[KUALA LUMPUR] Short sellers are taking aim at the world's longest-running equity rally.
Short interest in the iShares MSCI Malaysia exchange-traded fund more than doubled in the past month to 20 per cent of outstanding shares as of Monday, and reached an eight-year peak of 23 per cent on Jan 9. That's the highest level among 89 US- listed ETFs focused on emerging-market countries, according to data compiled by Markit Group Ltd. and Bloomberg.
Bears are stepping up wagers against Malaysia after the benchmark equity index advanced 116 per cent from its October 2008 low in the longest bull market worldwide. Oil's 58 per cent tumble since June has weighed on the crude-producing nation, with analysts predicting the weakest profit growth since at least 2009 and overseas investors pulling money from the US$449 billion market at the fastest pace in six years.
"Investors are worried Malaysia's economy will be affected by lower oil prices," said Alan Richardson, whose Samsung Asean Equity Fund outperformed 96 per cent of peers tracked by Bloomberg during the past five years and has an underweight position in Malaysian shares. "These participants are shorting in anticipation of deteriorating fundamentals, which have not yet been fully discounted in market valuations." The fortunes of Asia's only major oil exporter have worsened as oil's retreat to a five-year low near US$45 a barrel dragged down the ringgit to its weakest level since 2009. That's adding pressure on an economy already grappling with rising interbank rates, elevated household debt and the country's worst floods in a decade.
The FTSE Bursa Malaysia KLCI Index lost 0.5 per cent at 9:34 am local time, set for its biggest two-day loss in three weeks. The government cut its 2015 economic growth forecast to as little as 4.5 per cent on Jan 20 and predicted a bigger budget deficit than initially targeted. Oil and gas products account for about 20 per cent of the nation's exports.
"With less revenue, the government will have fewer options to stimulate the economy," Daphne Roth, the head of Asian equity research at ABN Amro Private Banking, which manages about US$218 billion, said by phone from Singapore. She has had an underweight position in Malaysian shares since May and now has zero holdings in the country.
The last time short interest in the Malaysian ETF was this high, in October 2006, the bears got burned. The KLCI index rose about 38 per cent in the following 12 months, versus a 55 per cent gain for the MSCI Emerging Markets Index. In a short sale, traders borrow shares and sell them, hoping to repurchase the securities later at a lower price and return them to the original holder, pocketing the difference.
"Those who shorted in 2006 all got killed," said Raymond Tang, chief investment officer for the Asean region at Kuala Lumpur-based CIMB-Principal Asset Management Bhd, which manages about US$17 billion. "We are still fairly comfortable with our holdings in Malaysia." Analysts are cutting earnings estimates as the nation's economic outlook worsens. Profits in the FTSE Bursa Malaysia KLCI Index are projected to increase 2.1 per cent in the next 12 months, according to data compiled by Bloomberg. That compares with a projected gain of 16 per cent for both Thailand and the Philippines, and 54 per cent for Indonesia.
Morgan Stanley reduced its recommendation on Malaysian shares to equalweight from overweight on Jan 26, citing continued weakness in earnings forecasts and the country's exposure to falling fuel prices.
Sime Darby Bhd, which owns palm-oil plantations, and SapuraKencana Petroleum Bhd, Malaysia's biggest oil and gas services company, have suffered the biggest earnings-estimate downgrades in the KLCI index during the past three months, underscoring the impact of the rout in commodity prices.
While the valuation of Malaysia's benchmark index has fallen to the lowest level since March 2013 versus the MSCI Emerging Markets Index, the nation's shares still trade at a 33 per cent premium, according to data compiled by Bloomberg.
Foreign investors sold a net 6.9 billion ringgit (US$1.9 billion) of Malaysian stocks in 2014, the biggest outflow since 2008, according to stock exchange data compiled by MIDF Amanah Investment Bank Bhd.
"Earnings expectations are still too high," ABN Amro's Roth said. "The market might continue to de-rate."