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Join The Motley Fool Singapore’s David Kuo every week on his new “Investing in Asia podcast”, available for download on iTunes, Spotify and Stitcher. He will be providing his insights and expertise as an investor in Asia, home to some of the world’s most dynamic and fast-growing countries.
In this episode, David doesn’t venture far, looking at Malaysia, a country Bloomberg recently stated was home to “the world’s worst stock market”. But how much truth is there to this gloomy outlook? More importantly, are there opportunities for investors to benefit from an unloved market?
David Kuo: Hello, Asia. Greetings, world. This is Investing in Asia — your weekly investing podcast from Motley Fool Asia — broadcasting from the island of Singapore, just one degree north of the equator. I am David Kuo and today we are heading to the peninsula of Malaysia just a few miles away from Singapore.
Malaysia and Singapore used to be one country until 1965 when the two separated. In terms of geography, Malaysia measures 330,000 square kilometers. Singapore is only 720 square kilometers, so Malaysia is about 450 times bigger than Singapore. But in terms of their annual economic output, they are roughly the same at around US$ 320 billion.
The reason why we’re heading to Malaysia is because I couldn’t help but smile when I came across a recent Bloomberg headline that read, “The World’s Worst Major Stock Market is Really, Really Boring.” I never realized that investing was supposed to be exciting. I always thought that investing was about putting my money into companies, preferably dull and mundane ones, that I think will deliver a good total return for me over the long term. I’m not alone. Peter Lynch, who is arguably one of the best investors of our time, pointed out: “Investing is fun, and exciting, and dangerous, if you don’t do any work.”
Now, if you haven’t already guessed, the market that has been maligned in the Bloomberg article is Bursa Malaysia or the stock market of Malaysia. It has been the worst-performing major market this year. The benchmark index, the Kuala Lumpur Composite Index, has dropped 3.5% when other key markets around the world have rallied on the hopes that the US Federal Reserve will ease off on its quantitative tightening. And what’s with this term “quantitative tightening?” It sounds like a treatment you can buy over the counter at a local pharmacy for an upset stomach.
So according to the report, the gloomy outlook for the Malaysian market isn’t likely to end soon because, as it pointed out in the article, the new Malaysian government has been lowering public debt as it continues to clean up government inefficiencies and corruption.
Now, I don’t know what to make of that comment. It feels so very wrong on so many different levels. It seems that some people would prefer governments to boost economic growth by racking up debt and condoning ineptitude and dishonesty just so the traders can make a quick buck by flipping shares.
Admittedly, the Malaysian economy might not grow as quickly if the government continues with its austerity drive to rein in its budget deficit. But what can be so wrong with fixing the roof while the sun is still shining? After all, the Malaysian economy is growing at a rate of around 5% a year, and we mustn’t forget that Malaysia only escaped the Asian financial crisis in 1997 by the skin of its teeth. We certainly don’t want a repeat performance that saw the East Asian miracle turn into another Asian financial horror story, especially if we are long-term investors.
There is something else. We should take economic forecasts with a huge pinch of salt. I mean, by all means read them; but, we should also put on our trainers or sneakers (or in my case, my flip-flops), and hop down to the shopping malls to find out how they are doing for ourselves.
I have investments in Capitaland Malaysia Malls and KLCC. They both own shopping malls in Malaysia. We should find out how the confectionary industry is doing. I own shares in Nestlé Malaysia. And maybe find out how the brewing industry is doing. I own shares in Carlsberg Malaysia. Now for me, that is real economics.
We should also remember that we can think of a share price as being made up of the product of two parts: these are the price-to-earnings ratio and the earnings per share. The price-to-earnings ratio is a function of investor sentiment, a sprinkling of human greed, and a hint of market optimism. The stronger the sentiment, and the greater the greed, and the firmer the market optimism, the higher the price-to-earnings ratio. But those are all intangibles.
The earnings per share, on the other hand, is something that is tangible and is a measure of how well a company is performing; so, a high share price could be because of a high price-to-earnings ratio or a high earnings-per-share. There is not a great deal that we can do about market sentiment, human greed, and market optimism, though some people like to talk it up. But as investors, we can focus on companies that can continually improve their earnings per share.
So a low share price in a boring market or industry isn’t necessarily a bad thing. It means that we can buy the shares that we like more cheaply. It is also important to go into boring places where other investors — especially those fund managers who are looking for exciting things to market — fear to tread.
Remember that in the short term there is no correlation between the share price of a company and its performance. But in the long term, there is a 100% correlation between a company’s share price and how it is performing. So even if the price-to-earnings ratio should remain unchanged, the mere fact that the earnings per share is rising should push up the share price.
And that is why we need to be long-term investors and ignore those that focus on the short term; because, in order for a stock to do better than expected, the company has to be widely underestimated. And the Bloomberg article tells me that the entire Malaysian market has been underestimated. That, for me, is a buy signal which is precisely what I’m doing: buying, buying, and more buying.
To make things even more attractive, the Malaysian currency, the ringgit, has been Asia’s worst-performing currency this month. FTSE Russell said this week that it might drop Malaysian debt from the FTSE World Government Bond Index because of concerns about market liquidity. This comes less than two weeks after Norway said it will cut emerging-market debt, including Malaysian securities, from its index. The double blow has set the ringgit lower.
It is reckoned the dropping of Malaysian bonds from the FTSE World Government Bond Index could see as much as US$ 8 billion flow out of Malaysia. In the four months to March, this year, Malaysian bonds were enjoying their day in the sun. It had four straight months of gains as traders were speculating that the Central Bank of Malaysia might cut interest rates. If they did, then Malaysian bond prices could have soared and it would have been an early payday for those traders. But it didn’t, which meant that bond traders had to retreat with their tails between their legs.
Clearly in an open economy, currencies are free to move in and out without control. That means the ringgit could go up as well as down. But eventually, common sense should prevail. As investors, there are some things that we can control and some things that we can’t. We can’t control the value of a currency — the market will always decide what it should be — but we can control the companies that we invest in, so we need to find good companies that can do well whatever the value of the local currency.
The upshot is that as investors, we must focus on the things that we can control and really stop worrying about the things we can’t.
Before I say goodbye, I like to end each podcast with a quote, and today’s quote comes from an American comedian called Moms Mabley who said: “When crossing the road, forget about the lights. Watch the cars. The lights ain’t never killed nobody.”
So when we invest, focus on the company accounts. Economists tell you nothing.
Goodbye for now and happy investing.
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