Staying on the sidelines

KUALA LUMPUR: The year 2011 was ushered in with a lot of optimism. Most quarters, if not all, were positive that the 2010 market rally would spill over into this year to make another good 12 months.

Some analysts had even expected the FBM KLCI to set new highs with targets varying around the 1,700 to 1,800 levels.

However, it seems the year may not be turning out as rosy as thought. Markets have turned decidedly downwards in what looks like a global sell-off in equities as the outlook for the US economy appears to be on the gloomy side.

Given the uncertain scenario, the question is whether investors should opt to cash out of the equity market or stay invested for a rebound later in the year. Needless to say, most analysts are not enthusiastic.

“Experience will tell us that in a volatile market, the choice is not about which sectors to be invested in. The choice is whether to remain invested at all,” remarked MIDF Research head Zulkifli Hamzah.

Should investors choose to stay in the market, he noted that a good strategy would be to invest in stocks that return decent yield, as capital gains would be hard to come by.

Dr Nazri Khan, head of research at Affin Investment Bank, believed there would be more market downside in the near term and advised investors to stay clear of equities.
Brokers look at screens in the trading room of an investment bank in Tel Aviv yesterday. Israeli shares were down more than 6% yesterday after Standard & Poor's downgraded the US credit rating.

“It is not a good time to buy now. Yes we are recommending equity investors to stay away and instead buy safe haven assets such as gold, silver, Swiss franc currency and Aussie government bonds,” he told The Edge Financial Daily.

He said it may be still too early to decide if there will be a recession with estimates of a recession in 12 months to be at 15%.

“The difference this time compared with the last crisis is that we have a serious fiscal drag with government spending expected to fall anywhere between 10% to 30% which is likely to exarcerbate economy further if there is a recession,” he said.

Year-to-date, most markets are in negative territory. Most European markets have declined more than 15% while Asian markets have declined around 10%.

The FBM KLCI slipped 22.46 points or 1.5% to 1,524.43 last Friday following a steep 4.3% loss in the Dow Jones Industrial Average and 4.8% loss in the S&P 500 last Thursday. The benchmark index touched a high of 1,597.08 points in early July but have fallen some 4.4% since in the run-up to the US decision on its debt ceiling on Aug 2.
Yeah: The US still has to grapple with high deficit and debt levels.


While the European sovereign debt crisis has been plaguing markets since late 2009, the US debt ceiling crisis landed a big blow to markets around the world.

Although Congress has agreed to raise the debt ceiling, averting an immediate default on its sovereign bonds, there is growing concern on its high level of debt, which could lead to large cuts in government spending and subsequently affect consumer spending.

Market sentiment has turned cautious as the optimism on a better second half of 2011 may not materialise given the slew of weak economic data from the US, said Kurnia Insurans (M) Bhd chief investment office Pankaj Kumar.

“I would reduce exposure to equity, taking some profit,” said Pankaj, who expects things to get tougher going forward.

He noted that investors are now focused on the economic figures to look for clues on the US economy as well as the world. Besides the fragile economic recovery in the US, he added that the growth momentum in Asia is slowing down, coupled with rising inflationary pressure which does not bode well for the equity markets.

Rating Agency Malaysia Bhd (RAM) chief economist Dr Yeah Kim Leng concurred that a synchronised slowdown in the US, Europe as well Asian powerhouses, China and India, would weigh heavily on equity markets.

“Even though the US managed to raise the ceiling, in the mid to long term, the US still has to grapple with high deficit and debt levels. They need to curb expenses without drastic tax increases and it is still uncertain if this can be achieved.

“The markets will be volatile due to the vulnerable position of the US economy. Apart from slow growth, there is also concern on its weakening currency, high unemployment and slow consumer spending. This is indeed a gloomy picture,” Yeah said.

Yeah noted that investors’ options are limited at this point as the KLCI is subject to external volatility as can be seen in its swings last week.

Additionally, the coming reporting season could see a moderation, particularly for export-based businesses. Yeah noted that exports for the second quarter were in negative territory.

A silver lining, he added, is the possibility of a general election, which may encourage more optimism and liquidity in the market. While it is imminent, there is not much certainty of when the elections will take place.

While the global markets are weakening, analysts and economists concur that the local market will continue to be buoyed by domestic demand and liquidity. Additionally, measures under the Economic Transformation Programme may support domestic demand.

Malaysia has been well liked for its defensive nature and is known to outperform on the way down. Fund managers said foreign investors are still positive on Malaysia and foreign funds may soon find their way into the local market.

Nonetheless, Malaysia is not an insulated market and being exposed to external factors, the upside remains contained.

It may be tough to put a floor to the market as no one can pinpoint market direction for sure.

“Volatility will continue until the Fed makes a commitment to carry out QE3 or China reins in inflation and is done with interest rate hikes,” Scott Lim chief investment officer MIDF Amanah Asset Management said.

Lim opined that the maximum downside for the local market is 20%. Thus, should the market reach that level, he advises investors to take on an aggressive buying stance given the good value to be had then.

For now, he is content to space out his buying, switching positions as the market moves along since there is no clear direction and not much can be done with “high conviction”.

Vincent Khoo of UOB Kay Hian Malaysia Research said the local market will continue through a period of consolidation in line with global markets.

“Without a fresh lead and uncertain economic cycles, it may not be a good time to go into equities,” he cautioned.

However, UOB Kay Hian said investors may want to start accumulating in the oil and gas sector towards end-3Q to position for a year-end market recovery.

Citi Investment Research noted in a recent report that there may be window-dressing activity closer to end-September and early-October as local institutional funds close their books for 3Q and Budget 2012. The research house hopes for a better 4Q as economic and market adjustments work through their systems.