- We believe that the statement of PM Najib that the FBMKLCI (capitalization-weighted stock market index) rally due to BN electoral results is at best an inaccurate exaggeration.
- FBMKLCI gained by 6% year-to-date is mostly due to regional foreign funds which incidentally is already a regional trend and not a specific trend in Malaysia.
- Secondly, it must be also noted that investors are piling back into the long-underperforming stock market as Bursa has stubbornly underperformed since March 2009.
- More substantively, we could see that even after the gain post GE, of the relative underperformance. Despite BN winning the election, Bursa is still trailing behind regional peers such as Indonesia, Thailand, Phillipines and Singapore who have all gained more than 10% year to-date.
- The irony about post GE rally is that most domestic funds are still cashed up and do not lend support to the local market. In fact domestic funds which are so-called Government-Linked-Investment companies (GLIC) have been net sellers of domestic equities in recent months ie January to May. Only retailers and foreign investors are net buyers who buy underperforming stocks.
- Further, we also noted that the rally was led by lower liners such as FBMMidCap and FBMSmallCap who outperform FBMLargeCap such as Sime, CIMB, Gamuda and MRCB.
- If the global economy continues to deteriorate over the next few months it is likely that the larger-cap sector would underperform relative to the small caps because of the flight of quality due to deteriorating economy reflected by the 4.1% lowest GDP growth in th 1Q 2013 since 4Q2009.
- To easily prove that this rally remains unconvincing is to look at Ringgit which continues to deteriorate and down by 6.8% in just one month while Bursa gains a meagre 6% within five months. We also believe that there is a mysterious disconnect between Bursa and Ringgit performance.
- It is worth noting that the exchange rate better reflects long term confidence on the economic power ( Purchasing Power Parity and genuine FDI) than Bursa FBMKLCI which is based on fluid short term sentiments (ie hot money and potential leakages).
- PM Najib doesn’t need to be told that in the final analysis, it is currency and purchasing power that determine the rakyat well-being. Furthermore, as at 2012, Malaysian personal disposable income is still unable to catch up with the inflation rate. The looming hike in inflation from1.8% to 2.8-3% in 2014 compounded by ‘subsidy rationalisation’ and the impending GST are surely cause for concern. Much as he wants to show that he is upbeat with the Bursa current performance, Najib couldn’t and shouldn’t be oblivious of the bad prognosis and the precarious situation ahead.
- He must remain focus on concrete structural economic reforms and address serious systemic leakages and abuses while enhancing transparency and accountability in his administration. Only through genuine reforms do we get to be on a different trajectory of competitiveness and a vibrant economy and hoped to support a strong stock market.
Dr Dzulkefly Ahmad, Executive Director Pas Research Centre. (Corporate Finance Resource Group).