Confusion and uncertainty

Apologies for the lack of postings since last April. As usual, work is still a priority so I couldnt write much. But there were plenty of stories to tell, most notably the fuel and electricity price increase and more political twist this week with the SAPP's no confidence on the PM saga.

The KLCI today closed 10 points higher at 1206 points. But that comes after a series of declines over concerns on inflation and political uncertainty. With the energy price adjustment, the market is worried that inflation might exceed 7% from its usual 2-3% range (from what I can recall), which could also lead to interest rate hike of between 25-75 basis points (from what brokers been telling me).

For an average guy on the street, all this means higher cost of living. Suddenly your take home pay is not worth that much any more. You may need to adjust your lifestyle and cut leisure spending, dining out etc. The low-income bracket might not see direct hit on electricity bills, or will only see a small increase in petrol expenses on their motorbikes, but prices of other products are rising too because of the general increase in energy cost. So all in all everybody is affected, both direct and indirect way.

The political drama is not helping either. Foreign investors often ascribe a premium to political stability, though the exact premium amount is still debatable. With all the noises of political defection and power transfer, investors are likely to take the sideline and wait for things to unravel. Short term investors might even just sell now and worry later. Perhaps one might not see rampant selling by all of them, but clearly there's no reason to favor this market when there's political and social tension on the ground.

We're lucky in the sense that the rest of the world are also facing challenging times. So the impact on Malaysia is not clearly seen. China market, for example, has fallen over 40 percent ytd. But this makes their market no longer expensive when compared to Malaysia. US is still unravelling the sub-prime losses on its financial sector and now coming to feel the effect from the spiralling fuel cost. It is a worldwide phenomenon not unique to Malaysia.

I think its going to be a while before we see market recovery. Right now there are so many theories on how the market will react. Any data releases can have double meaning. Even further increase in oil price can be seen as good indicator that demand is still strong. Less than three months ago the US Fed were cutting rates, now there are talks of rate hike soon. May be the market is confused. I know I am.

Making predictions

The last time I wrote in this blog, KLCI was some 200 points higher, BN holds more than 2/3rd majority in Parliament, and power-lady Rafidah Aziz was still in MITI. Two months ago none of us would have thought all this could happen now. And judging from how things have turned out, two months from now things could be entirely different. My entire work career revolves around making predictions on future market levels and stock prices. We all pretend to be experts. When things go wrong we defend ourselves by going back to the preconditions in the fine prints of our reports. It all makes sense in hindsight, although we may seem very confident when we first made those recommendations.

Some brokers have cut KLCI targets on the back of `higher risk premium' and `political uncertainty' that essentially removed 2-3x P/E multiples to the target KLCI. But earnings are irritatingly sticky, and so far consensus are still looking at high teens growth, after perhaps a couple of percentage points cut to account for these `political risks'. I dont blame them as I would have done the same. The rally in the KLCI was predominantly sentiment- or liquidity-driven to start with, so its not unnatural to use the same excuse for a market slump. The irony is, the `uncertainty' story is not just limited to Malaysian politics. Back in the US, there is still intense debate whether the economy is in recession or not. The book runners are still taking bets. My bet is... well, it doesnt really matter what I think because anyone can be right, or wrong depending on what comes out in the end.