KLCI Drifting - The Art of Moving Sideways

Who said anything about cars?

I bet a lot of you are eagerly anticipating a post about cars, performance mods and of course, drifting.

Sorry to disappoint you all, but I am referring to the 'sideways motion' of our stockmarket over the past few months (or year even)...hahah, bet you didn't see that coming did ya.


The power of 9

The Star newspaper has been talking a lot about the significance of the number 9 recently. I have no idea why though, could it be because they are celebrating their 9th birthday or something?..hmmm.

Well, this 'power' of 9 also translates to our KLCI, which has been stuck in the 900 range for more than a year now. Quite depressing actually. I opened up the newspaper this morning only to see that it has dropped by another 2.43 points to hit a low of 909.10. Just in case you're wondering, that's the same level we were at more than a year ago.

Back then, the underperformance of the KLCI was blamed on China's slowdown, the high price of oil and the rising interest rates in US. Fast forward a year later, China is still in the midst of slowing down, the interest rates in the US are still marching steadily (slowly) upwards and the price of oil, while down from its pre-Katrina high, is still pretty darn expensive if you ask me (RM1.62 for a litre of black stuff is painful by anyone's reckoning).


Just a case of blame game?

So is it fair to blame our underperformance on external factor such as those mentioned? Why is it that the KLCI in particular is underperforming so badly when compared to is regional peers (eventhough everyone is affected by the same external risks)? Here's a quote which was taken from CLSA Maxima 4Q/2005:

The Malaysian stock market continues to suffer from a distinct lack of positive catalysts. The market remains defensive in a regional context, reflecting its continuing underperformance. The MSCI Malaysia Index has risen by only 2.1% in US-dollar terms so far this year, while the MSCI AC Asia ex-Japan Index has risen by 12.3%.

Reading the above statement is enough to cause every Malaysian to go into a fit of kiasu-ness.

"We're losing out to our neighbours? Nooo!!"

Here's another quote taken from the same source:

The result is that the Malaysian stock market continues to be in the, hopefully, final throes of a long drawn out derating. This process has already led to a remarkable transformation. Prior to the Asian Crisis, Malaysia had claim to be the highest-beta market in the Asian region. This was, after all, the market famous for Clob, the Second Board, and a stock market to GDP ratio that peaked at 350%, all of which explains why Malaysia still accounted for 16% of the MSCI Emerging Markets Free Index at the beginning of 1997.

But Malaysia has now become the least exciting market in Asia, as reflected by the fact its average daily trading volume has risen much less than some other regional markets in the rally from the 2003 Sars lows. Average stock market daily turnover in Malaysia has risen from US$97m in 1Q03 to US$185m in 3Q05, while in Indonesia it jumped from US$21m to US$108m over the same period. Volatility in Malaysia has also collapsed. The annualised standard deviation of the KLCI’s daily performance had fallen from 61% in 1998 to 11% in 2004 and 8% year-to-date.

All this will change at some point since there is a latent speculative culture among Malaysian retail investors, which will surely return one day. But history suggests this is only likely to happen when foreign enthusiasm for the market returns. The obvious domestic trigger for increased foreign-investor interest is positive news on GLC restructuring. This is because the GLCs account for 33% of Malaysia’s stock market capitalisation, while successful restructuring of these companies would precipitate lots of opportunities for government divestments.

I don't claim to be an expert in economics, but to my simple mind, what we obviously have here is a lack of investor confidence, both domestic and foreign (the ang mohs don't seem to fancy putting their money in our country much nowadays...sighhh).

Looking back, you can hardly blame investors for feeling unsure about Malaysia though. Our new budget 2006 failed to generate a significant amount of excitement when it was announced. Same goes for the National Automative Policy which people criticised for its lack of details.


Chicken Little, The Sky Is Falling

Faced with all of this, I wonder what lies ahead for Malaysia. Will we continue to make strides towards achieving a developed nation status? Or will we be devoured by the competition as other nations surge ahead of us?

A point to note, back in the 1950's, both Malaysia and South Korea were roughly on par in terms of development and per capita income. Fast forward 55 years and South Korea has become an advanced technological hub which innovates and churns out cool stuff such as plasma screens, LCDs, video phones etc. As for Malaysia, ermm...we have our Gen.2.

Here's another quote which I like (I am not saying I agree or disagree with this quote):

The question of political will and the natural attachment to subsidies leads to the core structural problem posed by Malaysia’s 35-year-old New Economic Policy (NEP). In a world where the likes of China and India compete so aggressively, this policy has long since passed its sell-by date, assuming it ever had any value. But no one in the governing UMNO party is willing to say this in public.

I'm not bashing Malaysia or anything. I still think its a swell place to be. But we can't afford to be complacent one single bit. Times are too precarious for that.

Now if only some of our leaders and citizens would wake up to that fact.