the retail participation is still very limited, surprisingly, only about 40% of the daily turnover.
In the past, it used to be the reverse. The retail side formed 60% to 70% of the daily volume, and institutional, the balance. But now it's turned the other way. If you check with the remisiers, most of them are surprised that things are so quiet. So I think the retail players have not come in yet. If they do come in, I believe the market would be driven higher. But obviously we don't want the retail players to be holding the baby at the end of the day, like in the past. So, I think it is wise of them to be more cautious in their approach.
Gan: I have been asking the remisiers in our company. They told me the majority of their clients are still staying out of the market. In fact recently, when the market pulled back a bit, their clients stopped buying as well. So they are quite fickle. The volume you see, which averages 300 to 400 million shares daily, is actually contributed by intra-day dealers, stockists and also, I hate to add, syndicates.
Kok: A couple of things to add. I think the market was very cheap in the first quarter of the year, when the price earnings ratio (PER) was 12X. Historically, the market PER for Malaysia has always been in the high teens to more than 20X. If I remember correctly, in the old days, anything less than 20X PER was considered cheap.
Another point is that the dividend yield is also higher. This is actually something new to us, although it has been there for the last one or two years. If you look around, retail and institutional investors are typically very bearish and pessimistic about the entire environment as well as the market.
The run-up in the market was not totally unexpected. Starting about two months back, when the US dollar started to weaken, the international funds have re-looked at Malaysia, especially since our ringgit is actually tied up to the US dollar. And the dollar weakness is actually good for the economy as well. The dollar has actually bottomed and it's going to reverse. So now the tendency is to put money in countries which would benefit from there, and Malaysia is one of them.
Obviously, everyone is saying Malaysia is a laggard. We are behind Thailand by more than 20%, Indonesia by 18%. So I think there is a lot more room to go. A month ago, when we looked at some of the indicators such as the junk bond spreads and emerging market bonds spreads for example, junk bonds spreads have actually collapsed, as well as emerging market spreads. All this means that internationally, the risk appetites have increased and people are looking at buying riskier assets, and emerging markets bonds and equities markets are in the risky asset class.
And of course, the Federal Reserve is really pumping a lot of money into the economy in US and globally, by basically leaving the rates low and there's even talk that that there will be another 25 basis points cut in the Federal Reserve rate. I think the main point is that there is a really serious threat of deflation and the Federal Reserve is basically taking steps to keep the monetary policy easy. At the end of the day, if you have all this free liquidity flowing in the system, the money has to go somewhere.
Star: Lucy, what is your assessment of the KLSE performance?
Ng: Timing-wise, the recovery was not a surprise, given the existing factors. I think I started feeling bullish with the removal of uncertainties like the Iraq war and SARS. We expected SARS to be over in 3 months. As long as it was contained, people would adjust to living again after 3 months and things would be back to normal. We were very bullish then, I think sometime in April, when the World Health Organisation started lifting countries from the danger zone list by saying that it could have peaked.
The other thing that we were looking at was more on cycle and timing basis. If we look at the market's performance since the peak in 2000, the performance has been nothing short of atrocious. We had one disaster after another, whether it was geopolitical, epidemic, both expected and unexpected. After the 2000 peak, we had an economic recession in 2001 for the major part of the globe and then we had Sept 11 and the Bali bombing.
Then the Iraq war, and straight after that, SARS came in immediately. In a poor performance market for two to three years, the buyers would then be stronger buyers. That's what they call weaker hands into stronger hands. Those who could not stand the onslaught of the bad news would have sold and given up in despair, and those who bought would, hopefully, be better buyers.
After 3 years, I was quite confident that forced selling, if there were any, would have largely been done and the stronger buyers would be sniffing out all the good deals and would have been buying from the weaker buyers. That was the cycle and timing sense.
The good times which we have been waiting for 10 years since 1993, are close. They are very, very close – they could just be round the corner.
Star: Does that mean we are primed for a rally?
Ng: We are primed for a rally and we are looking at the government lending a big helping hand. If you look at the economic package, it was one of those things. Even today, we see Miti doing away with equity restrictions. We see this as a very encouraging sign that the government is supporting a bull run.
Supporting that, we have good liquidity and good valuations such as PERs in the low teens. Unlike KC who thinks of the good old days of PER valuations of 20X, we are more modest. Until we see Malaysia can show that it is in a fast track growth rate similar to the 1990s, we would never attain that PER, not at least in the medium term. We need to show we can return to the good old days of 8% to 10% economic growth. In the medium term, until 2005, we are only looking at 5% to 6% economic growth. Therefore, our PER target is about 18X. But we are still looking at 30% growth in the KLCI.
Gan: I am optimistic that the market can continue with its current uptrend. I think the factors that caused the rally in May are still present today and they are still very valid reasons for continued optimism for the local stock market. Having said that, I think they are other considerations. For example, a survey of 19 local fund managers in the unit trust industry showed that the average investment in equities was 72.4% in the first quarter. That might have gone up in May, because some of the local fund managers who were relatively underweight on equities were trying to catch up. Even then we don't think it has gone up substantially and we don't think it has reached the ideal weighting of 90% of their investment portfolio. So I think there is still room for the market to go up simply because of local institutional buying by those funds wanting to catch up.
The second factor, as most of the other panellists have pointed out, is that Malaysia, even after the rally in May, is still the worst performing market in Asia, even after the increase in the KLCI. That would actually draw the attention of some foreign portfolio managers, especially those who are looking at emerging markets or Asia/Pacific markets.
The other thing I would like to point out is the economy is expected to do better. If you take a look at the economic data that has been released for the first month of the second quarter, particularly the industrial production index, on a year-on-year basis, it grew at a very strong 11.8%, and even on a month-on-month basis, it was also strong at 6.7%. That is actually way beyond our original expectation.
If May comes in just as good, you can be sure that the Q2 would be very, very strong. We might even have to revise our outlook or numbers for the first half, which means that going into the second, it could be stronger. For the full year, we have actually revised our GDP growth forecast from 3.7% to 4.1%. But now, with the strong second quarter numbers coming through, it may be higher or at least 4.5%.
But having said that, my optimism for the second half may be tempered by corporate earnings which were not particularly encouraging. If you look at Q1 earnings, 4 in 10 companies actually came in below expectations and we had to cut our earnings forecast by 3.8% this year and 4.3% for next year.
No doubt, most expect Q2 earnings to be bad due to SARS and war, so I would say that these factors have largely been discounted by the market. So I would say look beyond Q2, and look at earnings in Q3, which we are about to enter.
The other factor that has tempered my optimism is that if I look at the market from a top-down approach, there are not that many sectors that I am particularly bullish about from the macro perspective. We can, in fact, narrow it down to just 3 or 4 sectors. Also, from a bottom-up approach, if I were to just look at the KLCI component stocks, out of 40 top market cap counters – only one third, today, is a buy at this level. The other two thirds are hold or take profit. Those things would probably balance out my optimism.