Short Position


Not looking good  

THE barometer of any stock market is the earnings that its corporates announce. Over the recent quarters, brokers have made steady cuts to their earnings forecasts for listed companies on Bursa Malaysia, and the trend has not been encouraging.

This time around, there were fewer large companies that showed an uptick in earnings compared with before. The problem is that ranging from plantations, which have been affected by lower global crude palm oil (CPO) prices, to construction companies and even a number of the semiconductor companies, they have posted lower earnings.

Even Bursa Malaysia reported flat or slightly lower earnings in the third quarter compared with the same period a year ago.

Earnings are the barometer of what is happening in the economy. When earnings are on an uptrend, it gives some insight as to how companies will perform. Conversely, when earnings start to slip, the indications are that things are going to get tougher for both the companies and the larger economy.

The performance of earnings also will determine investor interest. Weaker earnings will make it more compelling for international brokers to reassess Malaysia’s position in the investible universe, but there is another school of thought that feels that if earnings do drop significantly, then how much lower can they go?

Right now, the spark for an earnings upgrade is hard to come by. The economy is projected to slow down and this will directly impact the earnings of companies. CPO prices are depressed and this will have a major bearing on the earnings of plantation companies that dictate the direction of the overall market.

The banks did okay but there were also surprises in the semiconductor space, where a few companies disappointed when it came to their earnings.

Then, there is housing and construction which has its own longstanding problems to deal with. For investors, the issue is what is going to be the catalyst that will drive investor interest in the broader market that will determine the direction of the market in the short and medium term.

 

Dealing with the property overhang

WHEN Airbnb announced that Malaysia has seen the highest growth in South-East Asia, this is a statistic that should make people worried rather than happy.

Airbnb, which drives tourists to stay in privately owned homes rather than hotels, this week announced a near 100% rise in guest arrivals in Malaysia, with more than two million people staying in dwellings listed on its site.

There are now also more than 44,000 listings of Malaysian properties on that website, a 60% increase from a year ago.

This is bad news from a couple of perspectives. Firstly, it is negative for the hoteliers, who have been already hit by slower tourist arrivals in Malaysia. Hotel rates are already cheap in Malaysia compared with regional markets and having more people migrate to private residencies instead of hotels will stunt the growth rate of what hotels can charge customers. It also makes the establishment of new hotels less attractive, given the alternative market for tourists.

The second point is that the increase in listings shows that property owners are now forced to list their properties for such rentals instead of the traditional long-term rents that most are used to.

As the overhang reaches a critical level, house-owners are hard-pressed to find tenants that can take up such places for long-term rental.

Having short-term rents on Airbnb will help with generating enough cashflow to repay monthly loan obligations, but that will come at the detriment of neighbours who are staying there as their primary source of residence.

The rise in such statistics by Airbnb indicates the seriousness that is engulfing the property market in Malaysia, where house-owners will need to find some use for their idle property to generate enough cash for repayment. But that will also come at the expense of job generation that a vibrant hotel industry can provide. This predicament will need to be addressed by the authorities before it becomes a long-term structural issue.

 

Rising risk

THE risk in the financial markets has increased by another notch.

Earlier this week, the price of crude oil in New York dipped below US$50 a barrel, albeit briefly, for the first time in a year. That came a week after the price of bitcoin slumped below US$4,000 - a key support level.

As it is, both oil and bitcoin are in “oversold” territory.

In the equity markets. wild swings in prices are becoming frequent. One of the areas that is seeing ferocious selling pressure is in the technology sector.

According to some market strategists, the rising volatility across various asset classes is a clear sign of a bear market emerging.

Closer to home. dismal financial results of some of the biggest names on Bursa Malaysia in the recently concluded earnings season is adding to investors’ growing conviction that the decade-long bull market is coming to an end.

The price of crude palm oil, a key export commodity for Malaysia, is barely holding above RM2,000 a tonne.

For investors, going into 2019 will be a challenge.

Over the past decade, the persistent bull market has always rewarded those who have been willing and brave enough to enter the market to target the dips.

The V-shaped recovery that usually follows such price corrections has provided lucrative returns for savvy investors.

But the mood is changing in the market. It is much easier right now to make a case for a troubled stock market, going forward.

With economic superpowers the US and China locking horns, it is much safer just to stick to the sidelines for a while.

short position , brief