My Unfinished thoughts on KLCI, Part II

Found an interesting relationship between foreign shareholding in Malaysia and KLCI. KLCI performance is generally correlated with foreign shareholding, no dispute about that.

However what is interesting is the way foreign investors exited the market. They knew that Malaysian is an illiquid market, they can't rushed out the same door at the same time. If we look at the Asian Financial crisis in 97/98, they did not cut their position heavily even though the market crashed, loss of 50%. They exited gradually over 4 four years as the market begin to stabilize/recovering.

There is no surprise that foreign shareholders did not exit aggressively when KLCI fell off 25% from October 2007. Let me pick a few stocks with high foreign holdings.

Stocks / Foreign holding Dec 07 / Foreign holding Jun 08 / Change

1. MRCB / 40 / 30 / -10
2. Gamuda / 55 / 51 / -4
3. Pelikan / 60 / 60 / 0
4. Bursa Malaysia / 36 / 26 / -10
5. UM Land / 30 / 25 / - 5
6. AirAsia / 50 / 46 / -4
7. SP Setia / 41 / 35 / -6
8. IJM Corp / 50 / 47 / -3
9. Media Prima / 50 / 50 / 0
10. Resorts / 40 / 40 / 0
Source: CIMB, Malaysian Business.

Looking at the changes, stocks with high foreign holders have another foreign holders to take over their positions.

Implications:
(i) downside risk will be quite limited as foreigners are unlikely to do stupid things selling irrationally to wipe out their wealth. Now I begin to suspect local guys that do stupid things.

(ii) Back to 1997/1998 crisis, Malaysian heavy weights earnings like Maybank, Bumiputra Commerce, Telekom, Tenaga, etc almost fully recovered by 2002. This is coincides with foreign ownerships and KLCI rise.

Public Bank was one of the earliest to recover their earnings. EPS in 1999(17.8 sen) was even higher than pre-crisis level EPS 13.3 sen. As a result, the share price also recovered much earlier. 52 wk High in 1997 $ 3.21 vs 1999 $ 3.31.

Conclusion: earning is KING!.

(iii) Unless companies delivered exceptionally strong earnings, foreign investors may continue to sell on strength. So, don't dream of 1,500 anytime soon, it will take them a while to wind down their exposure. How long of winding down will again depend on company performance. It took them four years to bottom out in 97/98 crisis, I will rule out it will take that long as we are not as screw up as before, we are only going through regular business correction cycle.