Global markets’ Achilles heel

  • Business
  • Saturday, 19 May 2012

THE panic buying for safe assets sparked by Greeces political paralysis is fueling demand for US government bonds, pulling down yields on various treasury maturities near their historic lows, as well as sending global markets and commodities tumbling down.

For the last one week, global markets have been in turmoil, to say the least.

Once again, the bedlam is caused by Europes black sheep, Greece. The outlook for Greece is getting bleaker by the day, as it heads into another month of political ambiguity after power-sharing talks collapsed last week.

This is now triggering new elections mid-June. This could determine whether Greece retains its shaky position in Europes currency.

After inconclusive elections on May 6, Greece political parties have failed to form a coalition. Opinion polls show that anti-bailout parties will perform strongly in a new vote next month.

Over the week, the FBM KLCI has fallen by a total of 42.62 points or 2.71% as of Friday. Daily volumes were not particularly heavy, with daily volumes averaging at around RM1bil. The top losers were mainly the consumer and plantation stocks, although the selling was on relatively thin volume.

CPO spirals down

Meanwhile, crude palm oil (CPO) futures have been spiralling down, both due to the flight to quality factor as well as concerns of slowing demand from China. CPO futures dropped another RM60 to RM3,090 per tonne for the week.

On May 16, CPO futures hit a three-month low to RM3,085 on Bursa Malaysia Derivatives.

HwangDBS said that in Malaysia, counters that could be facing selling pressure are index constituents that have run up quite a fair bit such as Sime Darby Bhd, Tenaga Nasional Bhd, CIMB Bhd and AirAsia Bhd.

It is external factors now driving the market down. Compared to our regional peers, the FBM KLCI has been holding well until recently. So this drop is actually expected, just that Malaysia has a delayed reaction. I see more downside for the blue chips, whereas downside for the lower liners have been discounted earlier, said TA Securities Head of Retail Research Stephen Soo.

Hwang Investment Management Bhd chief investment officer David Ng says it is difficult to predict what will happen next, as many of the decisions that need to be made are political in nature and involves multiple governments.

What the world needs now is decisive action, which we suspect will not be forthcoming so soon, but which would have to be taken eventually. As such, we have been raising some cash to avoid being caught out amidst the contagion effect of a possible debt crisis.

For the time being, we are neutral on the market. We are not bearish, as we believe that barring the risk of a eurozone break-up, economic fundamentals are reasonably robust. As well, there is still enough liquidity in the system to support the market. The question is whether the investors are convinced to buy into this correction, said Ng.

Areca Capital Bhd CEO Danny Wong says that he started his defensive strategy about two months ago.

We switched our higher beta stocks to defensive ones such as high dividend yielders over the past few weeks. We were more affirmative to cut down our equity exposure recently especially after the change of leader in France. Our view is that the global market may have to go through another rough bumpy ride on concerns over Greece leaving the European Union (EU).

Flight to safety measures are in progress. It may trigger another sell-down in equities and risky assets should the event happens and cause negative contagion effect to the whole of EU or even some other region. That said, there is still hope that the situation may turn to the other side if Greece stays with EU and continue receiving aid from the European Central Bank and the International Monetary Fund, says Wong.

Sentiment-driven market

Another dealer adds that it is too early to make a decision on the market as it is sentiment which is now driving the market.

Our index has been falling, but the selling pressure isnt that big. People are just reacting to the negative news that is bombarding the newspapers and the Internet. Some investors may in fact be waiting to buy at a more compelling level, he says.

Until the elections in Greece in mid June, the market will continue to react to the developments that will unfold. We should be seeing more volatility with further downside bias, says Soo.

Nonetheless, Soo pegs an important support level at the 1,511-mark. He says this is the 200-day Moving Average, and in the past, this indicator has proven to be a technically strong support level.

If it does drop, I have a subsequent support level at 1,495. If it reaches this level, it should be temporary. Closer to the 1,511 and 1,495-level, I would recommend that investors start accumulating because after such a steep fall in the market there is bound to be a technical rebound, says Soo.

Ng adds that the phrase buy when theres blood in the streets, as Baron Rothschild would say, is appropriate when it comes to investing in Asia. Our conviction remains in Asia due to its relative strong corporate balance sheet and fundamentals. Having said that, stock-picking is ever more important in this volatile market as you would not want a benchmark-type return, which will be highly correlated to the global markets performance, says Ng.

Wong says that on hindsight, all markets recover after a crisis.

So if a crisis happens again and causes a huge discount to equity prices, I would advise investors to learn from the past and pick up fundamentally strong companies or those equity funds with proven track records for potential windfalls, says Wong.

Ng adds that in the case of Malaysia, it is generally more defensive than regional peers as it is supported by the local institutions.

Unique situation

To add to that, our market is currently in a unique situation as there is another factor in play the impending General Election and uncertainties associated with the outcome.

The KLCIs valuation is neither very expensive nor cheap. So, I would think hanging on to cash for now makes sense when it comes to investing in the Malaysian market. If we must invest, we will keep the politically-neutral stocks, says Ng.

Hence, while external factors play an important role, Ng feels that the General Election risk has a stronger influence on the stock market in the near term.

For some consolation, Wong says that Malaysia is relatively buffered as it doesnt have much of a direct exposure to EU sovereign debt.

Our economy to some extent is still intact, and is on a growth path despite facing the recent turmoil such as the US sub-prime crisis and the EU debt issue. Corporate earnings though would be affected, but I think it is still strong and this to some extent will make our equity market relative less volatile than other emerging markets, says Wong.

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