When will our stock market recover?

THE world’s stock markets, including Malaysia’s, have recovered lately.
Some analysts have viewed this recovery as window dressing activities while others have called it bear market rallies.
And there are those who wonder whether we have seen the worst.
They are eager to know whether the current stock market level has reflected all the negative news, like the sharp drop in consumer spending, higher unemployment rates or lower sales and lower profits for most of the listed companies in the coming corporate result announcements.
Every investor wants to know when will the market recover.
Some investors may be excited about the current stock market level as a lot of good quality stocks have been hammered down to attractive levels, and are keen to start accumulating them.
However, if the stock market continues to dip for long periods, certain investors may run out of “bullets” to average down their purchasing prices.
Then, they will start losing interest in the stock market as they do not have cash to purchase further and their earlier purchases also start to show losses.
We need to prepare ourselves for the market turnaround.
However, we need to be patient and wait for the right time to invest.
In this article, we will look into the past two major downcycles: the 1998 crash and 2000 crash versus the current 2008 crash.
From the table, it can be seen that the Kuala Lumpur Composite Index (KLCI) tumbled by almost 80% in a period of 18 months during the 1998 crash versus a drop of 45% in a period of 13 months during the 2000 crash.
The percentage drop and duration of the 2000 crash were much less severe and shorter compared to the 1998 crash.
For the current 2008 crash, our KLCI has plunged by 47% to its lowest level of 801 points on Oct 28.
If investors believe that the current crash is quite similar to the 2000 crash, then we may have seen the worst as the current percentage drop of 47% is near the 2000 crash of 45%.
However, if the 2008 crash mirrors the 1998 crash, then we may have to wait until the KLCI touches about the 300-point level (assuming the same 79.4% drop in the 1998 crash) before we can see any real recovery.
Hence, we may have to wait for another nine months or until September 2009 (assuming the same duration of 18 months).
We do not think the 2008 crash is similar to the 1998 crash.
Our current economic situation, like central bank reserves, the health of the banking sector as well as economic fundamentals, are much better compared to 1998. However, as mentioned earlier, we need to prepare ourselves for the worst.
What to expect from here on?
Our market will try to absorb all the negative news.
As long as the market continues to drop as a result of negative news, we know we have not seen the bottom yet.
We have to wait for the day when the stock market refuses to come down even when it is loaded with massive negative news; that should be the right time to buy.
Unfortunately, based on our past observations, by then most investors may not have any more cash to purchase or they will still worry about the economic situation.
Investors need to understand that stock market cycles are always ahead of economic cycles.
Normally, when the stock market hits the bottom, the economic situation is uncertain or is still getting worse.

xtrated frm : The Star Online 31/12/08 written by Ooi Kok Hwa

Planning to buy penny stocks?

