ONE of the famous phrases of Warren Buffett to investors is that they be fearful when others are greedy and greedy when others are fearful.

Typical of the investment guru who thrives on value investing, the statement actually is a tip to investors who do not know when to buy and sell stocks.

When people are fearful, they tend to sell their stocks and the price comes down. The reverse happens when people are greedy. They tend to chase after stocks until the prices typically boil over.

For investors who prefer value investing, the opportunity to buy is when there is an over-whelming sense of fear. When others are fearful of the stock market, it presents an excellent time to pick up good stocks.

This is what the Malaysian market presents today. Value is starting to emerge because of the fear factor.

For instance, a week ago, Telekom Malaysia (TM) hit RM2.15. Who would have thought that the dominant fixed broadband provider in the country would see its value drop from RM14.7bil to RM10bil in a space of six months.

At RM2.15, TM is a value buy. The company is a monopoly when it comes to fixed broadband services and is owned by the government. There is no chance of it closing down and its monopoly taken away.

The government has pressured telecommunication companies to drop their prices for broadband services. The fear is that this move to cut prices would impact the earnings of TM and hence the sell-down.

In the past few years, value investors would not have made much returns from their investments in the stock market.

This is because large funds such as the likes of the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) were always in the market buying the large capitalised stocks at the slightest of dips.

After May 9, it has changed. The government funds have been told to get out of business.

Suddenly, the market is abuzz with so many government-linked investment companies (GLICs) up for sale. It started with Khazanah Nasional Bhd disposing a 16% stake in IHH Healthcare Bhd  and losing its predominant shareholder status in the international healthcare company.

Now all eyes are on Axiata Bhd, the regional telecommunications company that provides mobile communication and network transmission related services.

It is not only companies that are owned by GLICs that have seen value destruction after the change in government. Even companies that are outside the ambit of GLICs, such as consumer related stocks, have seen their share price come down.

However the earnings of these stocks are not as badly affected, indicating that these companies are beginning to trade at their true values.

One of the fears is that the Malaysian economy will not do well next year due to domestic as well as external factors.

The government’s honeymoon period is almost over and starting January, businesses would want to see some spending take place to help revive domestic spending and investment. Not many would want to hear excuses of the government still being bogged down by the mismanagement of the old government.

Whether we like it or not, government spending plays a big role in propping up the domestic economy, especially now when the external sector is going through a turmoil due to the US-China escalating trade war.

Apart from getting the government machinery to work, the Malaysian stock market is also distracted by side-shows such as rallies and unruly crowds at temples. However most of these issues are political and will fizzle out over time as and when another issue crops up.

On the external front, the fear of the trade war between US and China escalating is very real, especially with the latest incident involving the arrest of the daughter of Huawei’s founder and major shareholder in Canada.

Apart from trade tension, fears of the US going into an economic slowdown due to the trade war and rising interest rates in that country is a nagging concern for investors.

One of the indicators of the US economy going into a slowdown is the flattening of the yield curve. The spreads between the 10-year and two-year Treasury paper is narrowing. The spread used to be 280 basis points nine years ago. It is now down to less than 15 basis points.

Ever since World War Two, the narrowing of the spreads between the two-year and 10-year Treasury yields has been a precursor to a recession.

This is because when the yields on short-term papers are higher than long-term papers, banks would tend to reduce their lending activities. A reduced lending would choke the financial system of cash and lead to an economic slowdown and possibly recession.

However, it does not mean that a recession is going to happen immediately. It is simply a warning that a recession is imminent. It is likely to happen in two or three years from now.

In the next few months, hopefully the trade war blows over and there is more stability to crude oil prices. This would bring some kind of stability to emerging markets such as Malaysia.

Couple that with the government’s resolve to wipe out corruption and improve governance on public spending, it is a recipe for a favourable stock market.

Now when everybody is fearful, perhaps it is time to start looking at that favourite stock you had always wanted to own but could not buy due to over-valuations.

It may not be the best time to buy Malaysian stocks but it is worth looking at. 

https://www.thestar.com.my/business/business-news/2018/12/08/value-starts-to-emerge-on-local-market/