Did We Miss Something?

Yesterday's indices in Asia:

Topix -4.67%
Nikkei 225 -4.25%
Hang Seng -4.97%
Shanghai -5.23%
Taiwan -4.12%
Kospi -4.29%
All Ords -3.36%
Thai Index -6.48%
Jakarta -10.03%
Sensex -5.78%
STI -5.61%
KLCI -1.95%
Vietnam -4.08%

The KLCI stuck out like a sore thumb. Was it really an outperformer, losing just 1.95% when others tumbled nearly 5%. Are the Malaysian fundamentals really solid?

Short answer: NO. KLCI fell the least because most foreign funds have already exited Malaysia months ahead of the rest. The rest are just being sold down now as foreign funds still have shares to sell there. Of course its not just a foreign funds thing, local funds have also pared down much earlier in Malaysia.

Malaysia was one of the first to be sold down because of a few factors:
a) political instability and uncertainty
b) indiscriminate slapping on and removal of windfall tax on CPO and IPPs

Ringgit had a very good run for most of 2007 and the first quarter of 2008. Then the above factors started to weigh on ringgit bonds' attractiveness. The additional factor was that the political uncertainty caused some to fear a possible reimplementation of "capital controls / peg". The ringgit is still not transactable outside of Malaysia. This weighs heavily on long term bond holders. The outlook for the ringgit is also important.

As funds sold stocks and bonds, they will convert and hence sell ringgit, thus explaining much of the weakness in ringgit over the past 3 months. This exacerbated the outlook for ringgit for the rest of the year. The situation was compounded when Zeti kept rates steady when the majority of investors expected Bank Negara to raise rates. Of course I think Zeti now has been proven correct in not raising rates looking at how the global economy has been unravelling for the past few weeks.

Hence foreign funds, and to a lesser extent, also local funds have a pretty minimal weighting on KLCI. They have very little to sell. It is safe to assume that the holdings they have now is unlikely to be sold off because no decent fund manager wants to be "caught out" by having Malaysia at zero holding. No sensible fund manager managing an Asian or global portfolio wants to do that. You can underweight a country exposure but not zerorise it. The risk taken is unacceptable.

The current bouts of selling in commodities and stocks in general has probably to do with more hedge funds unwinding their positions as September was the worst month for most hedge funds. Hence the redemption by clients would have been enormous following that.

Luckily, Malaysian stocks and bonds have had their major sell down a couple months back. While it may be still early to start getting back into equities, we need to have a proper view of where things stand right now. The local markets are oversold. It is better to give up the first 10% of a rebound. No point trying to pick bottoms. Start thinking of getting back when volumes get back to 70%-100% of normal daily volumes. If you start picking when volumes are less than 50% of usual daily volumes, the risk-return is not in your favour.

p/s photos: Karen Mok