Covid 19 causing force-selling & free fall of index

Koon Yew Yin 22 March 2020

Just a month ago, markets across the globe, particularly the Dow Jones and the S&P 500 were at all-time highs.

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How things have change so drastically in a matter of weeks. It has been four weeks of pandemonium in the market. 

Covid-19 has gripped the world, not just with its ability to spread disease quickly, but also to replicate fear and terror.

Governments around the world have hurriedly launched their respective stimulus packages to attempt to fight the contagion and collateral damage left in its aftermath.

However, judging by how financial markets have been hit by circuit breakers, limit-downs or even shut down, it’s safe to say that mass panic is the emotion ruling the day. Investors are not thinking about valuations any more.

The Dow Jones has fallen 32.7% from its peak of 29,569 on Feb 12, while the S&P 500 has also fallen 29.3%% from its peak of 3,386 on Feb 19.

Malaysia was not spared.

The FBM KLCI has been floundering since the 2014 general election. Since its peak of 1,887 on April 20,2018, the index has been on a slow downtrend.

From that peak, the market is down some 35% at the 1,219 level on Thursday. On a year-to-date basis, the FBM KLCI is down 23.7%.

In early February, it was the 1,500 level that was the support for the local index.

By end-February, it had to be the 1,400 level. By March 16, the 1,300 level was breached and the 1,100 level could be the next stop.

Force selling in Malaysia

The reasons for the FBM KLCI free fall are the margin calls and force-selling. Those who cannot cover their margin calls are forced to sell and the stock goes to a new low. This, in turn, triggers the margin call again, where prices again hit new lows, and more investors are affected. It’s a vicious downward spiral until the last of the weak sellers have been taken out.

What the market needs now is stability. It doesn’t need to go up. It just needs the margin calls to be contained, if not stopped.

So, at the market’s current level, are we close to that point?

What is patently clear is that tremendous values have emerged after the recent collapse. For example, Maybank, CIMB and Public Bank, the three leading Malaysian financial institutions, are trading at historical price earning ratios of nine times, seven times and nine times respectively. Dividend yields of Maybank and CIMB are between 7% and 8%.

There is so much value in well managed listed companies that it would be a fantastic time for major shareholders to take their companies private. 

WHO announcement

The World Health Organization is working with scientists across the globe on at least 20 different coronavirus vaccines with some already in clinical trials in record time — just 60 days after sequencing the gene.

“The acceleration of this process is really truly dramatic in terms of what we’re able to do, building on work that started with SARS, that started with MERS and now is being used for COVID-19 ,” Dr. Maria Van Kerkhove, the technical lead for WHO’s emergencies program, said at a press conference at the organization’s headquarters in Geneva on Friday.  

My advice: There are already many announcements of the discovery of vaccine that can cure Coronavirus infection. As long as you do not have margin call, do not sell at this ridiculous price level.   

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