Is the KLCI running ahead of the rest of Bursa Malaysia?
Case Notes 08: The KLCI has recovered to the 2016 levels. Is the recovery reflective of the prospects and it is broad-based? This article explores these issues.
When Covid-19 first hit Malaysia in early Mar 2020, the country went into a nationwide lockdown with the Movement Control Order (MCO) in mid- Mar 2020. The Malaysian stock market reacted like all the other stock markets around the world - there was a sharp decline.
The FTSE Bursa Malaysia Kuala Lumpur Composite Index (KLCI) (Refer to Note 1) declined. It actually reached the lowest point in the first week of the MCO as can be seen from the chart below.
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| Chart 1: KLCI c/w No of Covid-19 cases in Malaysia up to mid-2020 |
However, as the MCO began to get the spread of the virus under control, the KLCI recovered as can be seen from the chart. By June 2020 the KLCI had gotten back to the pre-pandemic level.
Since then Malaysia had another wave of the Covid-19 that began in Oct/Nov 2020. While as of April 2021 this has yet to be brought under control, the KLCI seemed to have recovered to the 2016 levels as can be seen from the red line in the chart below.
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| Chart 2: KLCI 5 years movement. Source: Yahoo Finance |
The fight against the Covid-19 pandemic is far from over in Malaysia. Yet the KLCI has made a significant recovery. Is the market being rationale?
At the same time, since the KLCI is comprised of the largest 30 companies on Bursa Malaysia, is the recovery broad-based?
I would explore these issues by comparing the current stock market performance with that in 2016.
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Contents
- KLCI vs Covid-19
- Does the stock market reflect the economy?
- KLCI comparative performance
- Bursa main board comparative performance
- Is the movement broad-based?
- Limitations
- Summary
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KLCI vs Covid-19
Over the past year, the KLCI has both reacted as well as disregarded the impact of the Covid-19 pandemic.
When Malaysia experienced its first major Covid-19 wave in Mac 2020, the KLCI declined from around the 1550 level (in Jan 2020) to 1240 (in mid-Mac). This was in response to the lockdown through the MCO. Effectively the KLCI experienced a 20% drawdown.
As illustrated in Chart 1, the KLCI was at its lowest level during the first week of the lockdown. The KLCI started to recover as the country began to control the spread of the virus. By the middle of 2020, the KCLI has recovered to the level just before the pandemic.
Since then, the virus did not seem to have the same impact on the stock market.
When the next virus wave hit the country in Oct/Nov of 2020, the KLCI had already surpassed the Jan 2020 level. While there was some decline in the KLCI as the number of daily cases of Covid-19 began to rise, it was not as large as that in Mac 2020.
The chart below illustrates this. You will notice 3 things:
- Firstly, what Malaysia experienced in the Mac/Apr 2020 Covid-19 wave paled in comparison to Oct/Nov 2020 wave. The Oct/Nov wave was not only larger in terms of the number of daily cases, but it lasted longer. Even today, the number of daily cases has yet to come down to the level experienced in the middle of 2020 when the virus was deemed “under control”.
- While the KLCI did decline, it was not as severe as in Mac 2020. The KLCI had declined from about the 1685 level in mid-Dec 2020 to about 1570 level at the end of Jan 2021. This was only about a 7 % decline compared to the 20% decline in Mac 2020.
- Furthermore, the decline this time took a longer period compared to the Mac 2020 decline as can be seen from the chart below.
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| Chart 3: KLCI vs No of Covid-19 cases in Malaysia up till April 2021 |
The KLCI is now at the 2016 level.
Is the market suggesting that the worst economic impact is behind us? And that we can expect an economic performance equal to that of 2016 when Malaysia had a 4.4 % GDP growth rate?
Does the stock market reflect the economy?
The economy of a country is about the production and consumption of goods and services in the country. That is why we have the gross domestic product (GDP) and GDP growth rate as one measure of economic health.
The production of goods and services is generally undertaken by companies in the country. The companies listed under the stock market in a country supposedly represent the best companies in the economy.
You would thus think that the performance of the companies in a stock market should reflect the economic performance of a country.
Unfortunately, the stock market is affected not just by the companies' financial results, but also by market sentiments. And it is not easy to separate these two.
The current performance of the KLCI and even the US stock market show that the link between the stock market and GDP not so clear-cut.
