For 3-month performance as of 11 February 2016, we saw FBMKLCI declining slightly more than 1 percent whilst the STI dropped close to a 14% decline
Possible reason 1 : STI has foreign companies as constituents
STI has few large market cap companies linked to China & Hong Kong, such as HongKong Land, Hutchison Port, etc. Hence, they will be affected by the recent developments in the mainland.
Possible reason 2 : Hot money, local support by GLICs, weak Ringgit and interest rate differential
Hot money has been largely flushed out earlier due to sentiments relating to 1MDB & political crisis in Malaysia since 2014. However, not all hot money would have left as there could be re-balancing from MY equities into MY bonds due to higher MY interest rate if compared to the interest rate of other countries (SG has a lower interest rate)
Being an oil exporter nation, there was a sharp “unexpected” devaluation in MYR mainly due to sudden reversal of crude oil price. The devalued Ringgit stems further capital outflow.
Last but not least, in view of a weaker Ringgit and call by the Government to support the domestic market, the FBMKLCI has not seen much selling by GLICs. Whatever foreigners have been selling, are mostly up by domestic institutional funds. Further, free float in KLCI constituents is generally low as major shareholders of these constituents are GLICs.
Key implications :
- If there is a rebound in global markets, STI is expected to perform better
- FBMKLCI is not “cheap”, trading at P/E of approx. 17.6x. Upcoming Q4 results are expected to push P/E valuation higher if there is no further selling pressure. Historical average P/E for FBMKLCI is about 16.25x.
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