Malaysia: 2009 may be a year of uncertainty with a bearish bias

We have seen many things happen this year and records being broken in the financial markets like many records being broken in 2008 Olympics in China. The year 2008 would not be forgotten by many, especially those who are investing in the financial markets. It is one of the most volatile years in the financial markets since year 2000, or perhaps in history.

Let us review what happened this year and try to forecast what is likely going to happen next year. After all, forecasting is always based on historical information and forecasts are not 100% accurate all the time. However, it helps us to prepare expected challenges in the future. There is a very good Malay proverb for investors in the financial markets and that is “Sediakan payung sebelum hujan” and it means get an umbrella ready before the rain.


Average Weekly Range % (Volatility) of KLCI since 1994

In Malaysia, the year started with a very bullish sentiment accumulated from a six years bullish trend that started in year 2002 after the dotcom bubble burst in the year 2000. The Kuala Lumpur Composite Index was at about 600 points. The momentum starts to get very bullish in the mid year 2006, when the KLCI was at about 900 points and one year later, it created a new record high. On April 2007, I wrote in Smart Investor and forecasted the KLCI to go as high as 1,500 points. In January 2008, the KLCI closed the highest level ever at 1,516.22 points.

While the equity markets were making new highs, a crisis was already brewing in the United States. During the year 2006-2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006 because of interest rates has increased and prices of properties did not go up as expected. Prior to that, easy and low interest credit was available to people who are not credit-worthy. Therefore a sub-prime mortgage crisis began that eventually lead to bigger financial crisis.

Equity markets around the world soon realized the extent of damage sub-prime crisis can create and started to correct downwards in October 2007. Historical high closes were created on major indices around the world. The US Dow Jones Industrial Average was at 14,164 points, London’s FTSE was at 6,730 points, Hong Kong’s Hang Seng index was at 31,638 points and our close neighbor Singapore was at 3,875 points. These markets started to correct downwards after October 2007 but the Malaysian equity market continues to climb. Only property and construction companies were affected in 2007 from June onwards as the crisis at that time was only on properties.

The first quarter

In October the KLCI was at about 1,400 points and it climbed to its peak of 1,516 points in January 2008 and while other markets fell. This was primarily due to the increasing price of Malaysia’s major commodity, the crude palm oil. In early 2007, the price of crude palm oil was at about RM1,900 per metric ton and about 1 year later, it shot up more than double to a historical high of RM4,300 in March. Major plantation companies which are heavyweights in the KLCI enjoyed huge increases. In early 2007, SIME Berhad price was at RM7.00 and rose 85% to RM13.00 in January 2008. Another heavyweight IOI Corporation Berhad’s share price rose 140% from about RM3.50 to RM8.50.

In January 2008 after the KLCI made the historical high and which my earlier forecast target met, I made a forecast on Smart Investor (published in February 2008) that the KLCI is going to go into a major correction with a 1,100 target, after analyzing the current economic conditions and the price chart. The price of crude palm oil was trading at around RM3,500 per metric ton for about 4 months after correcting from the historical high in March. This has led to a decline in share prices of plantation companies.

UK’s leading financial house Northern Rock faced financial difficulties in 2007 and in February 2008, it was nationalized (being bought over by the government. Another financial giant was facing difficulties in the US. Bear Sterns was acquired by J.P. Morgan Chase and the government though the central bank has to provide a loan of US$29 billion for the deal to go through. It was uncertain times for Malaysians as they were going to a general election in March. It created another history in Malaysian politics when the ruling government failed to get 2/3 majority for the first time. The KLCI plunged further in face of uncertainty. All these happened in the first quarter of the year.

The second quarter

In the second quarter of the year, the financial crisis deepens. The IMF warned that America's mortgage crisis has spiraled into "the largest financial shock since the Great Depression" and there is now a one-in-four chance of a full-blown global recession over the next twelve months. A report from Bloomberg on the 19th of May 2008 revealed that US$379 billion vanished in asset write-downs and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 100 of the world's biggest banks and securities firms. The IMF added that world's financial firms could end up shouldering US$1 trillion worth of losses from the credit crunch.

The price of crude oil suddenly started to increase sharply in April. The price of crude oil rose 40% from US$100 per barrel in early April to a historical high of US$140 in June. Malaysians were in a shock when the government, for the first time in history increased consumer petrol price by 45% from RM1.92 per litre to RM2.70 per litre in June. The increase has caused price of consumer goods to increase and this eventually led to higher inflation. The KLCI was trading in a range of 1,200 points to 1,300 points in the second quarter.

Events in the second quarter fueled the already worsening crisis. With rising inflation and the pressure from governments to lower interest rates to support the financial system, it has created an economic problem. The pain from the deepening crisis is felt in the third quarter.