There are studies that supported both sides of this debate as the following two illustrates.
- An article in Bloomberg titled “I Ran the Numbers Again. Stocks Are Not the Economy” compared the S&P 500 and the US GDP without adjusting for inflation. It found that “…the correlation between annual changes in nominal GDP and annual returns for the S&P 500, including dividends, was 0.11 from 1930 to 2019, and the correlation over rolling 10-year periods was 0.04. In other words, there was no correlation.”
- “The stock market's impact on GDP is less discussed than the effect of GDP on the stock market. When GDP rises, corporate earnings increase, which makes it bullish for stocks. The inverse occurs when GDP falls, leading to less spending by businesses and consumers, which drives the markets lower. However, whether it's a bull market or bear market, the stock market has some level of impact–albeit indirectly–on GDP and the economy as a whole.” Investopedia.
I have long given up trying to guess and/or understand the movement of the stock market. That is why I am a long-term value investor. I focus on buying companies trading at discount to the intrinsic value and holding onto them till the market re-rates. I believe that in the long run, the stock market would reflect the business fundamentals.
It is far easier to estimate the performance of companies than to guess the direction of market prices.
This of course requires you to be able to analyze and value companies. What happens if you don’t have the skills to do this yet want to invest based on fundamentals? One way is to rely on third-party advisers to undertake the fundamental analysis for you.
There are several financial advisers who provide such analyses. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.
KLCI comparative performance
Chart 2 seemed to indicate that the KLCI is back to the 2016 levels. This is after experiencing a deep decline in Mac of 2020 due to the Covid-19 pandemic.
Instead of looking at the index level, let us look at the actual performance of the companies making up the index.
I considered two perspectives - company financial performance and stock price performance.
- For the company's financial performance, I looked at 2 metrics - Earnings per share (EPS) and Return on Equity (ROE).
- For the market price performance, I looked at 3 metrics - Price Earnings ratio (PE), Price to Book Value ratio (PBV), and Dividend Yield (DY).
To get a sense of what is happening, I compared the current stock market performance with that in 2016. I chose the Dec 2016 stock market performance as representative of 2016 and the mid-Apr 2021 for the current performance.
Based on the median values, I found that the current financial performance is lower than that of 2016. Refer to Note 2 on why I used the median rather than the mean values.
- The current EPS is 35 % lower than that in 2016.
- The current ROE is 13 % lower than that in 2016.
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| Chart 4: KLCI component companies 2016 vs 2021 |
We should not be surprised by the results. According to the Malaysian Ministry of Finance (MOF) Economic Outlook 2021 report, the Malaysian GDP contracted by 4.5 % in 2020 owning to the pandemic.
When the stock price is taken into account, the current valuations are higher than those in 2016.
- The PE and PBV currently are higher than those in 2016 by 9 % and 38 % respectively.
- The current DY is 7 % lower than that in 2016
When comparing 2021 with 2016, what does the lower financial performance but higher valuation multiples mean? I interpret this to mean that the current market price has run ahead of the earnings.
It is commonly said that stock markets tend to run ahead of the economy. Past trends have shown that the stock market has often risen months ahead of an economic recovery, and fallen before a downturn.
MOF expects the Malaysian GDP to grow between 6.5 % to 7.5 % in 2021. The strong rebound in GDP growth will be driven by the anticipated improvement in global growth and international trade. The stimulus packages implemented by the government are also expected to have spill-over effects. These will boost the economy in 2021.
Given the economic outlook, the findings should not come as a surprise.
The tables below detailed the results.
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| Table 1: Performance metrics KLCI component companies 2016 vs 2021 |
Bursa main board comparative performance
I wanted to know what the results would be the same if you consider all the companies on the Main Board of Bursa Malaysia rather than just the top 30 companies for 2021 and 2016.
Such a comparison showed the following:
- The current median EPS and median ROE is 69 % and 61 % lower respectively than those in 2016.
- The median PE is currently higher than that in 2016 by 5 %.
- The median PBVs for both periods are the same.
- The current median DY is 69 % lower than that in 2016.
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| Chart 5: Bursa Main Board companies 2016 vs 2021 |
Financial performance
You should not be surprised to find that the 2021 performance for both EPS and ROE is not as good as those in 2016. The top half of Table 2 below shows that the mean and median performance for 2021 was very much lower than those for 2016.