MANY counters have been heavily battered following the recent stock market meltdown, and they continue to trade at historically low valuations. What’s even more attractive is that many counters, including some fundamentally good ones, have now become penny stocks and the list keeps growing as the bear continues its rampage on the market.
In Malaysia, penny stocks are defined as counters that trade below RM1 per share.
Under normal market conditions, penny stocks do not attract much interest, particularly among institutional investors, because they are deemed too risky and their returns rather insignificant to justify investment.
This is because penny stocks are usually associated with smallish companies that are less resilient, and do not have a sustainable business model.
“The reasons for these counters being quoted at low prices are because of the recurrent losses from their business operations and the extremely negative perception about their quality,” an analyst at a bank-backed research company explains.
Nevertheless, to some retail investors, penny stocks are cheap counters that could sometimes do wonders and provide decent returns.
At face value, these counters are highly affordable. And because they trade at such low prices, penny stocks have a limited downside risk.
This is possibly one factor that could attract some buying interest, particularly in the current volatile market condition, as investors seek to cap their losses in the event their equity investments turn sour.
However, analysts caution investors against being carried away with penny stocks that may appear to be attractive.
This is because many of these counters are inherently risky and have a higher chance of crashing out of the market in bad times.
Generally, investors should base their buying decision on the valuation of a stock, and not its absolute price because most of the penny stocks are not worthy investments, say analysts.
But if penny stocks are their flavours, analysts advise investors to do a thorough background check on the companies before jumping on the penny-stock bandwagon.
Investing in penny stocks need more research and monitoring compared with blue-chip counters, and investors need to be alert and watch out for news affecting the companies, they say.
Selective bets
TA head of research Kaladher Govindan recommends investors who are considering buying penny stocks to look for counters with good fundamentals and those that attract strong volumes.
“As in any investment, ensuring that a counter has good business fundamentals is very important, otherwise investors can face difficulty when they want to dispose of their shares later on,” he explains.
Aseambankers head of research Vincent Khoo points out that investors should also consider the sector in which the penny stock operates to ensure that the counter can still generate positive earnings in the midst of a challenging economic environment. Counters operating in defensive sectors such as consumer food, utility, gaming and rubber gloves have a higher chance of riding through the crisis.
Another criteria to justify a penny stock investment, according to analysts, is that the companies must have sufficient cash flow or the ability to generate short-term cash to last them through the economic slowdown, otherwise investors could risk losing their entire investment in the stock.
“A company’s cash-flow position helps to gauge whether the company can remain as a going-concern when the economy enters a difficult patch few months down the road,” an analyst explains.
“Pay attention also to the gearing level of the companies, and compare that to their industry average; highly geared companies are generally not preferred because they indicate higher risk,” he adds.
Staying power
Among the penny stocks favoured by analysts include oil and gas counters such as KNM Group Bhd, Dialog Group Bhd, Scomi Group Bhd, SapuraCrest Petroleum Bhd and Alam Maritim Resources Bhd.
Other penny stocks that also look attractive to some of them are Sunway Holdings Bhd, Zelan Bhd as well as real estate investment trusts, or REITs.
The list is not exhaustive, and analysts have differing opinion on various counters. The issue is, says a broker, investors have to do their own due diligence before investing.
Having penny stocks in the portfolio can be a good idea if the counters have strong business fundamentals but investors have to be prepared to hold on to these stocks for the long term to see decent returns.
According to TA’s Kaladher, most penny stocks do not have institutional following; therefore, it is difficult to push their prices up.
Generally, they are also thinly traded, which makes them relatively less liquid and difficult to sell. So, the prices of some penny stocks can remain stagnant for quite a while.
“Turnaround for penny stocks tends to be longer, hence investors have to be patient enough to be able to enjoy the upside potential of these counters,” an analyst says.
Aseambankers’ Khoo adds that certain penny stocks have the potential to offer investors multiple gains over the long run at current entry levels.
For instance, some penny stocks are actually worth more than twice their current market prices based on the company’s future earnings potential.
These stocks are currently trading at penny-stock levels due to poor market sentiment. When the market rebounds, these stocks are expected to gradually recover to their fair values.
Strategic approach
No doubt investing in selective penny stocks can be somewhat profitable in the long run. But most analysts still feel investors should take the current opportunity to accumulate blue-chip counters instead, if they could afford them.
According to OSK head of research Chris Eng, investors’ attention now is actually more focused on blue-chip counters because they are safer assets and generally offer good dividends.
Besides, most of these counters are currently trading below their net worth (some have fallen by more than 50% year-to-date), hence making them attractive buys.
In addition, blue-chip counters are normally the first to recover when the KLCI rebounds, he says. And if there is window-dressing ahead of the year-end and New Year festivals, blue-chip counters are usually the ones that will benefit.
OSK expects the full impact of the global economic slowdown to hit the local market in the first quarter next year, with a possibility of the KLCI staging a rebound in the second half.
TA Research, on the other hand, sees the second half of next year as the time when the KLCI would reach bottom; hence the best time to buy stocks for long-term gains.
The current market valuation may be cheap (with the KLCI having fallen by more than 40% year-to-date), but many investors dare not take up long-term buying positions yet for fear of a “value-trap” – a situation where they are drawn into buying an undervalued stock, only to have the stock price decline even further after that.
Kaladher says: “Due to the prevailing uncertainties and volatile market condition, most investors are currently trading only for the short term for potential ‘bear-market rally’”.
There is definitely more downward pressure in the days ahead for the local stock market. But as stock prices continue to fall, equities as an asset class will become even more appealing from the long-term point of view. This is particularly so in the midst of low interest rates and high inflation that eats up the real value of our bank savings.
So, whether investors are looking at blue chip or selected penny stocks, they can still benefit from the future growth of these counters when the current turmoil settles.

