The local stock market’s benchmark index hit an all-time high this year and also saw record trading volumes.
However, up to the week of Dec 19, it appeared to be south-bound and while anything can happen between now until the year-end, if it does turn in a negative finish, the local bourse will likely close lower for the first time in five years.
It’s not difficult to fathom why.
The year 2014 will go down as the year when crude oil prices crashed after being stable for the past five years averaging US$110 per barrel.
The fall in prices, though, came as a surprise as no one really predicted the fall.
And while there were other reasons for Bursa’s downtrend such as rich valuations, Malaysia’s position as an exporter of oil made it difficult for investors to ignore the impact of lower crude on the country’s general outlook.
The price of Brent crude, which is the global benchmark, had been relatively stable in recent years as robust production in US coupled with unrest in oil-producing countries like Iran and Libya ensured a balanced market for oil.
A decline in demand for the commodity as a result of weakening economies coupled with a comeback in production from the likes of Iran and Libya this year had not been factored into observers’ 2014 predictions for the commodity, hence catching many investors off guard.
Opec, which collectively is responsible for more than a third of global oil production, has said it could ride out the slump without altering production as a cut could mean it losing market share, according to reports.
Since June, Brent crude, the global benchmark, has lost more than 40% in its price. It is now down to slightly over US$60 per barrel and depressing its price has been Opec’s refusal to slash production despite an oversupply and falling demand globally.
This has had a negative consequence on all types of markets in Malaysia and the stock market has been one of its worst victims.
Malaysia has been particularly vulnerable to the crash as oil revenue forms a substantial part, about 30%, of Government revenue and concerns are that the country’s fiscal position will be affected by the drastic and protracted fall.
Mirroring these concerns is the FTSE Bursa Malaysia KLCI (FBM KLCI), the benchmark index of Bursa Malaysia, which is one of the worst performers in Asia this year, down about 8% to 1,715.99 as at Dec 19.
The last time the local mart ended the year on a negative note was in 2008 when it finished a whopping 39% lower amid a global financial crisis.
Rubbing salt into the wound is the weak ringgit, which is down 7% against the greenback so far this year. That is the most it has lost in five years.
While the flip side of a weaker local currency is the boost it can give to exporters by making local exports more competitive, it also means higher costs of imported raw materials and goods for Malaysians.
All said and done, it wasn’t just gloom for the stock market this year.
Investors who bought, sold and invested in the right stocks at the right time would have easily had the opportunity to beat the performance of the FBM KLCI.
Careful trading in selected small-caps, for example would have made investors a tidy sum as a handful of these saw a phenomenal run earlier this year, pushing the FTSE Bursa Malaysia Small Cap Index to an all-time high of 17,867 points on April 22.
A week later from that however, four small-cap stocks, namely Visdynamics Holdings Bhd, MNC Wireless Bhd, Solution Engineering Holdings Bhd and Industronics Bhd hit limit-down, sparking an immediate sell-off in other small-cap firms and leaving a dent in the small-cap space.
Notably, there were small-cap stocks that ignored that episode and these companies, relatively shielded from the oil price crash, continued their march toward record prices.
IFCA MSC Bhd was the top performing ACE market stock and possibly will end the year as the best performer on Bursa Malaysia in terms of price percentage increase.
Up to Dec 19, the IT solutions maker was up more than 800% from the beginning of the year, riding on its GST-software and growing demand for its property software in China.
In the small-cap space, technology stocks no doubt dominated the gainers’ list, aided by a comeback in the cyclical sector.
The FBM KLCI index, which tracks the 30 largest firms on Bursa Malaysia, meanwhile peaked in July after a weak start to the year, racing to an all-time high of 1,892 which was followed by record trading volume of over 7.7 billion shares in August.
But even as overseas markets continued to create new highs during that period and boosting overall sentiment, there were warning signs that share prices were overshooting their fundamentals, stoking concerns that a steep fall was in the works.
It did not help that the US Federal Reserve ended its quantitative easing program in October, hence putting a brake on liquidity flowing into emerging markets.
Foreigners finally sold off RM11bil worth of Malaysian stocks in the third quarter while up to Dec 15, net outflow totalled RM17.5bil.
For investors who had put all their money in local oil and gas stocks, which were a favourite with fund managers at the beginning of this year, and had not managed to cash out before the oil price slide, chances are they are sitting on a huge amounts of paper loss.
But a buying opportunity could also have emerged from this episode, with some oil and gas related stocks trading at single-digit price to earnings ratios after losing most of their value in line with the drop in crude oil prices.
Notably, observers are predicting a continuous slide in the price of oil well into at least the first quarter of next year before demand is expect ed to reach a more stabilised level.
While the first six months of the year saw a growth of over 6% each quarter, third quarter growth slowed down more than expected to 5.6% as a result of slowing global economies which meant declining exports, as well as less private consumption.
However, the Government is still expecting the economy to grow up to 6% for the entire year after expanding 4.7% a year earlier, supported mainly by domestic demand.
In July, Bank Negara raised the overnight policy rate by 25 basis points to 3.25% - the first time in three years - to help rein in inflation and household debt levels which stand at about 87% of gross domestic product (GDP), which is one of the highest in Asia.
Meanwhile, concerns are more on Malaysia’s 2015 growth path. The World Bank recently cut its growth forecast for Malaysia’s to 4.7% from an earlier estimate of 4.9%.
It cited expectations of slower export growth and investments in the oil and gas industry as well as moderate private consumption next year as reasons for its downgrade.
Notably, the Government is maintaining its projection of 5%-6% GDP growth for next year and says is still an achievable target. The actual figure may be at the lower end of the official target range given the uncertainties surrounding the global economy.
Malaysia has a target to cut its 2015 fiscal deficit to 3% of GDP while the country’s current account surplus to GDP ratio is expected to narrow to 3.1% in 2015 from 4.2% this year.
Malaysia will assume the chairmanship of Asean next year.
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