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| Table 2: Performance metrics Bursa Malaysia Main Board companies 2016 vs 2021 |
The 2 histograms below show the frequency distributions of the EPS and ROE for both years. Refer to Note 3 for the methodology.
You can see that for the EPS and ROE, the results for 2021 tend to skew more to the lower values compared to 2016.
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| Chart 6: Bursa Malaysia Main Board Companies EPS and ROE |
Market price performance
The mean and median of the market price comparisons are tabulated in the bottom half of Table 2. The frequency distributions of these metrics are presented in the respective histograms below.
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| Chart 7: Bursa Malaysia Main Board Companies PE and PBV |
- The mean and median PE multiples in 2021 are higher than those in 2016. You should read this together with the earlier lower financial performance. It suggests that the market did not price the companies lower despite the lower earnings. Also, the histograms indicated that many more companies in 2021 had negative earnings.
- However, on the PBV basis, the differences between the 2021 and 2016 mean and median values were not as large as those for the PE. They suggest that while earnings have declined in 2021, the book values of many companies are still intact.
- Dividend yields have dropped from 2016 to 2021. This is the result of lower dividends and higher prices in 2021. The frequency histogram suggests that more companies did not declare any dividend in 2020.
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| Chart 8: Bursa Malaysia Main Board companies DY |
Is the movement broad-based?
We know that the KLCI is made up of the top 30 companies in Bursa Malaysia. As such we would expect that the performance of the KLCI component companies to be better than those of Bursa Malaysia Main Board companies. In other words, expect a gap when comparing these 2 groups.
Are the gaps in 2021 the same as those in 2016? No
The chart below shows the gaps between 2021 and 2016 for a number of metrics.
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| Chart 9: Gap between KLCI and Bursa |
- In terms of EPS, the current gap is 30% smaller than that in 2016. Note that the % is based on the 2016 values.
- However, in terms of ROE, the current gap is actually 34 % larger than that in 2016. The contradictory result is because of the size of the current book value compared to that in 2016.
From a financial performance perspective, I would focus on the ROE rather than the EPS.
When it comes to the valuation multiples, the current median gaps for the PE, PBV and DY are larger than those in 2016. The findings suggest that the top 30 companies are currently running further ahead of the rest of the Bursa Main Board companies compared to 2016.
The table below details the gap for the various metrics.
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Metric |
Gap between KLCI and Bursa Main Board |
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2016 |
2021 |
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EPS |
34.9 |
24.4 |
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ROE |
5.0 |
6.7 |
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PE |
9.7 |
11.0 |
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PB |
0.8 |
1.4 |
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DY |
1.4 |
2.3 |
Limitations
There are two issues with the analysis that you should bear in mind:
- Differences in the companies making up the sample.
- Differences in the cut-off periods.
With regards to the former.
- There were only 23 common companies in both the 2016 and 2021 lists of KLCI component companies. (Refer to Note 4 for the list of the companies). This is even though there are 30 component companies making up the KLCI.
- There were 807 sample companies on Bursa Malaysia Main Board in 2016 compared to 775 sample companies in 2021.
You could then argue that the changes between the 2 periods are partly explained by the changes in the composition of the samples. I would counter this by saying that I am looking from the KLCI and Bursa perspective and everyone knows that the composition changes over time.
I am interested in how the performance of the top 30 companies or/and the Main Board companies have changed. It does not matter whether part of the change is due to a change in the composition. So the approach makes sense.
With regards to the cut-off periods,
- The April 2021 numbers probably represent the financial performance of 2020.
- The Dec 2016 numbers probably comprised the last quarter results of 2015 and Jan to Sep 2016 results.
I do not think that this is significant as I am not comparing financial year-end performances. Rather I am looking at the current performance relative to those about 4 years ago. The former covered the impact of the Covid-19 pandemic whereas the latter is clearly pre-pandemic.
I would argue that as I am looking at broad changes, the general conclusion is still valid
The goal of the article is not to find out whether or why the stock market performance is related to economic performance. Rather is it to determine whether the KLCI is running ahead of the rest of the Bursa Malaysia companies. Both of the limitations affected the KLCI and the Main Board companies. As such I would think that we can live with the limitations.
