Malaysia Stock Market and the Ringgit

As I trade primarily Options in the U.S. Markets, I have not looked at Malaysia stock market for a very long time as I no longer have positions here locally.  In light of the recent Wall Street Journal reporting here making 5 very specific transactions allegations involving our Prime Minister and Finance Minister AND he has not yet explicitly denied these specific transactions to be factually false, it seems to me that the financial implications to the country will become too great to ignore the longer he delays denial to the facts, and so, I decide to pull up the charts for the KLSE and the Ringgit to see where we are today.   I am surprised as both are not looking good for Malaysians.

KLSE chart

• This shows the KLCI over the past 2 years. 
• The important line for me is the slope of the Red Line, which is the slope of the 200-day Moving Average. 
• Unfortunately, it is now sloping down.
• In addition, the latest peak in May is now lower than the peak at the beginning of this year, indicating a lower high.
• Note the rapid crash since peaking in May - this is because when the slope of the 200-day MA is down, and the market makes a lower high, the right trading strategy then will be to Sell the Rallies, and this has occurred already.
• Selling the rallies continues to be the right strategy as long as the slope is down.
• Unfortunately, Malaysia stock market does not permit short-selling.   Trying to go long when the 200-day Moving Average is like swimming against the tide - it is very hard to be profitable.  The majority of traders will lose money over the long term if they keep taking the long side of the trade when the 200-day MA is sloping downwards.
• Perhaps a redeeming feature is that the Market looks Oversold, having just come off the bottom - the resistance test may be around the 200-day MA, which also looks to be near the 61.8% Fibonacci Retracement level visually.   If it is not able to make a higher high, it will test a lower low below 1700 again ....

Ringgit chart

• Again, the USD vs MYR over the past 2 years, with the same 200-day Moving Average line in red.
• Unfortunately for Malaysians, the red line is sloping upwards, which indicates that the Ringgit has weakened compared to the USD.
• In addition, the outlook on future USD interest rates is up over the next 2 years, suggesting possible strengthening of the USD over these period.  
• The trade now is to buy USD / sell Ringgit in anticipation of the continuation of this trend.

Implications for Malaysians investing in the local market

No one knows what's going to happen in the future. 

Having said that, what has served many traders well in the past is to respect the 200-day Moving Average slope.   It captures succinctly what happens to prices over the past year and more.   Nowadays, it is very rare to find a fund managers or serious traders and investors who never considers price charts - everyone is looking at the same chart.

Unfortunately, these charts do not paint a rosy picture for Malaysia.  In fact, it tells me to reduce/get out of Malaysia stock market, and reduce/get out of the Ringgit as both are weakening.  An overseas fund manager that stays in the Malaysia stock market risks a "double whammy" - continued weakening of stock prices, and continued weakening of the value of these stocks when expressed in USD.   It would be very hard to justify staying invested in Malaysia.

Worse is the recent 5 specific transactions levied at our Prime Minister and Finance Minister.   Unfortunately, he has not explicitly denied the facts of the 5 specific transactions.   Instead, he claims something else (e.g. "political sabotage") and diverting attention elsewhere.  This does not bode well to overseas investor's perception of what's happening in Malaysia.   Investment Managers are not paid high 6 to 7 digit salaries to act stupid.   US$700 million do not normally get deposited into a private individual bank account.   Either the facts are false, or they are true - there are no "ifs" or "buts".   The fact that he has not yet denied the factual nature of the accusation explicitly when it is extremely simple to do so, will have given rise to a lot of serious concerns to many prudent investors.

The investing community does not behave like a court of law.  Investment Managers are mandated by Investment Policies to be prudent.   Prudence means avoidance of uncertainties and risks when they cannot be quantified.   Investment Managers are not supposed to "gamble" with client's monies.  If even one of the 5 specific transactions (that details the date, $ amounts, the recipient bank account number, the recipient bank account name, the name of the bank, etc.) is proven to be factually true, the principle of prudence dictates that the Manager exercises extra caution.   This means at the very least, that new monies should not be allocated into Malaysia.   Worse, any existing investments may need to be pulled out of Malaysia.

The medium term implications to Malaysia is not looking good, if the allegations by the WSJ is true.  In this scenario, if true, means a very corrupt government leader, combined with widespread and deeply entrenched rot that has permeated to many levels, including what is supposedly an independent institution like Bank Negara, and institutions that are supposed to protect the financial interests of all Malaysians like the Ministry of Finance and all related bodies in the country.  No reasonable Malaysian public will not accept huge amounts of corruption like this.  It becomes even more likely that there will be a new change in government in the next election in 2017/2018, with possibilities of future social unrest.   No sane and prudent investment manager will want to stay invested in Malaysia over the next few years, until there is clarity and certainty over the future political situation.   Above all, the leader must be perceived as clean, reliable, predictable and someone you can trust to conduct business fairly.  A leader, if proven to have received deposits of US$700 million in his private account would not fall under this category.

If the facts are true, how foreign investors will decide and act next should be of no doubt, if they are true to the principle of prudence.

In light of the above charts and events, whilst 6-9 months late, I would still suggest a gradual diversification of risks in light of what could potentially happen over the next 2-3 years.  Over the mid term, the principle of prudence suggests that we should not keep all our investments in Malaysia - if possible invest some overseas.   If you have not yet funded your TOS account, you may wish to do so gradually when the Ringgit dips (to most likely a higher low).   If you have been trading the local stocks only, sell them at rallies, and start to trade gradually in the US markets that allows you to also short the market and play both sides fairly.   Unfortunately, the Malaysia market is one of the most unfair markets I have ever seen especially the warrant market where the only seller permitted are the banks that issues these warrants at a profit to them.   On a whole, buyers of these warrants (whether Call or Put warrants) loses monies.  

Until the red line slopes the other way, I would temporarily avoid committing new monies into Malaysia stock market and the Ringgit for the time being ...  I suspect, given the charts, that the "smart monies" have already done so since the end of last year.

Good luck!