My Take On The KLSE Sell-Off: Jittery Investors!

Wednesday's 3.28% (40.63 point) fall was in my view, an act of overreaction from investors due to knee-jerk effect as a result of the overnight sell-off on Wall Street. KLCI plummeted 8% from the opening bell, catching many investors by surprise and in a frantic manner. Based on my own source of information, this panic selling was mainly caused by retail investors, day traders and foreign hedge funds. So frantic were the selling that the sellers were ever willing to "give-in" whatever price that the "buyers" were bidding, hence the huge jump in prices spiralling downward! I would classify this group of traders as the "lucky" buyers and panicky "sellers"...Reason the buyers were lucky was because they were able to get a good price considering the fact that the market had gradually recovered a major yard of the lost ground over the remainder of the trading day. Sorry for the panicky sellers! Indeed a lesson learned which I am sure, will happen again and again in the course of market trading. On the reverse, this had provided great opportunities for investors to pick up valuable stocks at cheap bargains and at the same time, cancel out the overbought market before the crash. In my view, this is indeed healthy from the perspective of long term market sustainability, albeit it was rather too dramatic and traumatic!

So what causes the market to crash at the first place? No thanks to China's Shanghai composite index in which the market had fallen by nearly 9% on Tuesday amidst the following reasons:
- rumours of Chinese Government's intention to curb the excessive speculation in the Chinese market, by introducing capital gains tax ;
- talk of an imminent interest rate hike after poor inflation data in the past two months;
- Sparked by a major sell-off from a major Foreign fund, triggering the others to do the same and lock in the gains (Shanghai index had risen 130% in Year 2006!);
- hedge funds unwinding yen carry trade fueled purchases, as a result of Japan's recent hike in interest rates;
- Comment on potential slower growth and recession in US by year-end as quoted by Alan Greespan in Hong Kong;
- Crude Oil price increased to around USD61 per barrel, causing inflationary fears

As quoted by Shanghai Securities news, the Chinese Government had on Wednesday quashed such rumours pertaining to introducing capital gains tax as a form of curb speculative investment.

Based on the above events, I believe the sell-off in KLSE and the regional markets will be shortlived based on the following reasons:
- the global selling were caused by a systematic program selling as a result of overheated stockmarket in China, rather than triggered by a known major change in economic or political conditions. Market condition in Malaysia has in fact remained fundamentally sound and economic growth are expected to continue to be robust. I shall explore some of the key economic business drivers for Malaysia in a later post.
-crude oil price expected to fall after satisfactory oil inventory report;
- Chinese market has subsequently rebounded on Wednesday trade to end up close to 4% rise;
- US Federal Reserve Chairman Ben Bernanke clarified Wednesday that U.S. financial markets appear to be "working well" and are functioning normally. ernanke said the selloff did not change the Fed's view on U.S. economic growth. Bernanke was quoted in CNN as saying that there is really no material change in the expectations for the U.S. economy since he last reported to Congress couple weeks ago. He also expressed his believes that there is a reasonable possibility of strengthening of the economy sometime during the middle of the year;
- Strong fundamentals in Malaysian market remained unchanged, supported by promising stronger corporate earnings backed by the latest overall quarterly corporate earnings report to-date;

As such, my view is that KLSE will recover from the short-term losses and continue to be bullish in the medium term. This will be an excellent opportunity for long term investors to pick up fundamentally sound stocks and/or undervalued companies.