Monday, May 9, 2016

Sell in May and go away?




This article first appeared in The Edge Financial Daily, on May 9, 2016.


KUALA LUMPUR: The well-known trading adage, “sell in May and go away”, comes to mind when one considers the performance of the Malaysian stock market at the start of this month, which saw its first week skidding to 1,649.36 points, which was 1.4% or 23.36 points lower than the previous week’s 1,672.72 points on April 29.
chart_sell_fd_090516_theedgemarkets
Similarly last year, May was not a good month for the local equities market. It fell 3.89% that month when the ringgit declined against the US dollar, as crude oil prices slumped, and 1Malaysia Development Bhd’s (1MDB) woes hogged the headlines.
But the saying does not always ring true, at least not in the case of the FBM KLCI. According to Bloomberg’s statistics, the benchmark index gained in May 2011 (+1.52%), May 2012 (+0.64%), May 2013 (+3%) and May 2014 (+0.1%).
Still, based on the current technical indication, Malacca Securities Sdn Bhd’s technical analyst Loui Low Ley Yee thinks the selling may not be done yet this year.
“This is because the index now is below its 200-day moving average (suggesting a downtrend), which is quite similar with what happened last year,” he told The Edge Financial Daily over the phone.
However, after the recent selldown that led to the index falling below 1,650 points, he is looking for a mild recovery in the immediate next two weeks, with resistance seen at 1,670 and 1,700 levels. Nevertheless, he thinks the market is likely to trend lower in the next two months.
He is not the only one. By and large, investment managers are pessimistic about the market’s outlook due to lacklustre corporate earnings expectations, as the local currency heads south. First-quarter gross domestic product is also not anticipated to outperform, while the 1MDB default issue hovers over the market like unwelcome haze.
On the external side, oil prices, and whether the US Federal Reserve (Fed) will hike interests for the second time since it was last raised in December last year, remain uncertain.
As such, negative factors are expected to linger until July. Chris Eng, the head of research of Etiqa Insurance & Takaful, believes the market will continue to slide and end lower by then, compared with the current level.
“The index is definitely vulnerable towards the mid-1,500 points, and the technical structure does not look strong without another sharp drop,” said James Lau, investment director of Pheim Asset Management Asia, which manages assets worth over US$250 million (RM1 billion).
Lau, who described 2016 as a difficult year, also said corporate earnings downgrades are “inevitable” as key economies remain unresponsive to even negative interest rates.
“Looking for catalysts now is like looking for clear skies through the thick haze that has become a daily feature,” he said in an email reply to The Edge Financial Daily.
Jason Lee Wei Chung, chief investment officer of equity at Libra Invest Bhd, is also of the view that there is no catalyst in sight, and does not consider valuations are cheap yet.
“Currency and oil price movements will be the main drivers for the market in the short term; corporate earnings will be the drivers in the longer term,” he said in an email.
His views are echoed by KAF Investment Funds Bhd fund manager Tan Gan Leong, who described the market direction as “random” and “volatile” in the near term. It will also look closely for cues from the Fed’s Federal Open Market Committee meeting in June, he said.
But in terms of valuation, he differed: “I would say the market as a whole is fairly valued now, considering the current challenging business environment.” He also pointed out that if one breaks up the components of the FBM KLCI, it would be difficult to see strong growth from any particular sector.
To him, the financial sector (that is, the banks), which has the largest weightage in the FBM KLCI, has been very selective with the loans they give out as they are trying to improve their asset quality. Meanwhile, he noted that the plantation sector is seeing higher crude palm oil prices being offset by lower production.
“Sell in May and go away” is a saying framed by ebullient fund managers in the northern hemisphere as they prepare to head for the Greek islands with the beckoning of summer.
Or should it be make hay while the sun shines?
To Lau, May is a fertile time, with many rich pickings, especially with prices retracing as they are doing now.
“So, we are not going away. We are staying,” Lau said, even as he conceded that catalysts are nowhere in sight.
“One should look beyond the immediate horizon. I mean, commodity prices have surprised so many on the upside. For example, how many would have anticipated steel or iron prices to rally more than 40% from their lows? Short-term recoveries like these are still possible in other sectors or stocks that are currently finding the floor,” he said.
He also cited stock-specific recoveries like CIMB Group Holdings Bhd, Tenaga Nasional Bhd and Press Metal Bhd.
In terms of the sector that is worth watching, Lau said there is a chance that plantation would break out from its long-holding pattern and surprise on the upside.
With the US dollar/ringgit volatility continuing in 2016, he said, there is still some wind left in export-based companies. However, concerning stocks that are “bombed out” — for instance, certain technology and property stocks — he is selective.
Lau noted the low export growth and commodity prices are vunerable to the ringgit’s volatility, causing Malaysia’s trade to not improve much lately.
“Be patient and expect disappointments. Don’t equate disappointments with failures. Sometimes, rewards come later. Let time do its wonders,” he said.
However, Eng advised caution. “We have no sector and stock pick. We will revisit the market as it falls further,” said Eng, who downgraded the outlook for the utility and plantation sectors when the market reached its recent high of 1,727.99 points on April 15.
Meanwhile, Lee said Malaysia is very much a stock picker market, though he also felt that picking stocks is quite hard at present. Sector-wise, he favours construction, services and education.
Libra Invest likes services companies such as Scicom (MSC) Bhd, which is expected to deliver strong earnings growth of over 20% to 30% per annum in the next few years in all their business segments, foreign student visa applications, and business process outsourcing. It said the company also has a strong balance sheet, with a 3.5% dividend yield.
As for Tan, he remained bullish on consumer staples, with top picks including Dutch Lady Milk Industries Bhd, Ajinomoto (Malaysia) Bhd and Cocoaland Holdings Bhd.
“I like them because of their strong pricing power, which is reflected in the high gross margins they enjoy,” Tan said, adding that the combination of low commodity prices and strong pricing power should continue to drive their earnings.
In addition, Tan said these companies have strong cash-flow generation ability, and do not require intense capital reinvestment to sustain their earnings.
“It is also worth noting that these three firms are in a net cash position,” he added.

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