The Road to Revulsion for KLCI

Over the last two weeks of reading stockbroker reports round the world, one common theme among these bright brains is that the worst is behind us.

My question is that why should anyone should listen to these people? They didn’t see it coming, and yet somehow they are qualified to tell us it is allright!

As Karl Marx said – history repeats itself, the first time as tragedy, the second time as farce.

Perhaps, I am just unduly skeptical, but this reeks of a conspiracy of optimism. My view – the recession has barely started, let alone reached its nadir. Far from being behind us, the worst may well still be ahead! The slowdown in the US is barely starting. The demand and supply of credit are evaporating. The effective shutdown of both sides of the market should be serious concern for all, as it is one of the hallmarks of a liquidity trap situation. The underlying asset adjustment is likely to have much further to run as well.

To my mind, it is much worse that possibly the burst of Japanese bubble in land prices or the S&L crisis as securitization was part of the solution to the S&L problem, whereas it has been part of the problem in the build-up in this current bubble.

One of the key lessons from the Japanese experience is that the banks were second round losers and they didn’t really begin to under-perform the rest of the market until the second Japanese recession of its debubbling process. They really started to suffer when the consumers started to struggle.

Going by this backdrop, I think we are still a bunch of optimistic and the risk of underestimating the earnings risk of Malaysian companies remains real. Cut in fuel subsidies, rising inflationary expectation, policy flip-flop and uncharted territory in political scene – all of these suggest that P/E rating for KLCI could hit below 10x, or effectively we are seeing a potential drop of KLCI index below 1,100, if not more, sooner than later. The curse of Vietnam, the extent of oil tax, policy drift and shock to disposable income could further setbacks to why the consensus equity overweight remains a MISTAKE, at least over the next 6 months.