FOLLOWING two weeks of selloff of equities sparked by the coronavirus outbreak, the breach in support levels finally snapped – the fragile FBM KLCI tumbled to briefly hit its eight-year low of 1,521 on Feb 3 – a level last seen on Jan 31,2012.
This fall wasn’t isolated to the FBM KLCI. Across the region, markets were in a tailspin. The only difference was, most markets weren’t visiting lows close to a decade ago. The Dow Jones and S&P 500 also faltered, but they were still just a whisker away from their all time highs.
In the case of the FBM KLCI, it already had a dreadful time in 2019. On Oct 3, the FBM KLCI fell to one of its lowest levels in four years at 1,564.12. The last time the FBM KLCI hit the 1,500-odd-point level was back in August 2015.
Now though, the Rat year has heralded a market that is close to its eight-year low.
This week, along with regional markets, the FBM KLCI has recovered some ground. For the week ending yesterday, the FBM KLCI gained 32 points to 1,554.49, recouping some of the 67 points it lost since the beginning of the year.
With the local bourse at such low levels, investors are starting to ask: How low can it go?
Some investors are starting to see opportunities, as can be seen from the increased buying interest on beaten down stocks.
The coast is far from clear though, and investors are still expecting a volatile ride ahead so long as the coronavirus prevails.
We know that history has shown that infectious diseases aren’t enough to derail the underlying trend of a market and the economy.
Whether it is SARS, swine flu, ebola and avian flu, the market’s reaction to such outbreaks has been short-lived.
Shorter time span
Is this an opportunity to buy, or a sign to run?
“The FBM KLCI has tumbled to an eight-year low. The slump in share prices is effectively a sale in a sale, ” says former investment banker Ian Yoong.
Yoong noted that the decline in the FBM KLCI was 66.7 points or 4.16%, while the FBM EMAS dropped 572.97 or 4.99% between Jan 1 to Feb 4.
He says that fear spreads easily.
“That (fear) is the greatest impact the coronavirus has on capital markets. It is at these times that responsible journalism is shown to be in a stratosphere above social media, where fake and nonsensical news permeate, ” he adds.
Since Feb 4, Asian markets have been rising, showing signs of more confidence that the economic impact of the outbreak would be contained and short-lived.
Looking back, Yoong says that the SARS epidemic took about 10 months to be officially declared over.
“It is likely that the epidemic will have a shorter time span, most likely six to seven months. China and many developed nations are better prepared this time around. It also appears that a cure is in the works, ” says Yoong.
On Wednesday, there were unconfirmed reports that researchers had made breakthroughs toward developing a vaccine, but the World Health Organization said there are still no known effective therapeutics against the Coronavirus.
While Yoong sees buy opportunities in the market, he does opine that the rubber glove sector is overvalued, as it is now trading at an average sector price earnings ratio of 32 times.
Rakuten Trade Sdn Bhd vice-president of research Vincent Lau agrees that the buy opportunity has arrived. He feels that this is best time for investors to buy the stocks they previously wanted to buy, but couldn’t because of valuation issues.
“Markets will be up and down in the short term.
“However it is a matter of time before the fear subsides. This isn’t the first time the world has dealt with an infectious disease. Past statistics have shown that the fall in stock markets due to infectious diseases have been temporary, ” says Lau.
Taking a leaf out of Baron Rothschild, an 18th-century member of the Rothschild banking family, Lau says that ‘the time to buy is when there is blood on the streets’.
“There currently literally is death on the streets because of the disease, ” says Lau.
Lau says now is a good time to accumulate technology, plantation and construction stocks.
“This is especially for technology growth stocks that trade at higher valuations. Now that they have fallen to more palatable levels, it is a good opportunity to take position, ” he says
One of the smartest financial guys in the world Warren Buffett said something of a similar effect to Rothschild. Buffett said to be fearful when others are greedy, and to be greedy when others are fearful.
Meanwhile, it helps too that China has been proactively taking measures to support its economy in the wake of Coronavirus, the virus which originated from China’s Wuhan City.
The city of 60 million people has been on lock down since Jan 23, as the China government looks to effectively contain the virus’ spread to the rest of the country and world.
On Feb 3, stocks in mainland China had plummeted more than 7%, with a record US$720bil wiped out, after they returned to trade following aextended holiday as the fast spreading virus unnerved investors.
That day, the Chinese central bank lowered interest rates on reverse repurchase agreements to add money to the money supply.
The People’s Bank of China (PBoC) reduced the seven day reverse repo rate by 10 basis points from 2.5% to 2.4%, and the 14-day rate was slashed from 2.65% to 2.55%.
The PBoC injected 1.7 trillion yuan (about US$242bil) into money markets through reverse repurchase operations on Monday and Tuesday.
On Feb 6, markets got a further unexpected boost when China announced it was cutting tariffs on US$75bil in US goods in half.
Certainly as is standard when new diseases appear, headlines are linking the outbreak to market volatility and warning of a more serious impact.
SARS, which lasted almost six months from November 2002 to March 2003, resulted in about 8,100 people getting sick, with 774 people dying, according to data from the World Health Organisation and the Centers for Disease Control and Prevention.
Just like today, there was intense media coverage and the rush for surgical masks as people panicked to protect themselves.
During the height of SARS, the S&P 500 endured a 14.2% correction from Nov 27,2002 to March 11,2003. Meanwhile the FBM KLCI was down 1.5% during that period.
Following the eradiction of the disease, the S&P 500 subsequently finished 2003 up 28.7%. Meanwhile the FBM KLCI was up 25.55% that year.
Fisher MarketMinder said in a note that in the grip of an epidemic, it could feel like the sky is falling – but most such viruses die down in a matter of months.
“We don’t know yet when this one will run its course – and we don’t understate the impact on human life – but history suggests the economic and stock market impact won’t be lasting, ” said Fisher MarketMinder.
It recalls the responses to the 2003 SARS outbreak, the 2008 financial crisis, and China’s overzealous economic rebalancing toward consumption in 2015.
As on those occasions, fixed-asset investment (particularly by state-owned companies) is likely to surge to fuel fresh industrial activity.
“Given the government’s top priority remains preserving social stability, we doubt they would hesitate to draw on their US$3 trillion war chest if necessary, ” said Fisher MarketMinder.
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