High valuations, financial commitments pressure trading volumes

by SHAZNI ONG / graphic by MZUKRI

THE lower trading volumes could be a sign of the end of the retail-driven bullish phase on Bursa Malaysia and return to fundamental based valuations, according to analysts.

FSMOne (Fundsupermart) assistant portfolio manager Jerry Lee said investors appear to be profit-taking amid poor investor sentiment globally.

“After a decent rally since mid-March, we are not surprised to see a pause in the recent uptrend due to some profit-taking activities amid increasing political uncertainty in Malaysia.

“We started to see a disconnection between share prices and fundamentals which is a warning sign for investors to be more cautious and focused on company fundamentals before investing,” he said.

The volume of securities traded on the local exchange has steadily fallen in the past week with volume falling from around eight billion securities at the start of the week to 5.7 billion securities traded last Friday.

Malacca Securities Sdn Bhd head of research Loui Low said the end of the loan moratorium is behind the selling pressure in recent weeks, but he expects the trading value to stay around RM4 billion to RM5 billion daily.

“September is normally a slow market period due to lack of meaningful catalysts,” he said.

MIDF Research strategy head Syed Muhammed Kifni Syed Kamaruddin said the swell in market volume in July and August was contributed in significant quantum by retail investors who are now less active.

“Empirically, the ebbs and flows of retail participation were correlated to stock price performance. As the market barometer has been gradually grinding down during the past month, this may have dented investors’ sentiment. As a result, some might have decided to return to the sidelines,” he said.

Syed Muhammed Kifni noted the price-to-earnings ratio (PER) of the FTSE Bursa Malaysia KLCI (FBM KLCI) based on forward year (forecast) earnings is at 16.3 times or +1.67SD (standard deviation) its 10-year (2010-2019) historical mean of 14.8 times.

“We reckon the prevailing valuation level is unsustainable and expect a gradual reversion towards its long-standing mean going forward.

“We maintain our year-end 2020 FBM KLCI target at 1,400 points which equates to PER valuation on forecast earnings of 15.2 times or +1.45SD its 10-year historical mean,” he said.

Potential headwinds that may exert downward pressure on market valuation going forward include the impact of the end of loan moratorium on the asset quality of the banking system and its consequent impact on the level of consumer spending and business investment and risk of heightened political jostling, particularly at the federal level.

He added that a further decline in the FBM KLCI might dent market sentiment perhaps further until the broader market reverted to sounder valuation levels.

“Hence, we envisage a more sustainable market recovery to be underpinned by more reasonable valuation, which is a good thing to both the market and investors in our opinion,” he said.

Lee said it is difficult to conclude whether a market that is full of retail investors is good or bad but their participation tends to lead to an increase in market volatility as experienced over the past few months.

“With the moratorium coming to an end, we are likely to see a lower retail participation rate moving forward,” he said.

He noted that the surge in trading volume in recent months was not always accompanied by a higher trading value, which indicates investors were very much focused on penny stocks.

Low expects trading activities to stay vibrant at least until year-end, helped by the short-selling ban that is in place until year-end.

“It may be a sign of just taking a breather, as long as the trading value is higher than RM4 billion, it is healthy and hopefully it will last till next year.

“Some retail investors may have made some money while some struggled. The stock market, in trading terms, will always be a zero-sum game. In the end, it will fall back to fundamentals,” he said.