Did KLCI Really Performed That Bad in 2019?
(Image Source: Google)
KLCI in year 2019 has been up and down throughout the years, with multiple events occurring globally including not only the US-China trade war, British Exit (BREXIT), together with the latest Soleimani’s drone attack in Iran. Nevertheless, with Dow index (DJIA) currently at 29,297 points, it surged a staggering 29%, outperforming many fund managers under Trump’s ‘so-called’ America’s Greatest Year. NASDAQ and S&P 500 also rallied up 31% and 25% throughout 2019 as displayed in the figured above.
A picture is worth a thousand words, Malaysia was rated as the worst performing share market in SEA region, as quoted by TheStar with its index points dropped 9% throughout year 2019. Did Malaysia’s investors really suffer such a devastating fate as compared to the US? Did global investors lose appetite for the once-“Asian-Tiger”?
It all happened right after the election, when Pakatan Harapan took over from UMNO, the current opposition which has ruled Malaysia for over fifty years. January 1st, 2019 was the commencement of the adoption of MFRS16, the new financial reporting standard (FRS) that require lessees (the one that borrows, tenants) to It should be known as a matter of fact that some companies only incurred loss because of MFRS16. You can read more about MFRS16 here. Basically, under MFRS 16, which governs the accounting of leases in a company’s financial statements, a company has to recognize the interest expense on the leases it has taken as well as the depreciation on the assets leased. Company like AirAsia and Digi has taken a huge toll in its profitability, as it heavily relies on leased airplane which affect its profitability in 2019.
Question is, did the fear of new ruling government sour the appetite of global investors? It doesn’t seem to be that case from the statistics shown in the foreign direct investment (FDI) of Malaysia throughout the year as shown below. Why didn’t the money stimulate the market’s growth, instead it continues to run down at its lowest level of 1600 points in 3 years?
(Source: Department Of Statistic Malaysia, DOSM)
For me, the answer is a big NO. Yes, the index was down 9%, but it was only the BIG cap company. To further understand this, we need to take a look at what makes up KLCI. It consists of 30 blue-chip shares with a portfolio (in terms of market cap) of 30% banks, 12% telco, 10% utility, 9% plantation, 6% F&B, 5.5% chemicals, and a mix variety of automotive, engineering, glove, etc. To avoid writing too long, I am just going to focus on BANKS, TELCO, UTILITY, PLANTATION, which made up 60% of our KLCI portfolio.
BANKING sector took a huge blow in 2019. Although MFRS16 require finance and operating leases to be combined, its effect to the banks bottom line are minimal. However, with Fed cutting its rate followed by all the banks around the globe, bank Negara Malaysia also cut its overnight policy rate (OPR) by 25 points to 3.00% at 7th May 2019, all blue-chip bank stocks suffered the same fate with share price dipping lower at the end of 2019. For those who are unfamiliar with OPR, it is the basic interest rate that a bank has to pay to a leading bank for the funds borrowed. To maximize profit, banks lends out cash that is deposited by users like us to other bank on a basis rate which is OPR. A lower OPR rate means a lower profit that the bank can earn through interests. Net interest margin (NIM) of almost all blue-chip banks were affected by 2 to 4 basepoints. Banks like both RHB and Hong Leong raised their base financing rate (BR) to mitigate the impact of the rate cut.hence their quarter report was not affected much. The dipping of share price comes MAINLY as investors grows uncertain with a possible rate cut in the 2020, with banks’ profitability becoming more volatile.
BANK
|
Q3 Net Profit Growth (%)
|
Q4 Net Profit Growth (%)
|
SharePrice (6/5/19)
|
SharePrice (31/12/19)
|
Price Growth (%)
|
MAYBANK
|
-0.9
|
2.1
|
RM9.30
|
RM8.61
|
-7.4%
|
CIMB
|
-23.8
|
-14.4
|
RM5.20
|
RM5.15
|
-1.0%
|
HLBANK
|
1.7
|
-2.6
|
RM19.70
|
RM17.30
|
-12.2%
|
HLFG
|
3.2
|
-3.1
|
RM19.02
|
RM16.90
|
-11.1%
|
PBB
|
-4.5
|
-1.5
|
RM22.56
|
RM19.44
|
-13.8%
|
AMBANK
|
12.6
|
8.2
|
RM4.48
|
RM3.91
|
-12.7%
|
RHBANK
|
7.9
|
6.4
|
RM5.82
|
RM5.78
|
-0.7%
|
TELCO sector in 2019 had the hottest issue which is the possible merger between Digi and Axiata was called off by Axiata and Telenor on September 2019. Both Digi and Axiata rally up to a peak of RM5.05 and RM4.88 respectively before consolidating back to RM4.46 (-12%)and RM4.21 (-14%) at the end of December 2019. Effect of the adoption of MFRS16 was minimal to the telco, with its bottom line not quite affected. I will explain more about MFRS16 in the future post.
