It is the same for me. So as news reports have been coming in on forecast of the stock market for 2022, I took the liberty to review the research houses forecast at the start of 2021 to assess how many of them were on point or at least close to the year-end closing prediction at the start of the year.
One can refer to the table attached.
From the table, it is quite clear that majority are off the mark from the initial anticipation at the start of the year.
The variance is as wide as 9.8% to 17.5%. In the middle of the year, most research houses then revised their forecast based on the events that has happened.
Even then, only one research house was within striking distance of the actual outcome with a variance of 2%. Others were far off the mark.
The question then is why do we get caught up in the hype of forecast and prediction at the start of every year, when it is a moving goalpost due to the variables that happen throughout the year?
Unless one has the ability to see the future, otherwise it would seem like this act of forecasting is an exercise of futility.
In my humble view, the innate need of humans where we would like some sort of indication or overarching guidance for the unknown road ahead contributes to such hype in the first place.
It is more of an emotional desire that drives it. Some would argue superstition.
This is not unlike “Paul the Octopus” who made prediction of football matches during the 2010 World Cup. Whether there is an actual empirically backed data or formula which can lead to an objectively accurate outcome in index forecasting is a big question mark.
Ultimately, although expectations for a rapid recovery in 2021 was both high and premature, due to the subsequent turn of events including declaration of emergency, another change in government, the surge of Delta variant and repeated lockdowns followed by policies in Budget 2022 that is not favourable towards the stock market, the FBM KLCI index has been a regional underperformer closing at negative 5.2% year to date.
Now that we are a foot into a whole new year, I believe some level of optimism is vital towards actual recovery.
However, segregation and compartmentalisation of milestones are very important towards achieving an end goal.
By accomplishing parts of the end game, these baby steps are what lays the foundation to do well instead of an unrealistic blue print.
This is a good way to approach New Year resolutions and incidentally, towards the stock market as well.
Instead of forecasting an overall index target price, maybe breaking down the sectors and looking at selected industry for the investment portfolio is a more viable approach.
Banking sector proxy to economic recovery
It goes without saying that the banks should be the primary consideration in any investment portfolio. Apart from it being most stable with good dividend yields, for the past five years, the banks has been on decline in tandem with our economic performance.
Coming from a low base and resilient performance throughout the pandemic, value has emerged for many listed banks. With economic recovery in sight coupled with significant provisions made, banks are closest to the pulse of the economy.
Consumer stocks provide stable demand
Regardless of any uncertainty, consumer goods are necessities which are required on a daily basis. Even during a complete lockdown due to the pandemic, the fast moving consumer goods (FMCG) sector remained in operations and continued to function. While their growth prospects are nowhere as attractive as highly disruptive technology companies and the margins are thin, the stable demand especially for consumer goods would be another good option for building a balance portfolio.
Export stocks hedge against domestic weakness
The exchange rate for the dollar to ringgit closed the year at 4.18 compared to 4.02 at the start of the year. In effect, the ringgit has weakened around 4.5% for the year despite many forecast at the start of 2021 expecting the ringgit to strengthen towards 3.8.
While many may opt to invest in export stocks for the potential forex gain due to the prolonged weakness in our currency, I firmly believe export stocks are attractive because of their consistent revenue stream for foreign markets and strong cashflow. They are also somewhat insulated from the weakness in domestic economy and local policies. In addition, the potential growth prospect is there due to their target market is not confined by the constraints of our border. In short, the world is their oyster.
Risk for 2022
The rate hike and fear for taper tantrum are amongst the monetary policy risk which may affect fund flows globally especially towards an emerging market like Malaysia. While the United States Federal Reserve (Fed) rate hike has been estimated to be three times in 2022 and appears to be factored in by the market, my primary concern lies with the tapering of corporate bond buying by the Fed.
In the past many junk bonds and zombie companies were being propped up due the generous liquidity in the market, in the event the tap starts to shut tight, what would happen to these companies? In terms of rate hike, our current overnight policy rate is quite low and there is ample room to navigate in the event there is a need to follow suit.
Apart from that, domestically, there is the ever-impending 15th General Election at the back of the mind of the politicians and people. With this uncertainty in place, it is hard to expect a bull run for the stock market especially if foreign funds are going to take a cautious approach. Unless and until the political uncertainty is taken out of the equation, it is hard for investors to be adopt a risk on approach in 2022. With close to RM101 billion withdrawals in 2021, the Employees Provident Fund (EPF) had to navigate the largest net outflow in a single year throughout its history but also to meet the dividend obligations to members to be declared in 2022. This led to a continuous selling by EPF as well as other local institutions further exacerbating a downtrodden local equity market.
The upside however would be the high likelihood that EPF will no longer have further withdrawal programmes from the “sacred” Account 1. This to an extent will stymie the selling by local funds and provide a floor to the index should some level of support by local institutions return to the market.
When Benjamin Franklin wrote the expression “little strokes fell great oaks” in Poor Richard Almanack, he meant that great tasks can be accomplished through many small but persistent efforts. That is what I would say best reflected 2021 for me and what I aspire to continue for 2022.
While things may look bleak for our country at times due to the endless stream of issues, be it the pandemic, floods, political maneuvering or weak employment market, I believe there is no single quick fix.
Therefore, maybe the playbook for those in power should consider adopting in their attempt to put Malaysia back on the right track, would be to take little strokes instead of going for one grand swing. Wishing all readers a Happy New Year and may 2022 be a wonderful year ahead.
Ng Zhu Hann is the author of “Once Upon A Time In Bursa”. He is a lawyer and former chief strategist of a Fortune 500 Corp. The views expressed here are the writer’s own.