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Money from moratorium fuelled stock rally

Asia Analytica
Asia Analytica • 7 min read
Money from moratorium fuelled stock rally
Certainly, excess cash that flows to the stock market will fall, but investors have made capital gains and the wealth effect will have a longer tail momentum.
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To say that this has been a year filled with unpredictability and uncertainties would be a gross understatement. The current stock market rally, for one, has defied expectations and is in stark contrast to the global economic recession and corporate earnings slump.

Without question, this has been a rally led by retail investors – with many professional asset managers sitting on the sidelines – not just on the Bursa Malaysia but also in the US.

Case in point, Tesla’s 435% gain in eight months is not only difficult to justify based on improvements in fundamentals over such as short time period but the stock rose 63% in the last three weeks, after announcing a stock split on August 11. We have previously written about the reasons behind this retail momentum.

At the outset of the Covid-19 pandemic, stringent lockdowns and stay-at-home orders kept people within the confines of their homes. There was little to do, save for TV bingeing. Online stock trading has never been simpler. And with most live sporting events halted and gaming avenues-outlets closed, the stock market became the new playground for gamblers missing their daily adrenaline rush. The stars aligned.

Bursa Malaysia began registering rising trading volumes on the back of robust retail interests despite gloomy headlines on the pandemic and economic fronts (see Chart 1).

The number of new Central Depository System (CDS) accounts surged to 218,016 in the first seven months of the year, more than doubled the 97,027 in the previous corresponding period and exceeding the total accounts opened for the whole of 2019 (158,130).

Interestingly, trading volumes have continued to gain momentum by the month, even after the Movement Control Order (MCO) was gradually relaxed and most people headed back to work.

Net inflow of funds from retail investors into the Bursa totalled RM12.3 billion between January and August 2020, and notably, with more than RM5 billion coming in the last two months of July and August.

Trading volume on the Bursa hit fresh record high of 28.6 billion shares on August 11 – with an average of 9.8 billion and 14.5 billion shares changing hands daily in the months of July and August, respectively. In April, at the peak of the lockdown, the average daily traded volume was "only" 5.3 billion shares.

In other words, increasingly more people are being drawn into the stock market, attracted and emboldened by the rally gains.

Clearly, this stock rally is a function of more than just people with time on their hands. It is driven by liquidity, people has excess money to play with.

Notably, the local funds industry too saw a sharp reversal of RM101.4 billion increase in asset under management from April to July, after a huge RM80.6 billion selldown in 1Q2020.

That begs the question, where did all the liquidity come from and is it sustainable?

Part of it is from the additional "savings" from what would have gone to discretionary spending, for instance, for travel and entertainment that were curtailed, various government cash assistance initiatives as well as higher take home pay from the 4% reduction in Employees Provident Fund contributions, etc.

But we believe the bulk of the excess money came from the disbursement of the government’s loan programmes to SMEs – including the Special Relief Facility (SRF) and Penjana SME Financing (PSF) totalling some RM10 billion – and in particular, the six-month loan moratorium.

The money that would have gone towards paying down individual housing loans and hire purchases are estimated at up to RM10 billion per month since April, which will add up to nearly RM60 billion by September.

For those whose incomes are severely affected by the pandemic, the repayment holiday is a much-needed relief. But since the moratorium is automatic for all, there are many who stopped payments even though their cashflows were not affected.

It appears that the bulk of the freed up money has been left sitting in banks. There was a sharp increase in individual current, savings and fixed deposit accounts balances – up by RM42.4 billion in the first seven months of the year (see Chart 2). Comparing this against the average increases over the last five years, we estimate at least RM19 billion to 20 billion "excess" cash in bank balances.

But almost certainly part of the freed up cash has flowed to the stock market fuelling the current rally. This also jives with Bursa’s statistics that the level of share margin financing as at July was, in fact, about 10% lower than in 2019 even though retail net buys totaled nearly RM12.3 billion year-to-date (see Chart 3).

So, what happens come October, when the moratorium ends?

We think any negative liquidity impact on the stock market will be minimal. For one, the bulk of the excess cash remains in bank accounts. In other words, there is ample liquidity. Loan tenures will be extended by six months, which at most, will mean only marginal increase in monthly repayments. Borrowers are not required to repay the April-September deferred payments in October.

Certainly, excess cash that flows to the stock market will fall, but investors have made capital gains and the wealth effect will have a longer tail momentum. Furthermore, the drop could be partially offset by savers switching to higher yielding investments as fixed deposits mature given prevailing low interest rates, which are expected to remain so for some time.

In short, we do not expect a sudden drop off in trading interests or stock prices come October, but the momentum will slow and a correction of the penny and speculative stocks is likely. It could also suggest that the next market catalyst may have to come from another source.

Foreign investors have been huge sellers on the Bursa so far this year, withdrawing more than RM20.3 billion (see Chart 3). This is the highest net outflow since 2010, at least. Foreign ownership stood at just 21.4% as at June 2020, the lowest level in a decade. Netting out strategic and long-term holdings, we think there is very little of short-term portfolio money in the market currently.

In fact, emerging markets as a whole saw big foreign outflows this year, due to investor risk-off sentiment. This stance could reverse in the near future, as regional economic recovery gains traction, led by China.

A further attraction of the Bursa would be if the ringgit continued to gain against broader US dollar weakness while domestic interest rates remain relatively high against Treasury bonds. If so, we may see a gradual return in foreign money and rotational interests into larger caps and index stocks, which are the laggards in this rally.

The Global Portfolio reported another solid performance for the week ended September 3. Total portfolio value was up 2.9%, faring better than the benchmark index.

Last week’s gains lifted total portfolio returns to 39.9% since inception. This portfolio continues to outperform the MSCI World Net Return index, which is up by 24.7% over the same period.

All stocks in the portfolio closed higher for the week, save for Ericsson (-2.7%) and Home Depot (-1.6%).

Prices for Builders FirstSource and BMC Stock Holdings surged sharply higher, up by 12.9% and 27.3%, respectively. The two companies announced plans to merge via a share swap deal. BMC shareholders will receive 1.3125 shares of Builders FirstSource for each BMC share held. Clearly, the market sees the deal as value enhancing, taking into account the resulting economies of scale and operational synergies that should improve margins.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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