By Chan Quan Min
We are now right up to the end of the year 2014 and the local bourse has delivered one final spurt, as it has done almost every year before this.
December has historically been a good time for a stock market rally and this is usually said to be the result of window dressing, the practice by some fund managers of selling out of non-performing investments and buying into better performing ones.
Window dressing makes funds look good. To be exact, it makes it seem like their managers had made the right stock choices all along. Fund managers would argue, and rightly so, that it is anyway a good idea to get rid of dead weight before ringing in the new year.
This year the usual December rally was a welcome relief, as the FTSE Bursa Malaysia Kuala Lumpur Composite Index had by early December slid to below the 1,750-point mark, a level not seen for well over a year. By mid-December the index was lower still, momentarily below 1,700 points.
Much earlier in the year, most market observers would have noticed the local bourse was losing steam after sustaining a five-year rally. By mid-year, with impressive blue chip valuations on the local bourse, many experts began to call for more caution.
It was after that that the market started to go downhill, not because of warnings from experts but from a sudden plunge in the price of crude oil that took place from July that sent down the value of oil and gas (O&G) stocks. Inevitably, other counters were also affected.
Brent crude, the most commonly used crude oil benchmark, was trading at about US$110 a barrel in June but has since fallen to about US$60 a barrel.
As the only net O&G exporter left among major Asia-Pacific economies, low oil prices are bad for Malaysia’s balance of trade and economy but good for net O&G importers, which is almost everyone else.
Understandably, things did not look too good when the ringgit also fell in value at the same time from between RM3.20 and RM3.30 to the US dollar for most of the year to about RM3.50 to the dollar now.
While the fall in the value of ringgit looked to some like a sign of recession to come — probably because it reminds them of 1998 — it is more likely an adjustment related to the loss in export income from lower crude oil prices.
No one ought to lose sleep over it, as most of Malaysia’s main regional trading partners also saw their currencies fall against the US dollar, albeit not as much as the ringgit’s 7% slide. If anything, it was more of the US dollar gaining ground against other world currencies rather than the ringgit falling far behind everyone else.
So the traditional year-end rally this year was in effect a market rebound, and a strong one at that. In the space of two weeks the FBM KLCI managed to reverse some of its earlier losses at a frantic pace, going from just under 1,680 points to over 1,760 points. It was the fastest pace of growth all year.
But a rebound should never be confused with recovery. Window dressing has only managed to temporarily mask growing pessimism. Nielsen consumer surveys show more Malaysians are worried about the economy. Brokers, who have a thumb on the market, are even more cynical.
In recent reports, Maybank analysts nagged investors to “sell on rallies”, suggesting that the rebound was only transient. Most, if not all, market analysts think the rebound is for the most part window dressing.
This isn’t at all surprising. Corporate profits have been underwhelming this year. Investors are cautious and it does not help that we have little clarity on how government revenue will be affected by the fall in crude oil prices.
One hand we have no less than Petronas CEO Shamsul Azhar Abbas signalling a possible cut in Petronas dividends paid to the government. If he follows through with his suggestion, it could jeopardise Prime Minister Najib Abdul Razak’s goal to trim the budget deficit to 3% by the end of 2015.
But, you see, Shamsul doesn’t have the final say. Petronas is a national company tasked with managing our national resources and it is the Prime Minister who will make the ultimate decision on any cuts to dividends.
Some analysts say O&G stocks could be oversold at current prices, some of which are as low as 55% under the mid-year peak.
The thing is, calculations can’t show that investors are uncomfortable with uncertainty. They are unsure how the issue of lower Petronas dividends will pan out, not just for O&G stocks but the wider economy.
Some certainty is needed to ensure speculation is replaced by fact. Only then can stocks on the local bourse be fairly valued. Now is the time for senior government officials to step up.
GRRRRR!!!
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