Value starts to emerge on lo­cal mar­ket

It is the best time to start look­ing at stocks as un­cer­tain­ties con­tinue to roil mar­kets

The Star Malaysia - StarBiz - - Viewpoint - Star­[email protected]­

ONE of the fa­mous phrases of War­ren Buf­fett to in­vestors is that they be fear­ful when oth­ers are greedy and greedy when oth­ers are fear­ful.

Typ­i­cal of the in­vest­ment guru who thrives on value in­vest­ing, the state­ment ac­tu­ally is a tip to in­vestors who do not know when to buy and sell stocks.

When peo­ple are fear­ful, they tend to sell their stocks and the price comes down. The re­verse hap­pens when peo­ple are greedy. They tend to chase af­ter stocks un­til the prices typ­i­cally boil over.

For in­vestors who pre­fer value in­vest­ing, the op­por­tu­nity to buy is when there is an over-whelm­ing sense of fear. When oth­ers are fear­ful of the stock mar­ket, it presents an ex­cel­lent time to pick up good stocks.

This is what the Malaysian mar­ket presents to­day. Value is start­ing to emerge be­cause of the fear fac­tor.

For in­stance, a week ago, Telekom Malaysia (TM) hit RM2.15. Who would have thought that the dom­i­nant fixed broad­band provider in the coun­try would see its value drop from RM14.7bil to RM10­bil in a space of six months.

At RM2.15, TM is a value buy. The com­pany is a mo­nop­oly when it comes to fixed broad­band ser­vices and is owned by the gov­ern­ment. There is no chance of it clos­ing down and its mo­nop­oly taken away.

The gov­ern­ment has pres­sured telecom­mu­ni­ca­tion com­pa­nies to drop their prices for broad­band ser­vices. The fear is that this move to cut prices would im­pact the earn­ings of TM and hence the sell-down.

In the past few years, value in­vestors would not have made much re­turns from their in­vest­ments in the stock mar­ket.

This is be­cause large funds such as the likes of the Em­ploy­ees Prov­i­dent Fund (EPF) and Per­modalan Na­sional Bhd (PNB) were al­ways in the mar­ket buy­ing the large capi- talised stocks at the slight­est of dips.

Af­ter May 9, it has changed. The gov­ern­ment funds have been told to get out of busi­ness.

Sud­denly, the mar­ket is abuzz with so many gov­ern­ment-linked in­vest­ment com­pa­nies (GLICs) up for sale. It started with Khaz­anah Na­sional Bhd dis­pos­ing a 16% stake in IHH Health­care Bhd and los­ing its pre­dom­i­nant share­holder sta­tus in the in­ter­na­tional health­care com­pany.

Now all eyes are on Ax­i­ata Bhd, the re­gional telecom­mu­ni­ca­tions com­pany that pro­vides mo­bile com­mu­ni­ca­tion and net­work trans­mis­sion re­lated ser­vices.

It is not only com­pa­nies that are owned by GLICs that have seen value de­struc­tion af­ter the change in gov­ern­ment. Even com­pa­nies that are out­side the am­bit of GLICs, such as con­sumer re­lated stocks, have seen their share price come down.

How­ever the earn­ings of these stocks are not as badly af­fected, in­di­cat­ing that these com­pa­nies are be­gin­ning to trade at their true val­ues.

One of the fears is that the Malaysian econ­omy will not do well next year due to do­mes­tic as well as ex­ter­nal fac­tors.

The gov­ern­ment’s hon­ey­moon pe­riod is al­most over and start­ing Jan­uary, busi­nesses would want to see some spend­ing take place to help re­vive do­mes­tic spend­ing and in­vest­ment. Not many would want to hear ex­cuses of the gov­ern­ment still be­ing bogged down by the mis­man­age­ment of the old gov­ern­ment.

Whether we like it or not, gov­ern­ment spend­ing plays a big role in prop­ping up the do­mes­tic econ­omy, es­pe­cially now when the ex­ter­nal sec­tor is go­ing through a tur­moil due to the US-China es­ca­lat­ing trade war.

Apart from get­ting the gov­ern­ment ma­chin­ery to work, the Malaysian stock mar­ket is also dis­tracted by side-shows such as ral­lies and un­ruly crowds at tem­ples. How­ever most of these is­sues are po­lit­i­cal and will fiz­zle out over time as and when an­other is­sue crops up.

On the ex­ter­nal front, the fear of the trade war be­tween US and China es­ca­lat­ing is very real, es­pe­cially with the lat­est in­ci­dent in­volv­ing the ar­rest of the daugh­ter of Huawei’s founder and ma­jor share­holder in Canada.

Apart from trade ten­sion, fears of the US go­ing into an eco­nomic slow­down due to the trade war and ris­ing in­ter­est rates in that coun­try is a nag­ging con­cern for in­vestors.

One of the in­di­ca­tors of the US econ­omy go­ing into a slow­down is the flat­ten­ing of the yield curve. The spreads be­tween the 10-year and two-year Trea­sury pa­per is nar­row­ing. The spread used to be 280 ba­sis points nine years ago. It is now down to less than 15 ba­sis points.

Ever since World War Two, the nar­row­ing of the spreads be­tween the two-year and 10-year Trea­sury yields has been a pre­cur­sor to a re­ces­sion.

This is be­cause when the yields on short­term papers are higher than long-term papers, banks would tend to re­duce their lend­ing ac­tiv­i­ties. A re­duced lend­ing would choke the fi­nan­cial sys­tem of cash and lead to an eco­nomic slow­down and pos­si­bly re­ces­sion.

How­ever, it does not mean that a re­ces­sion is go­ing to hap­pen im­me­di­ately. It is sim­ply a warn­ing that a re­ces­sion is im­mi­nent. It is likely to hap­pen in two or three years from now.

In the next few months, hope­fully the trade war blows over and there is more sta­bil­ity to crude oil prices. This would bring some kind of sta­bil­ity to emerg­ing mar­kets such as Malaysia.

Cou­ple that with the gov­ern­ment’s re­solve to wipe out cor­rup­tion and im­prove gover­nance on pub­lic spend­ing, it is a recipe for a favourable stock mar­ket.

Now when every­body is fear­ful, per­haps it is time to start look­ing at that favourite stock you had al­ways wanted to own but could not buy due to over-val­u­a­tions.

It may not be the best time to buy Malaysian stocks but it is worth look­ing at.

Time to look: When every­body is fear­ful, per­haps it is time to start look­ing at that favourite stock you had al­ways wanted to own. — AP

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