UALA LUMPUR: While not yet raising the red flag, some analysts and fund managers are beginning to feel edgy about the direction of the local equity market, which has seen some of its most impressive rallies in recent years.
Consensus has been that the recent rallies, which saw the benchmark Kuala Lumpur Composite Index (KLCI) jumping 19.22% so far this year, are driven by excess liquidity, resulting in a substantial increase in valuations.
“There is just too much liquidity in the market, supported by the low interest and high saving rates. The recent earnings results and economic data do not seem to have any bearing on investors’ sentiment.
“Retail investors should understand that the current market condition is not ripe for trading purposes, but there are still good valuations for investments in the long-term horizon,” Pong Teng Siew, head of research at Jupiter Securities Sdn Bhd, told The Edge Financial Daily.
Investors too seem to have shrugged off the potential downgrade of local banks by international rating agencies and the mixed signals on the economy going forward.
“The underlying sentiment would probably remain resilient at least in the short run, judging by the steady market reactions to the kind of news flows of late,” said HwangDBS Vickers Research Sdn Bhd.
Last Friday, CIMB Group chief executive Datuk Seri Nazir Razak was reported to have said that investors should take advantage of the local market now, as recent rallies and economic indicators indicated that investors had over-reacted to the global economic slowdown.
“The stock market has gone up and liquidity is back. Believers could have made a lot of money right now as we did not realise the market would be in a much better shape,” he was quoted as saying. At the close of the week, the KLCI ended at 1,045.26 points, up 0.94% or 9.7 points from Thursday.
Echoing Pong’s cautious note, Benny Chew, managing director and regional head for equity research at AmInvestment Bank said: “While we agree that there is ample liquidity in the market, it is important not to get too bullish.
“Given the recent recovery, valuations have more or less normalised now, and the direction of the market could be tricky going forward.”
The recovery of the local bourse had also been supported by the new administration’s pro-business policies, which are bringing back confidence into the local market.
Last week, Prime Minister Datuk Seri Najib Razak said he was determined to continue with reforms in the country even if it risked a voter backlash.
“We are also seeing a return of foreign funds, albeit at a slow pace,” said Chew.
Nonetheless, downside risk for the KLCI would probably be limited in the immediate term, supported by the resilient sentiment as investors rotated their buying activities from out-performers to laggards for market exposure, said HwangDBS Vickers Research.