Summary
The KLCI as of April 2021 seemed to have recovered to the 2016 levels. However, this does not reflect the financial performance of the companies making up the KLCI.
From a financial performance perspective, the KLCI constituent companies in 2021 did worse than those in 2016. This meant that the current valuations are higher than those in 2016.
- The current median EPS and median ROE are 35 % and 13 % respectively lower than those in 2016.
- The current median PE and median PBV are higher than those in 2016 by 9 % and 38 % respectively.
- The current median DY is 7 % lower than that in 2016
The KLCI is made up of the top 30 companies in Bursa Malaysia. As such you would expect the financial performance of the KLCI component companies to be better than those of Bursa Malaysia Main Board companies.
A comparison of the gaps between these 2 groups showed contradictory results.
- The current median EPS gap is smaller than the 2016 gap.
- The current median ROE gap is larger than the 2016 gap.
The seemingly contradictory result is probably due to the differences in the book values of the sample. From a financial performance perspective, I would focus on the ROE rather than EPS.
In terms of multiples, the current gaps in the median PE and median PBV are larger than those in 2016.
From a relative valuation angle, I would conclude that currently, the KLCI component companies have run ahead of the rest of the Bursa companies.
END
Notes
1) The FTSE Bursa Malaysia KLCI, also known as the FBM KLCI, is a capitalization-weighted stock market index. It is composed of the 30 largest companies on the Bursa Malaysia by market capitalization that meets the eligibility requirements of the FTSE Bursa Malaysia Index Ground Rules. The index is jointly operated by FTSE and Bursa Malaysia.
2) Why median and not mean. Source: Laerd
When you have a normally distributed sample you can legitimately use both the mean or the median as your measure of central tendency. In fact, in any symmetrical distribution the mean, median, and mode are equal. However, in this situation, the mean is widely preferred as the best measure of central tendency.
This is because it is the measure that includes all the values in the data set for its calculation, and any change in any of the scores will affect the value of the mean. This is not the case with the median or mode.
However, when our data is skewed, we find that the mean is being dragged in the direction of the skew. In these situations, the median is generally considered to be the best representative of the central location of the data.
The more skewed the distribution, the greater the difference between the median and mean, and the greater emphasis should be placed on using the median as opposed to the mean.
3) Methodology
- The data were for the companies extracted from KL Screener.com. In 2016, there were 807 companies with data compared to 775 companies in 2021.
- To ensure that the histograms were compared on an apple-to-apple basis.
- I first determined the actual frequency distribution for each of the metrics.
- Then for each comparison year, I computed the relative frequency by dividing the actual numbers for each bin by the total number of companies for the year.
- A “bin” refers to a range of a particular metric. For example, for the Dividend Yield, there were 11 bins e.g. [< 0.5], [0.5 to 1.0], [1.0 to 1.5], etc. The data for each year were then slotted to the respective bins to get the frequency distribution.
- When I computed the statistics for the whole of Bursa Malaysia, I included the KLCI component companies. I am looking at Bursa companies as a whole and not comparing the difference between the top 30 and the rest.
4) List of component companies making up the KLCI
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2016 |
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2021 |
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AMBANK |
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ASTRO |
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AXIATA |
AXIATA |
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BAT |
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CIMB |
CIMB |
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DIALOG |
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DIGI |
DIGI |
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GENM |
GENM |
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GENTING |
GENTING |
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HAPSENG |
HAPSENG |
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HARTA |
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HLBANK |
HLBANK |
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HLFG |
HLFG |
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IHH |
IHH |
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IJM |
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IOICORP |
IOICORP |
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KLCC |
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KLK |
KLK |
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MAXIS |
MAXIS |
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MAYBANK |
MAYBANK |
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MISC |
MISC |
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NESTLE |
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PBBANK |
PBBANK |
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PCHEM |
PCHEM |
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PETDAG |
PETDAG |
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PETGAS |
PETGAS |
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PMETAL |
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PPB |
PPB |
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RHBBANK |
RHBBANK |
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SIME |
SIME |
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SIMEPLT |
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SUPERMX |
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TENAGA |
TENAGA |
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TM |
TM |
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TOPGLOV |
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WPRTS |
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YTL |
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Cool stuff you have got and you keep update all of us. frequency notes
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