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Indices remain volatile

This article first appeared in Focus Malaysia, on Feb 10-16, 2018.
Published in Focus Malaysia on Feb 9, 2018.

The month of February started on rough patch for capital markets in the US with the “flu “quickly spreading to the Asian and European markets. On Feb 2, the Dow Jones Industrial Average (DJIA) began a frantic sell down which continued into Feb 5. Collectively, both sessions resulted in the key benchmark index slumping over 1,840points before rebounding on Feb 6 with a 567-point gain to end at 24,912.77 points. However, nervousness lingers as evident in the DJIA shedding 0.08% or 19.42 points during the Feb 7 overnight trading to 24,893.35 despite seeing gains in the earlier half of trading. Ironically, the recent market behaviour has been blamed on the better-than-expected economic data which in turn has raised the possibility of the US Federal Reserve (Fed) raising rates quicker than previously anticipated. As Wall Street sneezed, many markets across the globe caught the flu with trillions in value being wiped out across global equities. Locally, the FBMKLCI gave up almost 60 points over the early part of last week. After two consecutive days of losses, bargain hunters went to work, and the benchmark index climbed back into the black to close 1.34% or 24.23 points higher at 1,836.68 on Feb 7. It remained in positive territory on Feb 8, up 0.15% or2.76 points at 1,839.44. Many market observers described this as a technical rebound whereby investors looked for pickings following the massive sell down.

Crash or correction 

The question remains whether the slump in the US markets were the beginnings of a crash or merely a correction amid hefty gains at a frenzied pace of late. For now, despite some legitimate concerns over interest rate hikes, analysts appear to see the recent selling as a correction given that economic fundamentals remain strong overall. “The pullback in equity markets this week [last week] was more of a correction in our view, as fundamentally, the economy generally is in as good a shape as it has been since the Global Financial Crisis in 2008,” MTC Asset Management co-founder Aaron Yew tells FocusM. Meanwhile, iFAST Sdn Bhd research analyst Tan Wei Yine believes that besides the stronger economic data, the earnings growth factor is also weighing on investors’ minds. This is given some companies have reported numbers that have failed to live up to expectations. “An additional reason that contributed to the dip was that the earnings by US corporates have somewhat missed market expectations,” opines Tan. “With headlines painting a strong picture for the tech sector and global economic growth into 2018, market participants were taken aback when corporate earnings missed consensus estimates.” On this note, Tan attributes the current situation to expectations being too high, hence equities are merely reflecting those disappointments. Nonetheless, iFAST remains positive on equities “simply because we do not see any material impact on fundamentals or the current recovery derailing from its course.” Echoing the sentiment expressed by Tan, MTC’s Yew points out that earnings growth has been positive on the whole amid an increase in consumer spending driven by wage increases and low unemployment. Strong manufacturing data is also supportive of healthy economic expansion going forward. The only proviso to this outlook is that interest rate hikes do not unexpectedly rise too quickly. 

Volatility persists 

While it is impossible to say for sure how long the current swings will last and whether it is a hiccup or the beginnings of a more significant slump, what is clear is that volatility will persist over the near to medium-term. How investors should react to this remains a point of contention with analysts offering differing advice. “Right now, I worry over whether the swings of the past two days are the start of a deeper correction or just a temporary blip in the US market’s nine-year bull run,” reckons one industry watcher. “In view of the near-term uncertainties on Wall Street –and on the Dow – it is best for conservative traders or investors to remain on the side-lines.”

Yew, however, takes a different view saying that volatility presents a good buying opportunity for long-term investors. “There are bargains that you can get when negative market sentiment unjustly punishes a company’s valuation too much,” he suggests. According to him, equities will outperform the other asset classes over the long term. Therefore, the recent sell down does in fact present an opportunity for investors to buy into the right companies at the right price. “It is a pretty good time to get into equities or increase your allocation to equities with the current market correction– this is of course if you are a long-term investor who is able to buy a company on the cheap and have the patience and discipline to wait three to five years for the company to demonstrate its [true] value,” justifies Yew.

Exciting period

On the contrary, iFAST’s Tan feels that this is a good time for investors to pause and take a breather after an exciting period for capital markets. “The past two months have been great for investors – this may have led to investors chasing some of those returns,” he observes. “If investors are feeling jittery over the fall inequity markets over the past three days, it may be a good time to reassess if they have taken too much risk relative to their actual risk profiles.” Even if fundamentals of the economy are thought to remain sound, investors are encouraged to perform their own analysis to see if fundamentals have changed for the equity markets or the individual stocks that they have invested in. “If fundamentals remain sound, stay invested,” advises Tan. “To sell off everything in fear and panic without considering fundamentals and tore-enter the market again when things start to recover would be a bad decision.”

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