Trading Value vs. Market Value
Market Momentum – Getting past the speed traps
- Velocity in the Malaysia equity market has fallen from around the 40% level early this year to as low as 19% on 6 Jul and is currently trending around the median of 29%. Velocity is a function of trading value vs.. market value – we note that average trading value (for Jun-Jul) has fallen 16.0% since end-2010 but we note that market value has risen by around 4.7% over the same period (even after stripping out new listings). This suggests that the market has not hit a roadblock and that investors are not in a hurry to sell.
- Looking at the sectors’ YTD performance, timber (including all four plywood plays) and media stocks were strong outperformers, despite negative returns in the last two months. More consistent outperformers for the YTD and last two months were telecom and banks, while utilities and technology consistently underperformed. We believe this trend may continue for a few more months but technology stocks could see a turning point in the 4Q as inventory is depleted and sales begin to pick up.
- We counted five oil & gas stocks among the top 20 YTD outperformers, but this was balanced by price declines for KNM and Perdana Petroleum. Nevertheless we expect offshore activity to continue picking up, which will likely lead to improved performance for vessel and downstream plays over the next 6-12 months.
- We anticipate there may be earnings disappointments for some sectors this quarter, including motor (supply chain disruption), technology (weak demand/supply chain disruption) and education (delays in student enrolment), but the reasons are already known.
- We also see investors weighing the risks of: 1) M&A deals that are pending completion, concessions that need to be renewed, and ETP projects that are pending execution and this will continue to affect related stocks. In our view, the risk/reward equation has not changed.
- As we move forward, we expect sceptics to disappear, thereby lifting the market. Nevertheless, to bridge the gap in investor confidence in the near term, we believe alpha+ stocks offer a measure of comfort in terms of estimated returns from capital upside and dividend yield.