I believe that most people in Malaysia are still not invested in the stock market. At most they are indirect investors through unit trusts and investment-linked insurance products.

For some reason, stocks are seen as risky and for most people rightly so. Compare it with the KL property market in the past few years and you see little reason to be in the stock market.

So how is it that the fund managers can always flip out their charts to show how shares outperform all other asset classes?

There is an interesting article in Yahoo Finance today. It is written in the American context, extracts of an interview with Roger Ibbotson. I had to look up Wikipedia and found out that Ibbotson is a Yale finance professor who is an expert in capital markets. Although Warren Buffett never really thought highly of academics, there are some good observations in the article.

The thing that caught my attention was the comparison between Stocks and Bonds. The extra risk you take when investing in stocks is still the same as before, but what is unusual about the last 30 years in the US is that the bond market often outperformed the stock market over long periods. According to Ibbotson, we won’t see this again.

Why not?

In 1980s the US saw double-digit yields, and when those yields dropped, the prices of bonds went up making it a great period for bond investors. But today yields are 3% to 4%. So we’re starting out with a low yield that is more likely to rise than fall, which means you won’t get any capital gains from owning bonds. Many investors in the US are no doubt disheartened with stocks, causing a flight to safety which will not favour them in the long run.

Ibbotson is putting his money where his mouth is. He manages funds which invest in less liquid stocks, those that trade less frequently:

“But research shows that the stocks that are more liquid historically have lower returns, while those that are less liquid have higher returns. We’re buying companies that have strong fundamentals but are relatively less liquid, companies that there’s less interest in, the ones not talked about in your magazine. Effectively, you get an out-of-favor stock, and if it ever comes into favor, you get a big kick-up in the returns.”

Most fund managers would shy away from this approach but it is the wise contrarian who often has the last laugh.

Photo Credit: http://falcetti.photoshelter.com/image/I0000YIwaIV0Ic44

Has the market bottomed out?

I’ve just read a pretty good report by CIMB Research. Can’t say that I agree with everything they said but there are some good observations.

The report looks at the six major bear markets that Malaysia experienced in the past 30 years. The observation is that each bear market lasted 15-17 months on average (from peak to trough).

As you can see, the average decline from peak is 53%. Using this figure, CIMB derives a floor of 707 points for the KLCI. Based on the average period, it says the market may bottom out around May-Jun 2009.

Positive Political landscape
Deputy PM Najib Razak is set to take over as Prime Minister around Mar-Apr 2009. According to the report, investors typically give new leaders the benefit of the doubt and this time should not be different. In the 6-7 months before Dato Seri Abdullah Badawi took over from Tun Dr Mahathir in Oct 03, the KLCI rallied 29%. Three months after the handover, the Malaysian market went up another 13%.

Weak Corporate Earnings
The recent quarterly results in 2008 have been generally poor and this is expected to continue for at least another 1-2 quarters. Malaysia is a net oil exporter and the world’s largest exporter of Crude Palm Oil. The recent plunge in these commodities will filter through into lower earnings. Many brokers have downgrades across the board especially for sectors such as plantation, construction and property.

The flip side is that lower petrol prices will reduce operating costs for businesses. Here’s a good illustration of our petrol prices over the last 8 years.

Source: CIMB Research

Price fall for coal and steel will also mean lower energy cost and raw material costs for industries such as construction and property. We are now in for a period of stable prices and low inflation and hence stable interest rates. This may be the slowdown Malaysia needed so it’s really a blessing in disguise.

Foreign Shareholding
According to CIMB Research, foreign shareholding in Malaysia is still relatively high at 21% which is 5-6% higher compared with the previous trough.

Foreign shareholdings in some heavyweights remain high and there is a risk of further sell down. In Jan-Sep 2008, portfolio outflows amounted to RM41 billion. In 1997 to 1999, portfolio outflows totalled RM71 billion. According to CIMB Research, similar outflows would wipe out a further 10% of market capitalisation.

Corporate Strength
Except for the utility and infrastructure companies, net borrowings in top Bursa Malaysia companies are low. Malaysian banks are looking strong. However among the small to mid-size listed companies, quite a number that have a Net Gearing ratio of more than 100% (i.e. Net Borrowings more than Shareholders Funds).

