It’s not the time to be in ‘love’ with your favourite stock

by **Cals** Sat 15 Aug 2015, 16:42

It’s not the time to be in ‘love’ with your favourite stock

Saturday, 15 August 2015
By: M. SHANMUGAM

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Going down: A man sits before electronic boards showing stock movements in Kuala Lumpur. The current downtrend in the market started a year ago when oil prices began their fall. – AFP

IN the current environment, the only thing we can predict about the stock market is uncertainty. Nobody can tell for sure how currencies and stock markets will behave in the next six months.
Investors, or rather punters, looking for quick gains would have already felt the brunt of the impact by now. Those who had put their money into investments in the past six months looking to exit quickly are probably losing money or barely breaking even.
Even long-term investors who do not want to take some money off the table have seen their “paper” wealth being reduced to what it was a year ago.
There is a long-term investor who believed in a small-cap gaming stock that was churning strong operating cash flow. The excess money was so good that the stock managed to halve its debt of RM140mil within two years. With improving fundamentals, the price also moved up.
Instead of taking some money off the table, this long-term investor put more money into the stock. Even in March this year, when there was a selling opportunity, the markets were still good and the stock had already gained 100% from his original entry price, the investor did not reduce his holding.
His rationale was that it deserved a higher valuation.
Now, the stock is back to the levels it was trading more than a year ago. Only last week, the investor sold 50% of his holdings in the stock for a small gain.
With some of the proceeds, he has taken his family for a short holiday in Thailand – where the appreciation of the baht against the ringgit is manageable.
The art of making money from the stock market is not only identifying the good companies. A key element is to know when to sell.
Most investors are caught because they don’t know when to sell or take some profits. They don’t want to cut their losses. They tend to be in “love” with that particular stock that they keep putting in more money without realising that the market may not be kind to them.
The current downtrend in the market started a year ago when oil prices began their fall. No investor can say that they did not see this downtrend coming.
Between August and end-November last year when Petroliam Nasional Bhd or Petronas announced that it was cutting down on its capital expenditure by 30%, the price of Brent crude has dropped by 52% to US$49.17 at the time of writing.
The revised Budget 2015 announced in November last year was another signal that things were not going right for the economy and markets.
But many were still optimistic in the first quarter this year, with the view that the policy makers had the situation under control. Everybody expected consumption to slow down after the implementation of the goods and services tax on April 1 this year.
But the man in the street did not see the China slowdown hurting markets across the world.
China has a unique way of managing its currency. The yuan is managed within a tight band. A reference point is fixed everyday and the yuan is allowed to move up or down within that point. The average movement is less than 0.1%.
In currency markets, a movement of more than 20 basis points is a lot. So, when the People’s Bank of China allowed the movement upwards or downwards at 2% on Wednesday, it jolted global markets.
But to be fair, the yuan is over-valued and its strength does not reflect the fundamentals of the economy. The yuan should have been devalued gradually since early this year when the US dollar started to rise significantly.
But then, nobody would have thought that the slowdown in China, which started a year ago, would continue.
The slowdown in China, coupled with the turmoil in Europe, has taken the global economic growth by storm since the middle of last year.
Now Europe is recovering, as seen by Germany’s strong growth in exports, thanks in part to the weak euro.
China’s economy will eventually recover, but the signs of when that will happen are still not clear.
As for emerging markets such as Malaysia, they are caught between a rock and a hard place.
The devaluation of the yuan adds to the depreciating currencies that are already affected by a possible interest rate hike in the United States next month.
For currencies like the ringgit that depend on China and the US for trades, there really is no place to hide in the short term.
Both forces are rocking the ringgit and most parts of the world. In terms of currency depreciation, the New Zealand and Australian dollar have fallen more against the US dollar compared to the ringgit in a space of one year.
In the next six months, the best strategy is not to be greedy. Learn to cut losses and look at other options.
This is the time to look at the blue chips that you had always wanted to own but were not able to because of hefty valuations.