Volatility kaputs the mid-cap futures contract

Maybe going long and picking stocks based on genuine fundamentals are the way to go during dark virus-plagued days

THE volatility of financial markets due to the Covid-19 pandemic has been all but outright freakishly crazy, with benchmarks like the FTSE Bursa Malaysia KLCI (FBM KLCI) trading up to the 100 points range, while the Dow Jones Industrial Average moving some 2,000 points in day trade.

The virus has brought the end to the bull and driven it into the hungry grip of the bear in the Year of the Rat.

Most equity market benchmarks have fallen by some 30%-40% in a short span of time. The FBM KLCI is testing decade lows at 1,200 points as panicked investors sought the safety of cash, leading to a wave of selling with short-sellers and algorithm trades amplifying the downward trajectory.

While the sharp fall in valuations may offer some attractive opportunities, one investment to avoid for now is the mid-cap index futures contract.

The volatility has exposed the shortcoming of the mini FBM Mid- 70 Index Futures (FM70) contract on Bursa Malaysia Derivatives Bhd (BMD). It can become a trap for those seeking to benefit from directional trades.

While the crude palm oil futures (FCPO) and equity benchmark FBM KLCI futures (FKLI) have the volume and markets to give very competitive quotes, the FM70 contract volumes have fallen sharply as market-making activities have dried up despite the underlying FBM Mid-70 Index moving in triple-digit figures daily.

BMD has to relook at what has happened with this contract offering because there’s no real reason for investors to trade it. The bid-offer spread yesterday for the March contract month was as high as 350 points in the afternoon, which means if you were to buy a contract at the offer price and the next trade was at the bid price, you would be down some RM700 for the contract, which has an initial margin of RM1,000.

Even if you were to take a gamble and dive in, you can’t be sure you would get a decent quote the following day as total volume for the contract fell to four lots yesterday from about the average of 800-1,000 contracts prior to the pre-Covid-19- driven market.

Market making for the contract has literally failed and it was not all that great prior to this period either.

That said, the volatility has been great for the FKLI and FCPO contracts with volume traded at very healthy levels and set to boost Bursa Malaysia Bhd’s prospects.

With the volatility on the local market starting to show signs of ebbing with the restrictions placed on short selling, the valuations of many stocks look very appealing.

Genting Malaysia Bhd, for instance, is at 15-year lows, while Petronas Chemicals Group Bhd and Lotte Chemical Titan Holding Bhd are trading at historic lows.

Not surprisingly, the cheap valuations have started to attract institutional investors like the Retirement Fund (Inc) and Employees Provident Fund, according to recent exchange filings, which have been buying into counters like Digi. Com Bhd, Telekom Malaysia Bhd, Dialog Group Bhd and Sime Darby Bhd, to name a few.

The funds seem to be falling back on fundamentals and investing in the businesses with a long-term view rather than buying and sell- ing shares like many tend to do.

Maybe going long and picking stocks based on genuine fundamentals are the way to go during dark virus-plagued days.

  • Bhupinder Singh is the corporate desk editor of The Malaysian Reserve.