Thursday, August 26, 2010

Why Is There A Lack Of Interest In The Market?

THE FTSE Bursa Malaysia KL Composite Index (FBM KLCI) finally touched 1400-level again. Despite high index level, the overall daily traded volume remained low at about 700 million-800 million. We believe, except for certain fund managers and day traders, not many retail investors were excited about the market. In this article, we will look into the reasons why investors are not investing at the moment.

We believe one of the main reasons is that many investors are still quite worried about the global economic recovery. Given that a lot of newspaper articles, media as well as some investment gurus have been saying that the global economy still has the possibility to have “double dips” or slip into recession again. Nevertheless, at this point in time, we believe nobody will know for sure whether the economy will enter into recession.

However, we notice that the current high FBM KLCI level was mainly driven by high stock prices of some key blue-chip stocks or fund favourite stocks. Investors need to understand that even though the FBM KLCI is surging to reach the recent 2008 peak of 1500-level again, there are still plenty of stocks selling at very cheap valuation.

A lot of second- and third-liners are still selling at 2008-09 low but with good values, i.e. price/earnings ratio of about six times, dividend yield of above 5% as well as selling below the owners’ costs (or selling below net tangible asset).

Despite the cheap valuation for lower liner stocks, not many investors are aware of their values. For those who may be aware of the values, not many are willing to inject fresh money into the stock market. One of the main reasons is many may still be holding poor quality stocks and these stocks are selling at 2008-09 low.

Given that they are not willing to cut their losses and worried about losing more money in the stock market, they prefer to stay sidelined while waiting for their existing poor quality stocks to recover one day.

In behavioral finance, we name this phenomenon as “snake-bite” effect.

Unfortunately, in most instances, the moment the prices of these poor quality stocks start to recover, this may indicate the end of the recent market rally because most fund managers, company owners and experienced traders will take the opportunity to liquidate their holdings to these retail investors.

Apart from the above reasons, some investors are quite worried over corporate governance issues in some Malaysian listed companies.

Incidents, like some companies being abandoned by their key owners, companies defaulting on their loan repayments, increasing number of companies being classified under Practice Note 17 and later failed to regularise their companies, are affecting the overall market sentiment. As a result, retail investors are quite careful in investing in new companies lately.

Except for Malaysia and a few other countries in the emerging market, the stock market performance of most overseas markets was weak since April this year.

Retail investors were quite concerned over the financial crisis in some European countries, the weak euro currency, weak US economic indicators as well as asset bubble in China. As a result, the retail participation in these markets, including Malaysia, was quite low. Hence, the current low buying interest from our retail investors is in line with the overall global market phenomenon. The buying interest will only come back when the global stock market starts to show signs of recovery again.

Another reason why investors are not buying stocks is that most retail investors have invested quite a big sum of money in unit trust funds. Even though they still have some savings to invest directly in the market, they prefer to keep those excess savings in fixed deposits rather than to buy stocks directly.

This phenomenon also happens in most developed countries where investors prefer to put money in unit trust funds rather than investing in the stock market. As a result, the fund size managed by unit trust companies grows faster every year.

Hence, we notice that the stock prices for fund managers’ favourite stocks or stocks covered by research analysts are surging to new high whereas the performance of the neglected firms remain low.

Unless investors are holding those fund favourite stocks, they will complain that they have not benefited from the recent market rally.

As mentioned earlier, we still have a lot of second or third liner stocks with strong fundamentals that are selling at cheap valuations. Investors are encouraged to do their own research to discover those companies.

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