The Malaysian Stock Market: Better Than Last Year?
“How’s the market doing?”
When asked this question, I can’t help but wonder - “How beneficial are answers to this question to our personal wealth?”. Does it add meaningful dollars to our net worth?
Let’s take the Kuala Lumpur Composite Index (KLCI) as an example. Last year, the KLCI was at 1,457 points. Today, the KLCI is at 1,596 points, almost 10% up from last year. The key question is - “Did I invest or manage my stock portfolio differently?”. My answer is nope. To me, I continue to invest and stay invested in stocks based on their business qualities and valuations, not on the ups and downs in the KLCI.
Why do I invest as such? Isn’t the KLCI an important factor in making investment decisions? So, to answer this, I’ll explain the context behind:
● The KLCI
● How is its performance measured?
● and how do I view it generally as an investor?
Then, I’ll end this article by listing down critical factors that drive investment success. This would allow you to focus on what is pertinent when building and managing stock portfolios.
What Is The KLCI?
Generally, the KLCI is used as a representation of the Malaysian stock market.
In brief, the KLCI comprises 30 biggest public companies listed on Bursa Malaysia measured by market capitalisation. Market capitalisation is essentially the “price tag” of a company if investors wish to own 100% shareholdings of it. Take Malayan Banking Bhd (Maybank) as an example. At present, Maybank has 12.07 billion ordinary shares in issue. Its stock price is RM 10.10 a share.
So, if you wish to completely own Maybank, its “price tag” is RM 121.9 billion for all of its shares. That is its market capitalisation.
Market Capitalisation
= Number of Shares x Stock Price
= 12.07 billion shares x RM 10.10 per share
= RM 121.9 billion.
At present, the 30 companies that are included in KLCI are as follows:
How Is Its Performance Measured?
There are 2 main drivers to the performance of KLCI.
First, it is the overall share price movements of the 30 stocks in the KLCI. If the share prices had risen, by and large, the KLCI would go up. Most people would view such as “an improvement” to the Malaysian stock market. However, if share prices of these 30 stocks had fallen, the KLCI fell and such is viewed to be “poor performance” of the Malaysian stock market.
But, not all stocks have the same impact on the KLCI. This brings us to the second factor, which is the weightage of individual stocks in the KLCI. For instance, Maybank carries higher influence to the KLCI as compared to QL Resources Bhd as its market capitalisation is 10X larger. Hence, if share prices of both Maybank and QL Resources Bhd had risen by 20%, the 20% appreciation from Maybank would move the KLCI far greater than QL Resources Bhd.
From above, the industries that dominate the KLCI are finance, utilities, telecommunications and plantations as their weightages are 35.6%, 10.0%, 7.9%, and 7.6% of the KLCI respectively. So, the movements of companies in these sectors would deliver more impact to the KLCI.
How Useful Is This Information?
As stated, the KLCI stands at 1,596 points today.
Is this piece of information useful to me? Nope.
Think about it. With Google or Yahoo! Finance, I could easily find out the current share prices for any stocks listed on Bursa Malaysia. I know that Maybank is now trading at RM 10.10 per share, CIMB is at RM 8.17 per share and Public Bank is at RM 4.41 per share. But, what benefits do all these share prices bring to me as an investor? By itself, nothing.
Personally, I would have some context to their share prices after I know of their fundamentals. In other words, I can only tell if Maybank is cheap or expensive after knowing its business model, a track record of past profits, management team, future direction and valuation.
It is the same with the KLCI.
I would assess the performance of KLCI relative to the earnings growth of 30 stocks in the KLCI. This would give a better context to the KLCI.
For example, one year ago, the 30 stocks listed above collectively had a market capitalisation of RM 1,009.1 billion. At that period, their combined annual earnings was RM 58.3 billion. Hence, it is possible to value the KLCI at a P/E Ratio of 17.3.
P/E Ratio (One Year Ago)
= Market Capitalisation / Annual Earnings
= RM 1,009.1 billion / RM 58.3 billion
= 17.3
Today, the 30 stocks combined have a market capitalisation of RM 1,085.3 billion. They reported making RM 69.1 billion in combined annual earnings. Thus, the KLCI’s current P/E Ratio is 15.7.
P/E Ratio (One Year Ago)
= Market Capitalisation / Annual Earnings
= RM 1,085.3 billion / RM 69.1 billion
= 15.7
With this, we know that annual earnings of these 30 companies grew more than the KLCI for the last 12 months. This caused the KLCI’s P/E Ratio to fall from 17.3 to 15.7, despite its increase in index points in the 12-month period. Thus, the KLCI becomes more attractively valued presently than one year ago based on corporate earnings.
So, does it mean that we can just buy “any stocks” in the KLCI? The answer is no. Doing so isn’t really investing but speculating, which is a fantastic way to lose money fast with stocks. Here, I’ll share critical factors that contribute to investment success. Such would set you apart from being a speculator or spectator in the stock market.
What Drives Returns in Investing?
In any form of equity investing, be it directly with stocks or indirectly with unit trust funds, ETFs & index funds, the main factor that drives long-term returns is the long-term earnings growth of the underlying stocks. The compound annual growth rate (CAGR) of earnings per share (EPS) of an impeccable business over a 5-year, 10-year, or 20-year period is what matters the most as such would deliver the “big money” in stock investing.
The short-term events, including the ups and downs in the KLCI, are irrelevant.
Also, what counts besides earnings growth is the habit of consistent investing, which is an act of accumulating shares of good quality companies at attractive valuation habitually in the long term to build wealth. Think about it. Imagine you owning 1 million shares of Maybank. Do the ups and downs in the KLCI really matter to you?
Conclusion:
In short, I find that the question “How’s the market doing” is one that is futile in wealth building. It is only meant for socialising.
Sensible investing is one that focuses on the pertinent, which is to invest in stocks where annual earnings can compound and grow over the long-term. If one cultivates a habit of doing so, he or she could gradually build and manage a portfolio that is worth 6-7 figures over time. Such would contribute to his or her wealth and ultimately, financial freedom.