UNDERSTANDING THE STOCK MARKET – II

BY NEOH SOON KEAN

PREAMBLE

There is little doubt that in the last decade or two; the KLSE has earned itself a reputation for being a poor investment avenue. Using the KLSE EMAS Index (the EI), its value from the end 2014 had experienced a rise of only 6.7% up to 31/12/24. This was poor performance indeed. It is therefore not surprising that few young people invest in KLSE nowadays. If they invest at all, they are much more likely to invest in crypto currencies or in the US market. The attraction of these investments is not surprising: the S&P has gained 186% and the Bitcoin by 292 times over the same period. As I mentioned in my last article: when my wife retired and started a new career as an investor (15 years ago), even her accountant strongly advised her against it.

And yet, during this period of time, Dynaquest’s KLSE portfolio has gained on average more than 10% per annum compounded. To understand this paradox, we must first understand why this index of KLSE stocks had performed so poorly.

WHY KLSE HAS PERFORMED SO POORLY?

One interesting fact which emerged from watching the videos on air crash investigation is that aircraft accidents are very seldom caused by a single catastrophic failure such as an engine falling off. More often than not, several small failures combine to cause the disaster. The poor performance of KLSE is the same. There are multiple causes, which together, had led to this poor performance.  Let us look at these one by one, the external factors first.

THE EXTERNAL FACTORS

NEARLY ALL REGIONAL MARKETS HAD PERFORMED POORLY IN THE PREVIOUS DECADE

Let’s look at the value of various emergent stock market indices and their performance for the 10 year period from 2015 to 2024 and for 2025 year todate (up to 15-12-25).

INDEX	VALUE AT 31/12/14	VALUE AT 31/12/24	% CHANGE	VALUE AT 15/12/25	% CHANGE FROM YE 2024
HANG SENG	23732	19760	-16.7%	25691	+30.0%
STI	2883	3788	+31.4%	4589	+21.1%
JAKARTA  IDX	5227	8538	+63.3%	8650	+1.3%
SET (Thailand)	1498	1400	-6.5%	1273	-9.1%
SSEC (China)	3235	3352	+3.6%	3868	+15.4%
EMAS	11794	12586	+6.7%	12090	-3.9%

Consider first the performance of the indices for the 10-year period from end of 2014 to end of 2024. As can be seen, apart from SGX and Jakarta, the other emergent markets of the region did not do well either. What could have explained this general poor performance? A major reason was the outflow of funds from these markets to the mature markets due to their superior performance. As the saying goes: “Nothing succeeds like success”. The inflow of funds to the mature markets caused them to perform even better which would have attracted even more funds.

SHARP DEPRECIATION OF THE RINGGIT

A fund manager in London or New York is concerned not only with the value of the stocks he has invested in a country but also the value of its currency. If the currency of a country depreciates; his portfolio would be hit even it’s the prices of the stocks remain the same. If the currency of a country depreciates; there would be pressure to exit its stock market. Let us look at the value of various currencies against the US Dollar.

CURRENCY TO 1 USD	VALUE AT 31/12/14	VALUE AT 31/12/24	% CHANGE	VALUE AT 31/1224	% CHANGE FROM YE 2014
SGD	1.32	1.36	-2.9%	1.29	+2.3%
IDR	63378	85787	-26.1	89770	-29.4%
HKD*	7.80	7.80	0.0%	7.80	0.0%
CNY	6.05	7.07	-14.4	7.00	-13.6%
THB	32.86	34.29	-4.2%	34.14	-3.7%
MYR	3.63	4.46	-18.6%	4.04	-10.1%

*HKD is pegged to the USD. Hence its value stays the same.

This time I show the change in value of a currency from the end of 2014 to both the end of 2024 and to 15/12/25. The relationship is not so clearcut with Indonesia being a major outlier and China a minor one. Apart from these, we can see that the two countries with the most stable currency vis a vis USD from 2014: Singapore and Hong Kong, also attain the best stock market performance during this period. Not unexpectedly, since Malaysia’s currency is still down from 2014, its stock market has also been very lacklustre.

POLITICAL UNCERTAINTIES

A strong stable government which administers the country well can have a great influence on the performance of the stock market of the country because investors hate uncertainties. A clear example we can see from the table above is the excellent performance of the Jakarta Stock Exchange (+63.3%) between 2014 and 2024 which coincided exactly with the presidential era of Joko Widodo despite the weakness of its currency. With the instalment of Prabowo Subrianto as the new president, the performance of Jakarta SE has weakened. Not unexpectedly, Singapore and Hong Kong with their strong stable government; top the list in terms of market performance. Unfortunately, with five changes of government and five different prime ministers since 2013, our country has earned itself a reputation of having unstable governments and together with the 1MDB fiasco, has put off many foreign investors.

INTERNAL FACTORS

TWO-TIER MARKET

This is something I first discovered when I was doing my Ph.D. on the Malaysian stock market in the Eighties and this aspect of the market has not changed in the 40 years since. I found a big preference among Malaysian investors for low price stocks (preferably less than RM1.00). This is despite that fact that KLSE has reduced the board lot to 100 shares. The main reason seems to be that local investors much prefer short term capital gains rather long-term dividend income. Lowly priced stocks have much higher volatility and this provides opportunities for quick capital gains (and losses). A glance at the top 20 most highly traded stocks each week would show that nearly all of them are of low value with poor financial track record and little dividend. Admittedly, I hold very high standard for choosing the shares I invest in. By my standard the vast majority of stocks listed on KLSE would not constitute investment grade stocks. Just consider the Main Board alone, there are nearly 800 shares listed and I would regard less than 200 of them are worthy of consideration for investment. My pervious research showed that about 70% of newly IPO’ed stocks went on to perform poorly in financial terms after two years. Latest evidence I have seen shows that this aspect has also remained the same. If one tracks the performance of the popular shares over long period of time; one would find most of them preform poorly after a while. Since the vast majority of listed stocks are not doing well financially, one cannot expect their market price performance to excel either.

LOW VALUATION OF HIGH-QUALITY STOCKS

This is the most mysterious aspect of KLSE. Given the preference for low price and speculative shares; the average local investor largely ignore the high-quality stocks in the market. This produces the paradoxical situation of the high-quality stocks being priced at much better value than the low-quality stocks. In our company we keep a database of around 500 KLSE listed stocks. At the last count, 50% of the stocks in the database has a Price Earnings Ratio (PER) of more than 14.0 and Dividend Yield of less than 3.4%. And yet, the average stocks we hold in our KLSE portfolio has a PER of 10.0 and DY of 5.0%. These may be considered very lowly priced. In a mature market, these stocks should be priced much higher, thus boosting the market index.

SO, WHAT LIES AHEAD?

Predicting future market direction is always tricky. But based on the above analysis; the future should be better for KLSE despite its history. There is clear evidence that Western fund managers are increasingly focusing on the Asian markets. So far, Singapore and Hong Kong have captured the lion share of their money and these markets have done very well. However, given the political and economic uncertainties of several of our neighbours; KLSE may start to look attractive too. The Ringgit has become one of the strongest currencies in 2025. The Mandani government, while acting more slowly than many voters would like to see, has brought a good degree of certainty to the political and economic spheres.