Stocks on Bursa Malaysia have seen strengthening investor interest in recent weeks. While increased trading volume and broad price gains in July may be attributed, at least in part, to foreign fund inflows on improved sentiment for global equity markets — and perhaps some speculative trading ahead of the state elections — it was not the case in August. Notably, much of the trading interest over the past month was centred on mid-cap and smaller stocks — the FBM Small Cap Index gained 3.1% m-o-m while the FBM Mid 70 Index was up 2.4% on the back of higher-than-average volumes (year to date). By comparison, the FBM KLCI — made up of the 30 largest-cap stocks — fell 0.5% last month, amid declines in the US and key regional markets. We do not see the same trading trend on the Singapore Exchange. In fact, traded volumes were actually below the yearto-date averages and all the bellwether indices for large-, mid- and small-caps, ended August in the red (see Table 1).
A deeper dive into the statistics shows that the biggest spike in trading volumes and gains on Bursa Malaysia were registered for the property and construction sectors. Table 2 shows the five most actively traded stocks in the two related sectors. Share prices for UEM Sunrise surged a massive 170% in just one month, creating positive spillover effects on the rest of the property stocks. The construction sector also saw smart gains, albeit to a lesser extent. Even so, the gains were huge, by any yardstick. The questions then are, what is driving this renewed trading interest, is the rally sustainable and will momentum broaden out to the rest of the market?
We suspect the answer is no — and we would caution investors against jumping blindly onto the bandwagon. We have seen this play before, where share prices are driven by storytelling but, ultimately, unsupported by underlying fundamentals. Case in point, glove stocks during the pandemic. Different themes, same play. And they rarely end well.
What’s driving property stocks?
The current theme that is driving property stocks? Plans to extend special financial zone (SFZ) status to Forest City, an ongoing massive property development within the Iskandar Malaysia Special Economic Zone in Johor, just across the bay from Singapore.
The project is spearheaded by China-based property developer, Country Garden Holdings, in a joint venture with an affiliate of the Johor state government and the Sultan of Johor. (Country Garden made global headlines last month after it missed two scheduled coupon payments on its dollar-denominated bonds and reported a massive US$6.7 billion loss in 1H2023. The company has been hard hit by China’s property market slump and is now facing a liquidity crisis.) Forest City was initially conceptualised as a second-home residential project targeted at mainland Chinese buyers, but demand has been far below expectations and construction progress slow. It is reportedly only 15% complete, after breaking ground eight years ago.
The Malaysian government recently announced several new incentives for residents in the SFZ — likely in a bid to revive the flagging project — including multiple-entry visas, fast-track entry for those commuting to Singapore and a flat income tax rate of 15% for skilled workers. It is hoped that Forest City could be a lower-cost base for companies currently operating in Singapore and thus, attract investments and spur development in the Iskandar region.
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We think there is likely to be spillover opportunities from Singapore, over time. The Johor Bahru–Singapore Rapid Transit System (RTS), once completed in 2027, will further improve commute between the two countries. However, it is far from certain whether this Forest City pivot will be successful, as well as the timing and to what extent. Hence, the surge in investor interest and share prices is highly speculative at this point. Certainly, it is unlikely to have a material impact on the nationwide property sector.
Underlying fundamentals for property sector improved slightly but remain weak
It is also probable that the surge in share prices for property stocks is a lagged “catch-up” effect. The property sector has been severely underperforming the broader market over the last five years and many stocks are trading far below their book values. This latest rally is recouping some lost ground. The Bursa Malaysia Property Index has caught up with the FBM KLCI but remains down from five years ago (see Chart 1).
The reason for its underperformance is persistent over-building amid weak demand due, in part, to falling homeownership affordability. This underlying fundamental has not materially changed, though there has been some moderation in new launches/housing starts in 2018-2020 and a marginal reduction in unsold homes (see Chart 2). Nevertheless, the overhang situation remains bad, especially in Johor and Kuala Lumpur. Many owners are struggling to sell, especially higher priced units (in terms of RM psf) — a situation that is likely to persist, in light of weakening economic conditions.
Indeed, the number and value of residential properties transacted have fallen for two straight quarters — 4Q2022 and 1Q2023. Mortgage loan approvals have stagnated in 2Q2023 (see Chart 3). And as we wrote some months back, a survey of both landed and non-landed properties in the Klang Valley shows that the number of “same properties” (in terms of location and type) that have fallen in value far exceeded those that have appreciated over the past five years, save for those priced below RM400 psf, generally-speaking.
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In short, there are no clear turnaround signals for the beleaguered property sector. And we do not foresee the situation improving by much going forward. Hence, our caution to investors. It may well be that this is a bear market trap or the start of a new upcycle. We cannot say for certain. However, expectations of higher-for-longer inflation and interest rates mean that cash will be king.
With rising real yields on cash (savings and money market funds), there is no reason for investors to take speculative risks — and no need to chase the rally, especially for mid-cap and smaller stocks whose valuations have caught up with the big caps. We still believe the overall risk-reward proposition remains negative for risky assets including equities, given the uncertain economic outlook in the near-medium term. If you want to buy, stay with the larger-cap stocks, which typically have stronger fundamentals and, thus, lower risks.
Our only stock holding in the Malaysian Portfolio, Insas, gained 2.3% last week, boosting total portfolio returns to 158.8% since inception. The portfolio is outperforming the benchmark FBM KLCI, which is down 20.2%, by a long, long way.
Recall that we bought three stocks with negative enterprise value (market cap is less than net cash) back in mid-April 2023. All three stocks have recorded double-digit gains in the five months since (see Table 3). We have sold KUB and Star Media Group, making profits on both but continue to hold Insas. We think Insas has the best potential to realise its actual underlying value, perhaps sooner rather than later. Although Star has a lot of cash and negative enterprise value, the fear is that its underlying business is performing badly and, thus, will continue to drain cash. The company’s recent decision on property development leaves doubt as to whether the cash will be applied to maximise gains for minority shareholders.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