The third quarter

More government bailouts are happening in the west, and these bailouts caused tax payers money. Equity markets continue to decline from July to September and sentiments continue to be bearish and a new fear has arisen, recession. Most equity markets have already gone down by at least 40% in September since October 2007 peak.

Most of the major events happen in the last month of the third quarter, which is in September. Financial giant Merrill Lynch was acquired by Bank of America for $50 billion. Another financial giant, Lehman Brothers declared bankruptcy on 15 September 2008, facing a refusal by the federal government to bail it out. The US Federal Reserve provided an emergency loan of $85 billion to America’s largest insurance company AIG. Just over three weeks later the Fed reported that AIG had drawn down $70.3 billion of that $85 billion facility. These were only some of the highlights and I believe more financial institutions were facing serious problems. The financial catastrophe has not yet landed in Asia including Malaysia.

The recession fears and financial turmoil have caused price of commodities to fall. Price of light sweet crude oil fell to US$100 per barrel in September. Price of crude palm oil fell to RM2,100 per metric ton, more than half from the peak in March. The sharp decline in prices of commodities was not able to lower the prices of consumer goods and therefore, inflation remains high. Malaysia's inflation rate jumped to a 26-year high of 8.5 percent in August. It only managed to ease to 8.2% in September. The government decided to review price of fuel on a monthly basis and remove some subsidy. The KLCI was at 1,000 points in September 2008. The bearish sentiments have caused me to change my bearish forecast target from 1,100 points to 850 to 900 points.


Weekly relative performance chart of KLCI, Crude Palm Oil and Crude Oil since January 2007

The Fourth quarter

Markets continue decline as more negative corporate earnings were reported and this time more aggressively. Many markets have suspended trading in this quarter because of a breach in the trading range limit. Some markets fell to its sharpest ever fall in a single day. The Dow Jones Industrial Average (DJI) made its biggest single day fall ever with 777.68 points or 7% in the end of September after the US$700 billion bailout plan by the US government failed to get support initially.

Further financial packages from governments and reduction in key interest rates have eased the aggressive decline and markets have found a bottom in late October. The US has cut its interest rates to near zero. The KLCI closed as low as 829.41 in October and is currently at 867.35 points, as at 7 November 2008.

Prices of commodities continue to decline heavily. Price of Crude Oil is currently trading at US$35 per barrel. Just 2 quarters ago, the price of crude oil was at US$140.

The table on the left shows performances of major indices since January 2008:

Most of the indices started to decline after October 2007 last year and if calculated from that peak, most of the indices have fallen more than 50%. Malaysia equity market generally fell about 36%.

Where do we go from here?

In my previous article in Smart Investor, I mentioned that the KLCI is heading for 850 to 900 range level for support. The KLCI has found a support at 800 points. Has the market bottomed out?
In my humble opinion, temporarily yes, at least until the end of the year.

The equity market normally leads the economy by 8 to 12 months. The equity market has already fallen about 36% from the January high. The Malaysian economy is currently slowing down little, unlike other countries especially the west which is slowing rapidly. Our neighbour Singapore is already in a technical recession. Just recently, DBS Bank, a major bank in Singapore planned to cut its workforce by 6% or 900 jobs as profits declined sharply. Companies in Singapore are already preparing for an economic slowdown and economist are predicting that the worst is still far away from what is happening now. I'd expect Malaysia to cut interest rates in 2009 to spur the economy.

I expect the Malaysian economy into recession next year if the financial markets do not recover fast and when this happens, another sell down is expected in the equity market before the market finds its bottom. In 1997, the KLCI fell about 80% from the high of 1,300 points to a low of 260 points. Just a thought, if the current crisis is more severe than the Asian financial crisis, do you think it can fall more than 80% from the high of 1,500 points? My forecast is between 500 to 550 points.

The year 2009 may be a year of uncertainty with a bearish bias and the equity market volatility is expected to settle down a little from the 2008 tsunami. Investors should stay alert in 2009 as short term opportunities may still arise. Investors should learn how to identify these stocks fundamentally and technically. Investors should also look at other investment alternatives like the futures market, which allows investors to also profit from bear markets so that if the year 2009 remains bearish, the investment portfolio can still grow.

While others whine and complain on their disastrous investments in the past years, smart investors learn from their past investments and seek more knowledge to improve their investing skills. Investment education is the best investment when markets are uncertain and bearish. The experience and knowledge learned will prepare you as a better investor in the future.

I wish you a Happy New Year 2009 and may your investments continue to grow in this New Year.

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The article above was published in Smart Investor December 2008 issue and is modified with current information. Article contributed by Private Trader, Market Expert, Trading Coach and Chief Market Strategist of Nextview, Mr. Benny Lee. For more articles and commentaries from Benny, click HERE.

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