PETALING JAYA: The local stock market performed better in October than in the previous months in which its performance had been dragged down since July. The benchmark FTSE Bursa Malaysia KLCI increased by 8.35% from September, prompting the question whether the market has started its year-end rally.
Since reaching a multiple-year high of 1,594.74 on July 8, the index had been on a downtrend and dropped 16.49% in its value as at Sept 26 — the lowest point in the year. This is a period of 52 trading days between July 8 and Sept 26.
Since then, it had rebounded to hit 1,491.89 on Oct 31. The index settled at 1,477.51 last Friday, an increase of 10.94% since Sept 26 but 7.35% lower than the high on July 8. It is 3.65% lower from its opening of 1,518.91 points at the start of the year.
According to Dr Nazri Khan, head of retail research at Affin Investment Bank Bhd, the year-end rally has started, based on the performance of the benchmark index in October and he expects it to be extended until the end of the year.
He believes that the rally was supported by increased investor confidence. This is because external factors, such as the sovereign debt crisis in Europe and the sluggish economic data in the United States that have adversely affected investor sentiment since the middle of the year, have subdued.
“The external economic environment has become calmer now,” he said. “The European governments, especially Germany and France, are seen to be on a more united stand on what they need to do to tackle the debt crisis and stop it from spreading from Greece to other larger European economies such as Italy,” Nazri said.
“The scrapping of the Greek referendum with regard to accepting the bailout package agreed at the eurozone summit last week has also given the market some certainty, at least in the short term,” he said. “Now the whole of Europe can focus on Italy because if the latter becomes like Greece, the implication will be much worse as Italy’s economy makes up almost 12% of Europe’s,” he added.
The US economic data has also provided some fresh breath to investors, said Nazri. US first-time jobless claims fell last week to 397,000 from a revised 406,000, while new orders for goods from factories unexpectedly rose in October.
According to Nazri, the year-end rally could even be attributed to supportive internal “feel good” factors such as the coming festive seasons — Christmas in December and the Chinese New Year in January next year.
Another internal factor that could prolong the rally well into early 2012 is the anticipated general election which political analysts and observers alike speculate it to be held in the first quarter next year. The Umno general assembly to be held in mid-December could trigger more speculation on the general election.
An analyst with a foreign bank told The Edge Financial Daily that the rebound seen starting in October would still be volatile until the end of the year. She said even though buying interest has certainly returned, the question is how long can this last.
“If you look at the Greek situation, when it was announced that a referendum would be held with regard to the bailout plan, the market was spooked and investors were selling down. Later in the same week, when there was not going to be any referendum, suddenly the market started to go up again,” she said, indicating that the rebound is going to be volatile.
She said the so-called year-end rally does not necessarily happen every year and the factors supporting those rallies are a coincidence. The market still needs new catalysts to start a long upward run.
“Hypothetically, if the market could go up, it could go down as well. So we are not yet bullish on the stock market to extend the upward trend seen in October well into the end of the year. We predict that the market would still be volatile and end the year at 1,520 points,” the analyst added.
This article appeared in The Edge Financial Daily, November 8, 2011.
Since reaching a multiple-year high of 1,594.74 on July 8, the index had been on a downtrend and dropped 16.49% in its value as at Sept 26 — the lowest point in the year. This is a period of 52 trading days between July 8 and Sept 26.
Since then, it had rebounded to hit 1,491.89 on Oct 31. The index settled at 1,477.51 last Friday, an increase of 10.94% since Sept 26 but 7.35% lower than the high on July 8. It is 3.65% lower from its opening of 1,518.91 points at the start of the year.
According to Dr Nazri Khan, head of retail research at Affin Investment Bank Bhd, the year-end rally has started, based on the performance of the benchmark index in October and he expects it to be extended until the end of the year.
He believes that the rally was supported by increased investor confidence. This is because external factors, such as the sovereign debt crisis in Europe and the sluggish economic data in the United States that have adversely affected investor sentiment since the middle of the year, have subdued.
“The external economic environment has become calmer now,” he said. “The European governments, especially Germany and France, are seen to be on a more united stand on what they need to do to tackle the debt crisis and stop it from spreading from Greece to other larger European economies such as Italy,” Nazri said.
“The scrapping of the Greek referendum with regard to accepting the bailout package agreed at the eurozone summit last week has also given the market some certainty, at least in the short term,” he said. “Now the whole of Europe can focus on Italy because if the latter becomes like Greece, the implication will be much worse as Italy’s economy makes up almost 12% of Europe’s,” he added.
The US economic data has also provided some fresh breath to investors, said Nazri. US first-time jobless claims fell last week to 397,000 from a revised 406,000, while new orders for goods from factories unexpectedly rose in October.
According to Nazri, the year-end rally could even be attributed to supportive internal “feel good” factors such as the coming festive seasons — Christmas in December and the Chinese New Year in January next year.
Another internal factor that could prolong the rally well into early 2012 is the anticipated general election which political analysts and observers alike speculate it to be held in the first quarter next year. The Umno general assembly to be held in mid-December could trigger more speculation on the general election.
An analyst with a foreign bank told The Edge Financial Daily that the rebound seen starting in October would still be volatile until the end of the year. She said even though buying interest has certainly returned, the question is how long can this last.
“If you look at the Greek situation, when it was announced that a referendum would be held with regard to the bailout plan, the market was spooked and investors were selling down. Later in the same week, when there was not going to be any referendum, suddenly the market started to go up again,” she said, indicating that the rebound is going to be volatile.
She said the so-called year-end rally does not necessarily happen every year and the factors supporting those rallies are a coincidence. The market still needs new catalysts to start a long upward run.
“Hypothetically, if the market could go up, it could go down as well. So we are not yet bullish on the stock market to extend the upward trend seen in October well into the end of the year. We predict that the market would still be volatile and end the year at 1,520 points,” the analyst added.
This article appeared in The Edge Financial Daily, November 8, 2011.