Individual Wealth
Unlike the bull markets of the mid-1990s, individual investors now have low exposure to the stock market. Wealth lost in the stockmarket collapse in 2008 is much less than in 1997-98. Property prices continue to hold firm although transaction volumes are much lower.

According to CIMB Research, total household debt is now higher at 67% of GDP as at end 2007. My guess is that these days, people are borrowing more to buy more expensive houses and cars because they have more disposable income. A low interest rate environment helps to keep this sustainable.

As I am writing this article I am in Kuching, Sarawak and the economy has never looked better. Although there is talk of job losses (such as Western Digital retrenching 1,500 workers), the economy in Sarawak has been riding on years of growth and favourable conditions. So a lot of wealth has been created. Furthermore Sarawakians are a conservative lot, many are cashed up and misers when it comes to spending.

But I believe Sarawak is changing fast. The younger generation are starting to spend more and the consumer profile is changing. Good restaurants continue to mushroom and many are well patronized despite charging KL prices. I attended banquet dinners and each time the restaurants were unbelievably packed.

If there is anything that epitomizes the modern consumer, it is the modern shopping centre. Go to The Spring in Kuching and you will feel like you are shopping in Mid Valley, 1Utama etc. You have the convenience of everything under one roof, brands that look familiar – Parkson, Giordano, Starbucks, HSL, MPH, FOS, Padini, Vincci etc etc. Truly, Sarawak is playing its catch up game seriously! And I really should mention some of the cars I saw – Aston Martin Vantage, Ferrari 360 Modena and a ton of other latest model Mercedes and BMWs. OK enough rambling … basically Kuching is in great shape going into the slowdown and should do more than its fair share for the Malaysian economy.

There should be some good opportunities to accumulate stocks in the coming months. Some companies with conservative balance sheets and solid market positions are trading at low PE multiples. Rather than being too defensive in your Portfolio, maybe it’s time to identify companies that are reasonably priced and can take advantage of the coming downturn to build their business further.

The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band.

Bollinger Bands are akin to envelopes on the upper and lower side of a moving average line. They consist of three curves:
Middle Curve: usually a simple moving average (SMA) of the stock price
Upper Curve: SMA + 2 standard deviations
Lower Curve: SMA – 2 standard deviations

For the moving average calculation, a period of 20 days is usually used.

Standard Deviation
Standard deviation is a statistical concept that is often used to measure stock price volatility. It also shows the spread of the stock price around its mean (or average). In the Central Limits Theorem (a Statistical Theory), a set of data will form a Normal Distribution Curve and 95.4% of the values in the data set occurring within 2 standard deviations of the mean.

Expressed in another way, there is a 95.4% probability in theory that the share price will occur within 2 standard deviations of the mean price.

The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average. The default parameters, 20 periods and two standard deviations, may be adjusted to suit your purposes.

Using Bollinger Bands
Some important concepts are used in Bollinger Bands:

1. Band Width

= (Upper Band – Lower Band) / Middle Band

The bands will expand and contract as the price action becomes volatile (expansion) or becomes bound into a tight trading pattern (contraction).

2. The Upper and Lower Bands can be used to determine price targets

Bollinger Bands can help determine overbought and oversold levels. As seen above, statistical theory has it that 95.4% of the values in a data set will occur within 2 standard deviations of the mean. When the share price move closer to the Upper Band, it indicates that the share is overbought. Conversely as the prices move closer to the lower band, it becomes oversold. Basically there is 95.4% chance that it remains within the band.

3. %b – This is a measure of where the stock price is in relation to the bands.

%b = (Price – Lower Band) / (Upper Band – Lower Band)

4. If the price deflects off the lower band and crosses above the 20-day moving average, the upper band represents the upper price target. In a strong uptrend, prices usually fluctuate between the upper band and the 20-day moving average. When that happens, a crossing below the 20-day moving average warns of a trend reversal to the downside.

Simple Illustration
A Price and Bollinger Band plot for Bursa Malaysia share price. The brown line is the 20-Day Moving Average. Notice the share price became more volatile from early-mid October. The lower most chart showing the band width also starts to move up.

The share price nears the Upper Band in early November and but the RSI does not confirm the upward move (moves closer to 70) - a sell signal is generated.