Fund managers say investors should wait for selling to subside

PETALING JAYA: Fund managers and analysts are mixed in their view on the market following a 513 point drop in the Dow Jones Industrial Average.

They felt caution was still the predominant theme of the market and it would be better for investors to wait for the selling to subside.

Some are worried that demand destruction from developed markets will hurt exports especially the electrical and electronics and crude palm oil (CPO). More than 20% of CPO goes to Europe. Net exports account for about 25% of gross domestic product.

Hong Leong Asset Management Bhd executive director and chief executive officer Geoffrey Ng said the sell-off in the United States and the market rout in Asia which collectively erased in excess of US$1 trillion in capital value was similar to panic selling in May 2010.

“The selling that is occurring now is orderly. Unlike the flash crash in May 2010 that severely shook confidence in the market itself, today's selling is met with sufficient liquidity as to not result in dramatic price falls, although a 5% retracement in a day is dramatic enough,” said Ng.

Two things may occur from here.

Firstly, Ng said that markets could be overly pessimistic of the recently reported economic numbers from most countries which have been below expectations. This may be a possibility due to severe supply chain disruption resulting from the massive earthquake in Japan in March.

“Manufacturing output was severely curtailed in the following months, with far reaching implications to manufacturing activities around the world. The lack of production activity and consumption thereafter may be blamed for the poor quarterly GDP numbers that is scaring the markets today,” explained Ng.

Secondly, if markets are proven right, and the global economy is decelerating faster than expected, then the risk of recession increases dramatically. This may force the governments to act again to inject liquidity into their respective monetary systems in order to keep the pace of economic activity from failing further.

“In the near term, this will help stabilise markets and hopefully mend frayed consumer confidence to motivate consumption again,” he said.

“Yes, the sell down that we are experiencing now is unnerving.”

Ng said the events unfolding could be a continuation of the rebalancing of world consumption that started with the Global Financial Crisis in 2008.

“Emerging economies that are rich with population, commodities, national savings and consumption ability are now refocusing their efforts toward building their own consumer base by normalising wages, improving infrastructure and moving up the value-added chain. This rebalancing is not in a straight line, and will have times of immense volatility such as recent times,” he said.

Meanwhile, OSK Research Head Chris Eng feels the market is in a “touch and go” situation, and he will be closely looking at how the Dow Jones closed on Friday night.

“If the Dow Jones rebounds by 2% in its Friday closing, then there is still hope. If however it does not rebound, then things will start getting a little iffy. We would then downgrade Malaysia to a neutral, and suggest switching to defensive stocks,” said Eng.

He acknowledged that Malaysia was still a very defensive market, but however this won't prevent it from falling.

“Looking into 2012, we are going into an environment of subsidies increasing and interest rate normalisating. Fundamentally, everything will be more challenging,” said Eng.

Another research head felt that there was not much to look forward too. “Look at the problems happening in Europe. You have four to five countries facing difficulties to raise money because their credit worthiness is suspect. So, we're going to see borrowing cost increase in an environment where interest rates are also high. Things can only get more difficult.”

A trader from JP Apex Securities said: “Don't buy now, as people are still in selling mode. But perhaps in one to two weeks time, things will die down. Look at the strength of the US Dollar today. It has rebounded back to RM3.01 from RM2.90 last week. This shows that people still see US as a safe haven.”

He added that Malaysia was not affected as there were hardly any foreigners in the market.

“The Malaysian economic fundamentals are still the same and have been priced in,” he said.