Lead Story: ‘Geopolitical events and negatives around the world usually fizzle out’

This article first appeared in Capital, The Edge Malaysia Weekly, on August 21, 2017 - August 27, 2017.

Co-author with Kang Siew Li from The Edge Media

THE geopolitical tensions between the US and North Korea are “overblown”, says Kenny Yee, head of research at low-cost online equity broker Rakuten Trade Sdn Bhd, dismissing the possibility of a nuclear war.

“People tend to overemphasise the current situation — the geopolitical events and the negatives around the world. More often than not, all these will fizzle out. I don’t think there will be a nuclear war anytime soon,” he tells The Edge in an interview.

Yee’s remarks come as the US and North Korea appear to have toned down their fiery rhetoric. North Korean leader Kim Jong-un has reportedly delayed his decisions on plans to fire missiles towards Guam while he waits to see what the US does next. US President Donald Trump responded on Twitter last Wednesday, saying Kim has made a “wise and well-reasoned decision”.

Yee also does not think the tension between the US and China should be taken seriously, blaming it on Trump’s rhetoric since taking office in January.

In fact, Yee is positive that there is more upside for the Malaysian stock market this year, despite the rally seen on the FBM KLCI, which has gone up 8% for the year, citing the flow of foreign funds.

“Year to date, foreign investors purchased almost RM11 billion net. We expect this to continue because of the cheap ringgit. We believe the ringgit is grossly undervalued and expect foreign funds to take advantage of this,” he says.

He thinks the fair value of the local currency should be 4.0 against the US dollar. The ringgit closed at 4.2955 last Thursday.

Yee is of the view that Malaysian stocks are neither cheap nor expensive relative to their history.

Stocks remain reasonably priced despite the market’s gains, so investors should not race for the exit, he says. Stocks in the KLCI index have traded at around 16 times their earnings over the last year.

“Looking at it in terms of its own past, we have seen the index trade at 18 to 19 times. So, if the market momentum gains traction, we don’t see why we cannot attain that sort of valuation,” he says.

Other catalysts for the market include high levels of liquidity and the upcoming general election.

So, what could derail the stock market? Yee is concerned that the US stock market is overvalued and could crash. In January, the Dow Jones Industrial Average reached 20,000 points for the first time. It crossed the 21,000 mark on March 1 and closed at 22,024.87 last Wednesday. Wall Street strategists reportedly believe the US market has already peaked for the year.

Bespoke Investment Group, a research firm, was quoted as saying that the current bull run is now the second longest since 1928, surpassing in duration only the one that ran from December 1987 to March 2000.

“Stocks on Wall Street are trading at an all-time high. The Dow is trading at around 21 to 22 times. The average was about 15 times,” notes Yee.

“On the one hand, you see the US Federal Reserve wanting to mop up its US$4.5 trillion in bond holdings later this year. On the other, Wall Street is trading at an all-time high. It doesn’t jive. Something has got to give — it is only a matter of time,” he says.

With the Fed’s unwinding of its balance sheet, dubbed the “Great Unwind”, the US would have to move from an accommodative monetary policy to a more restrictive policy, which could put a damper on the market as liquidity — one of the main factors driving the market in the past years — would be affected.

Put simply, the Fed will shrink its balance sheet by letting the Treasury bonds and mortgage-backed securities that are on its books mature and redeem them, which will take the money out of the system.

“What seems to be driving the market are hopes that US companies will meet their earnings expectations — historically the biggest driver of equity market gains. If that doesn’t materialise, you may see some selldown [in Malaysian stocks],” says Yee.

Still, any selldown should be short-lived as foreign funds would eventually flow back into Asia, he opines.

As Chinese investments pour into Malaysia, some have warned against the risk of becoming too dependent on China. Yee says he is not too concerned.

“We have done a compilation of China’s proposed investments in Malaysia and they amount to about RM250 billion, excluding the Bandar Malaysia project. Once this money starts to flow in and projects get moving, you will see a lot more activity, especially in the construction segment. That’s why we are quite optimistic about the construction sector,” he says.

Another opportunity is semiconductor and technology stocks, with selection among companies from a bottom-up approach.

Meanwhile, the scandal surrounding 1Malaysia Development Bhd will continue to surface on and off until it is resolved. However, Yee believes the political uncertainties have been largely factored in.

He forecasts that the FBM KLCI will finish the year at 1,850 points, 4.15% higher than the benchmark index’s closing price last Thursday. Year to date, the index has risen 8.2%.

Source: http://www.theedgemarkets.com/article/lead-story-geopolitical-events-and-negatives-around-world-usually-fizzle-out