UTILITY stocks like TNB and PETGAS’s share price was pretty much the same throughout year 2019. TENAGA had an eventful year, posting its first quarter lost since seven years at early 2019, mainly affected by one-off impairments and foreign translation alongside with the new incentive regulation as the government embraces renewable energy. It then began to rose to a peak of RM14.22 at mid 2019, before diving down to RM13.26 at the end of 2019. TENAGA alone contributes 7.4% of the whole KLCI Big Cap, hence its share price can really affects the points itself. PETGAS share price was wobbling around RM15.34 at the end of 2019 but rose back to RM16-ish after PETGAS announces three new tariffs that is expected to contribute positively to the group and its subsidiary’s earning.
Finally, PLANTATION sector like IOICORP, KLK, and SIMEPLT seem to avoid the destiny of a sinking ship but its share price seems to have taken a toll on growth as all three blue-chip prices were the same. With the palm oil ban coming from the European Union, India palm oil curb, crude palm oil (CPO) prices has gone down in the early-mid 2019 but rally up recently due to consumption beating its supply, but there are still uncertainties like the US-China trade deal. As US places heavy tariffs on commodities, Malaysia’s export to China rose to 1.4 million tonnes from January through August 2019, as compared to 1.08 million a year ago. With the trade war tension dissipating as phase 1 were ongoing, there were fear that the CPO export will drop alongside with the import bans from India. Okay too far from the topic, conclusion is plantation has not affected the index much.
FTSE MID 70 Index surged to a peak of 14,950 points at August 2019, from 13,728 points at January 2019. That’s a 9% increment. Although it dropped to the current level of 14,202 points at Jan 2020, but market timing is everything. Small Cap 70 surged 17% from 12,137 (Jan19) to 14,247(Jan20). Who said you can’t profit from Malaysia’s market? Favorite term that Benjamin Graham and Buffet taught me is Mr. Market. It’s all about whether you are manipulated by Mr. Market or you manipulate Mr. Market. Graham and Buffet’s Mr. Market is an American man, you should always modify it to a ‘Malaysian’ version. Our share market is not as robust as our American counterpart, so you should always learn how our ‘Pakcik. Market’ react to global news and domestic news.
One of my favourite Chinese blogger is Harry Teo, he has been on my journey since I began investing in year 2016. He always said our Pakcik has a very special character, it doesn’t follow the majority and only acts on its own way. Well, basically when the global share market rally, our Pakcik will still goyang kaki minum kopi, whereas when the market become bearish, pakcik will be the first one to masuk longkang. Aiyo, you know already our pakcik behave like coward, then if you have a set of strategy that fits this pakcik’s coward style, earning some pocket money will not be a problem for you. Nevertheless, there are still some good fundamental shares that shine eventually when the bad news subsided, a good example would be SCIENTX (4731).
As someone who only looks at FA, 2019 was an incredible year, with my annual return at around 30%, thanks to incredible run by MYEG (0138) at the beginning of the year, MBMR (5983) at the middle of the year, and of course Revenue Group (0200) at the end of the year. As a big Warren Buffet fan, I believe on his way of having one basket and only look at that basket. I personally only buy 5 to 6 shares that I hold long term, and occasionally some discount shares during some ‘Angpao’ events. ‘Angpao’ events means some incidents that caused the share price to fall due to some apparent reason like removal of PENTA (7160) from shariah, Dayang (5141)’s debt restructuring, announcement of government’s initiative to boost e-wallet before market is closed, and more that I can’t possibly list all. You can easily get some 5 to 10% gain from this incident alone.
Do you still believe 2019 is a bad year for KLCI? If yes, let’s take a look at our IPO.
IPO
Table
1: Source: Bursa Malaysia
Year
|
Amount of IPO
|
2018
|
22
|
2019
|
30
|
Amount of IPO has been hitting a peak of 30 companies on 2019 which is the highest since 2006. That is an indication that the local market still has the liquidity and attraction. If KLCI is really that bad, companies will NOT even be considering to be listed in KLCI. From Bursa as of 17/1/2020, IPO has been doing pretty decent, with 10 companies in the RED, 3 companies NEUTRAL, and 12 companies in the BLACK. We all know technology stocks is the on-trending sector for Malaysia as an emerging market. There was even a discussion in the local investing forum that states ‘No need to see prospectus for technology IPO, just throw money confirm will earn’. Looking only at technology IPO in 2019 like GREATECH, TTV, MCOM, UWC, ISTONE, IDBTECH, only two was in red while the rest was doing extremely good with UWC and GREATECH gaining 153% and 239% over the counter respectively, and the worst was IDBTECH with a 11.7% gain.
More and more can go on with the PMI, GDP growth, fiscal deficit, government’s performance but I think this is more than enough. As long as you select the correct sector with some basic fundamental analysis, you wouldn’t perform that bad. Do you still think KLCI performed bad, or you performed bad?
Next post I will be analyzing Mr.DIY’s prospectus. Stay tune!
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