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Large trades recorded on Bursa M'sia have no bearing on value-creation

Publication Date : 23-08-2014

 

So far this year, the stock market has hit a fresh record high and seen record volume in terms of shares traded.

However, in terms of value, there is negligible increase in the total value of the exchange, suggesting there has been little value creation for Bursa Malaysia.

From a market value of 1.7 trillion ringgit (US$537.8 billion) as at Dec 31, 2013, Bursa’s market capitalisation has increased a marginal 600 millionn ringgit ($189.8 million) to 1.76 trillion ringgit ($556.8 billion) today.

At the same time, the 30-stock benchmark FTSE Bursa Malaysia KL Composite Index (FBM KLCI) hit a record high of 1,892 on July 8 and saw a whopping 7.7 billion shares – the largest volume ever – traded just earlier this week.

This lack of value creation at Bursa has become more obvious of late, no thanks to the flurry of retailers chasing penny stocks.

Sumatec Resources Bhd, PDZ Holdings Bhd and Marco Holdings Bhd are among the penny stocks that have been topping the most actively-traded stock list in the past several weeks.

Some other lower liners have since followed their lead, resulting in a rally that has pushed trading volumes to levels never seen before.

While retailers take in the euphoria and jump unto the bandwagon hoping to cash in on fast and fat gains, turnover values have not moved up in tandem – naturally – given that most of the stocks in focus are low-priced.

“I think such stocks are enticing but may not be suitable for everyone unless there is a very strong compelling story to them. Such stocks usually give an impression of continued strong volumes but mostly lack depth and follow-through,” an observer says.

When there is a situation like this, it is normally a prelude to an eventual pull-back in the overall market, experts say.

Simply because a market needs to see both increasing trading volume and value to have a convincing, prolonged rally.

In fact, in a broad market rally, trading value should be higher than trading volume.

Just as volume is often needed for a buy signal on a certain stock, value is important to justify that upward thrust.

Pong Teng Siew, head of research at Inter-Pacific Securities feels that current market behaviour serves as a warning sign and that there are already some cracks.

“When higher values fail to be created as volumes keep climbing, there will be a crack, at least in the confidence of investors,” he says.

Already, the trading volume on Bursa has cooled down to 3.3 billion shares as at yesterday’s close, a far cry from the 7.7 billion recorded on Wednesday.

There was also an obvious slowdown of interest in the basket of flying penny stocks yesterday following the implementation of financing curbs by certain brokers which used such restrictions to mitigate their risks in view of the sharp rise in the prices and volumes of certain stocks.

Additionally, it is understood that proprietary day traders or better known as stockists were told to trim down their trades to avoid fuelling excessive speculation in the current market.

“Massive gains can only be sustained if you keep pouring in more and more money. This also depends on the leverage the brokers are giving – there are finite limits,” Pong says.

He says investors and retailers have “become used” to the belief that stocks which have run up and down will go up again, at some point.

“However, I feel that some of these stocks which have been running have already reached their peaks for now, especially those without fundamentals and which move upwards purely on speculative news.

Pong says their volumes are too large to reflect any possible real interest.

He adds that in the case of analysts, there is no basis to write reports on these types of stocks.

“There usually needs to be a solid basis for a recommendation of stocks in the first place,” he says.

The saving grace, analysts point out, is that the current euphoria is confined to a group of stocks.

“I believe it is confined to a small basket of stocks; while valuations for most big-caps appear stretched, they are still not overly-expensive compared to historical highs,” says TA Securities head of research, Kaladher Govindan.

On Tuesday, the stock market’s trading volume forged ahead to reach a record high of 5.1 billion shares worth about 2.9 billion ringgit ($927.4 million) as retailers chased gains in small-cap stocks like never before.

That trend was extended to 7.7 billion shares on Wednesday in trades valued at 3.3 billion ringgit ($1.04 billion), of which about half of the entire volume was contributed by penny stocks.

Hong Leong Investment Bank, in a traders brief note, tells its clients that ongoing correction on lower liners, which will neutralise their over-bought positions, could dampen broader market sentiment and cap further appreciation of the FBM KLCI in the near term.

It puts key support at the 1,867, 1,860 and 1,850 levels.


 

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