Market Outlook 2014

A question that has been ringing all year long, "Is THE Crash Coming?"
Have a look at the following link, which will show you the US market's Ups & Downs from 1980-2014.
(Corrections/additions for the graph: 2013-30% and 2014-1%)
Link: US Market - Ups & Downs 1980-2014

Why am I showing the above graph? This is because statistically now the following data can be concluded on:

How Frequently Corrections Occur on Average
-   5% market corrections  : 3x per year
- 10% market corrections  : 1x per year
- 20% market corrections  : 1x every 3.5years
[Source: JP Morgan Fund - David Kelly]

This is because should you compare the KLCI graph against the S&P500, Dow Jones and NASDAQ(US indexes), you will find corresponding similarities (except the 1998 down)
Link: Comparison Graph by Yahoo Finance

Hence, the rife conclusion is that the Malaysian share market always tracks or follows the US market.

Despite the above statistics, the writer believes this SHOULD NOT be the case. Shares should be taken individually to a certain extent. How they perform should be based on how the company performs and it's continued performance in that particular economy.
[Note : Logic doesn't drive the market. A bear market MAY even push prices of well evaluated companies down]

In short, if you are holding great companies that should generate steady earnings and give you good dividends, perhaps any of the KLCI index companies, then you should only consider selling them if  there are some major dynamic shifts in the company's fundamentals.

However, a question pops, why not sell and buy more when it gets lower (assuming a 2014 Market Doom)?

Before answering the above, let us view this. Theoretically, a "market doom" or "market crash" happens when major shareholders start selling off their holdings in big bulks. Some indications of such activity have been spotted since the 4th of April. According to CNBC, there was news of investors pulling out $400mil out of a $2+bil fund and hedge funds in the US selling off their stakes in momentum stocks.

These news make things more "scary" as tech stocks (usually termed momentum stocks) and stocks that have high valuations (high P/E ratio, no earnings but high prices) usually takes the first hit (drops) before a market downturn and which has been seen occurring recently in the US (since the 4th of April 2014).

These events occur as evaluations in US for many companies have long exceeded the acceptable limits suggested by Benjamin Graham amongst others, back in the 1930s when shares had P/Es of 10 or below. In today's world, the safe recommendation would be a P/E of below 20.
[Note : Creador, a private equity fund is of the view, valuations in Malaysia are still conservative. However, perhaps many companies have exceeded their valuations by the end of 2013 i.e. Oldtown hence the exit of the aforementioned fund of it's relatively substantial holding reaping huge returns)

P               Price per share         :  What you pay
--    =     ---------------------------
E            Earnings per share      :   How much net profit a business makes per share that you own

Thus, when people realize that everyone realizes this over evaluations, a well grounded fear takes hold of the investors (you & others).

However so, back to the answer.
Good shares (big companies with good fundamentals). How long were you intending to hold your shares? If it is for the long term and you had bought your shares at a low price, then you should only sell knowing that these company will still perform, and that their prices may even increase as investors may now seek for these sort of companies. This is as no one can truly predict who is going to sell their major stake next driving prices down.

Shaky fundamentals stocks (bulls favourite)
Interestingly enough, momentum stocks do give good returns if traded properly or even as an investment if you were to have bought it earlier knowing the business background, it's affiliations & it's major shareholders. However, when you buy a stock that is not making any money or worse is losing money, do it knowing that one day this fact will come to light and start a bearish trend for your stock REGARDLESS of market outlook, for one major sell off by a substantial shareholder may unleash the bears. The saving grace would be that this stock may have a high liquidation value also known as current asset value, thus giving you a great return SHOULD the company dissolve. However, remember, businesses often strive to survive and may liquidate it's assets (rightfully-yours) or dilute per share value via rights offer (which indirectly forces shareholders to purchase more shares to prevent a drop in their shareholding value) to keep it afloat i.e. some airline company.

In a nutshell, the writer who has put aside some cash for investment (not much) would be more cautious in his purchases and only purchase shares that are fundamentally strong e.g. oligopolistics liquor companies, monopolistic companies, regaining popularity undervalued companies etc. The reason is that should there be a Market Correction not crash (as current over-valuations should be corrected), it would be much more beneficial to be greedy when others are fearful. Statistically, a few good purchases will outperform many mediocrely good purchases but one great purchase will of course triumph over all. Thus, a question unfolds. Are you willing to look for that one or diversify?

Until next time, keep your heads up, make wise decisions and happy investing.