By CECILIA KOK xtracted from The Star Online

Understanding stock market rumours

THE stock market is always filled with lots of rumours. Some may be true while others may have certain intended purposes. However, rumours can cause a great impact on companies’ stock prices.
The stock market always says that we should buy on rumours and sell on facts. Certain rumours may not be true but traders may still be able to benefit by buying the stocks based on the rumours and sell immediately once the concerned parties correct the rumours and reveal the actual facts. In this article, we will look into the various types and characteristics of stock market rumours.
What is a rumour? It is information that is not verified, but it is important and the recipients may be interested to know more about it. In most times, it is created to cause others to believe in it. It can reach out to a large group of people by transmitting through the mass media.
Over the past few weeks, there was one plantation company faced with some negative news. Some investors who owned the stock sold some of their holdings as they were worried that the rumours might be true.
Even though some of the negative rumours were true, the real impact was not as bad as the rumours that had been circulating in the market. Hence, we should not be trapped into panic selling.
Given that investors always overact on rumours, we need to be careful and check further whether those negative rumours may have been reflected in the stock prices.
Based on a study by Ralph L. Rosnow (1991) titled “Inside rumour”, there are three main types of rumours - wish, dread and non-involvement rumours.
Wish rumours are intended to create hope for some positive consequences to happen whereas dread rumours are intended to create fear and cause some disappointing consequences. Non-involvement rumours will not cause any impact to the recipients.
However, some will still want to spread them as they want to show that they are knowledgeable or they just like to do it.
How do we deal with rumours? Should we ignore or pay attention to them?
In Malaysia, based on our experience, most of the negative rumours on certain companies are true.
We need to pay attention to them. We may need to check further on the real impact from those rumours if we own the stocks. Even though sometimes they may not be true, we feel that it is safer to avoid holding on to such stocks.
On the other hand, we should put less weight on positive rumours. Sometimes certain owners like to liquidate their holdings by creating positive rumours.
Once the general public start to believe in them and start chasing the stocks, normally they will be the main sellers of those stocks. Some examples of these rumours are like “The managing director of this company is buying the stock”, “This company may be able to get some big contracts from the Government”, etc.

Rumour vs Sources

A rumour cannot travel very far if its source is not reliable. If a rumour is spreading through a reliable mass media, then it can travel very far, last longer and can cause a major impact.
Once, the rumours have been generated and start transmitting, there will be some changes to the original messages.
According to Gordon Willard Allport and Leo Joseph Postman in their study titled “The basic psychology of rumour”, there are three levels of changes to the messages - levelling, sharpening and assimilation.
At the first level, when the rumour travels, it gets shorter and more concise. This is to help it to be understood easily in order to travel further.
At the sharpening level, a lot of details will be left out. As a result, it will become clearer and more focused and can have greater intended impact. At the assimilation level, in order to have a greater impact to the recipients, the rumour will be added on with certain elements that are in line with the recipients’ habits, interests and sentiments.
Understanding stock market rumours can help us to know how to deal with them. In short, we should pay less attention to positive rumours.
Instead, place more attention to negative rumours on certain companies, especially those that we are interested in.