Year-end rally goes out of the window

PETALING JAYA: The lukewarm response of investors on Bursa Malaysia to China’s decision to allow inbound travel from Jan 8, suggests a year-end “window dressing” rally may not be on the cards.

Analysts, however, do not discount the possibility the benchmark FBM KLCI inching higher to the 1,500-point forecast by some brokerages for the year-end as thinly traded markets could trigger outsized moves.

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“The lack of exuberance from investors to China’s decision to allow foreign travellers into China from January is a surprise and a sign that maybe a year-end rally is not likely. Many fund managers are also on leave till the new year.

“The decision by Beijing is nevertheless very important as the relaxation of its zero-Covid policy has been rapid and outbound travel probably could be allowed a couple of months later,” said Jason Wong, research manager at iFast Capital.

While regional benchmarks closed in the green on China’s Covid policy move, the local benchmark closed 0.01 point higher at 1,474.69 points but not before hitting a low of 1,468 points and a high of 1,477 points in intraday trade. The local benchmark was edging to a lower close, but last-minute buying saw its close even for the day, and a possible sign that local institutional buyers could be doing some window dressing to boost the value of their portfolios.

“The extent of the window dressing varies. Stocks on Bursa, these past few days, have been generally listless. We anticipate some action on the last day of the year,” said former investment banker and high net worth investor Ian Yoong Kah Yin.

He added institutional funds are holding on to 10%-20% cash or near money assets due to the general perception that there would be a global recession in 2023.

“Fund managers are sitting on their hands in anticipation of this global recession, which will impact Malaysia too.

“China’s reopening has had little positive impact on our stock market, most probably because of the high Covid numbers in China,” he said.

News reports suggest the Covid outbreak has spread rapidly in China since Beijing moved to relax its zero-Covid policy following street protests and growing concern about its impact on the economy.

The spike in Covid infection in China has, however, attracted fresh interest in rubber glove makers such as Top Glove Corp Bhd, Hartalega Holdings Bhd and Supermax Corp Bhd on Bursa Malaysia yesterday.

Top Glove rose 12.8% or 10.5 sen to 92.5 sen while Hartalega up 13 sen or 7.7% to RM1.82 and Supermax 7.5 sen or 8.98% higher at 91 sen in active trade on expectations the bearish industry fundamentals may see some reprieve by the rising infection numbers in China and abroad.

The weak market indicated that many local investors could be in for another disappointing period in the local market, which has been trading sideways since a brief rally post-the 15th General Election.

The improved political stability in Malaysia seems to be undervalued by investors.

Wong said the weaker economic growth forecast for the global and local economy in quarters ahead had not been fully priced in as local corporate earnings estimates remain relatively optimistic and have not seen any big earnings downgrades.

Analyst reports on markets such as the United States also warn of the same problem with valuations yet to price in weaker earnings expectations moving into 2023.

The Federal Reserve (Fed) has warned that to get inflation in the US under control, interest rates there would have to go above the 5% rate and remain longer, which the market was, by and large, not expecting.

The narrative from the Fed raised concerns about the impact that might have on the economy.

That is quite worrisome as Bursa Malaysia is currently trading at a valuation of 12.2 times price-to-earnings (PE) as compared with the three-year average PE of 21 times, signalling investors appear to be pessimistic and concerned on recession risks, high inflation, Budget 2023, party and state level elections next year, among other factors.

Wong added local market price action was correlated to external developments going into 2023, but has reduced in the past few years as seen in the diverging performances between other major markets like the United States or China in 2022.

He advised investors to be prepared when investing during an uncertain market.

One of the ways to navigate markets better would be to invest in a properly diversified portfolio that encompassed different asset classes, regions, markets, sectors and individual securities with proper risk management strategies such as concentration risk limits in place.