TY20203 FINANCIAL ECONOMICS

1. 1.0 Introduction
Stock market in Malaysia was conducted by Bursa Malaysia. Bursa Malaysia used the indexes
standard by FTSE or Financial Times Stock Exchanged. There are many company listed in Bursa
Malaysia such as Maybank and Petronas. In this Assignment, our main purpose is to forecast
the outlook for 4 months from now which are end of month of 2011, January, February and
March. Our Forecasting is based on the Rational Expectation Theory and efficiency market
hypothesis. There are many factors that influence our hypothesis such as economic stability,
monetary policy, inflation, dividend, budget 2012 and others.
1.1 Background of stock market in Malaysia
The first formal securities business organization in Malaysia was the Singapore Stockbrokers'
Association, established in 1930. It was re-registered as the Malayan Stockbrokers' Association
in 1937. The Malayan Stock Exchange was established in 1960 and the public trading of shares
commenced. The board system had trading rooms in Singapore and Kuala Lumpur, linked by
direct telephone lines (Bursa Malaysia, n.d).
In 1964, the Stock Exchange of Malaysia was established. With the secession of
Singapore from Malaysia in 1965, the Stock Exchange of Malaysia became known as the Stock
Exchange of Malaysia and Singapore. In 1973, currency interchangeability between Malaysia
and Singapore ceased, and the Stock Exchange of Malaysia and Singapore was divided into the
Kuala Lumpur Stock Exchange Berhad and the Stock Exchange of Singapore. The Kuala Lumpur
Stock Exchange which was incorporated on December 14, 1976 as a company limited by
guarantee, took over the operations of the Kuala Lumpur Stock Exchange Berhad in the same
year (Bursa Malaysia, n.d).
On April 14, 2004, we changed our name to Bursa Malaysia Berhad, following our
demutualization exercise, the purpose of which was to enhance our competitive position and to
respond to global trends in the exchange sector by making us more customer-driven and
market-oriented. Bursa Malaysia which had been the third largest stock exchange in the region
after Tokyo and Hong Kong (Ali Abbas, 2004).
1.2 Definition
Short term refers to period or duration in one year or less such 30 days, 3 months and 6
months (Mishkin, 2009).
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2. Stock market known as common stock represents a share of ownership in a
corporation. It is security that is a claim on the earnings and assets of the corporation. Holders
of common stock or stockholders own an interest in the corporation consistent with the
percentage of outstanding shares owned. Stockholder receives whatever remains after all other
claims against the firm‟s assets have been satisfied. Stockholders are paid dividends as known
payments made periodically, usually every quarter, to stockholder from the net earnings of the
corporation (Mishkin, 2009).
Two type of stocks which are Ordinary Stocks and Preferential Stocks. Ordinary
Stocks you own a share of the company. This entitles you to receive profits from the operations
of the company in the form of dividends. At the annual general meeting (also referred to as an
AGM), you have voting rights. Ordinary stocks are what you will start to trade in and most
traders never venture beyond this. Meanwhile, the preferential stocks are different because you
will receive dividends before dividends on ordinary stocks are announced. If the company is
wound up, preference stockholders rank above ordinary stockholders in the distribution of
assets. Preference stocks can often have a fixed dividend rate (Bursa Malaysia, n.d).
Bull Market is a stock market in which buyer dominates and where prices are on a
rising trend. Bull markets are characterized by optimism, investor confidence and expectations
that strong results will continue. It's difficult to predict consistently when the trends in the
market will change. Part of the difficulty is that psychological effects and speculation may
sometimes play a large role in the markets. Meanwhile, Bear Market is a market condition in
which the prices of securities are falling, and widespread pessimism causes the negative
sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling
continues, pessimism only grows (Investopedia, n.d).
Rally is a period of sustained increases in the prices of stocks, bonds or indexes. This
type of price movement can happen during either a bull or a bear market, when it is known as
either a bull market rally or a bear market rally, respectively. However, a rally will generally
follow a period of flat or declining prices. A rally is caused by a large amount of money entering
the market, bidding up the prices. The length or magnitude of a rally depends on the depth of
buyers along with the amount of selling pressure they face. For example, if there is a large pool
of buyers but few investors willing to sell, there is likely to be a large rally. If, however, the
same large pool of buyers is matched by a similar amount of sellers, the rally is likely to be
short and the price movement minimal (Investopedia, n.d).
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3. 2.0 Short Term prospects of Malaysia’s Stock Market Rally
Short term stock market rally in Malaysia influenced by many factors by past data history,
current and forecasting analysis by the next 4 months from now which are December, January,
February and March. Rational Expectation theory is the guideline to forecast the rally rather
than adaptive expectations. Adaptive expectations only suggest that changes in expectations
will occur slowly over time as past data change and past data history (Mishkin, 2009).
Rational expectation theory was developed by John Muth an alternative theory of
expectations, called rational expectation which is expectations will be identical to optimal
forecasts using available information (Mishkin, 2009). Thus Efficiency market hypothesis is
just an application of rational expectations to the pricing of stocks and also to the other
securities. This hypothesis based on assumption that prices of securities in financial markets
fully reflect all available information (Mishkin, 2009).
This available information included three categories of information. First is past data
history by using published data to forecast what will happen using the past history because
history can be repeated. Second information about current information to forecast what will be
happen such as the current issues going around that will effects the reaction to future. Lastly
future outlook determines by forecast using the two information from past data history and
current. So our hypothesis is based on the efficiency market hypothesis by refer the rational
expectations theory to forecasting the indexes for the short term stock market indexes in Bursa
Malaysia.
2.1 Indexes Hypotheses of short term stock market rally
Our Indexes Hypothesis based on previous history of recorded indexes on Bursa Malaysia
(Table and graph 2.1). Based on the table and indexed chart below, there are average
increased indexes started Month January until June. Next, decreasing indexes started from June
to September. Then the indexes increased from September to October. Bear Market rally
started from June to October. Based on 2.1 graph, future forecasting for December until March
refers to efficiency market hypothesis. Based on table and graph 2.1, the overvalue recorded on
June at 1579.07 points. The undervalue from the indexes is on May that recorded 1387.13
points. The average value between and 1472.10 points and 1579.07 points.
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4. Months KLCI INDEXES
January 1519.94
February 1491.25
March 1545.13
April 1534.95
May 1558. 29
June 1579.07
July 1548.81
August 1447.27
September 1387.13
Octobers 1491.89
November 1472.10
Table 2.1 Resource: Bursa Malaysia Key Indicator
Indexes
Months
Graph 2.1 KLCI Indexes (Source: Bursa Malaysia Key indicators)
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5. 2.2 Factors that influence future outlook
2.2.1: Economic stability
Economic stability important in the stock market rally in short term prospect. If Malaysia had
good economic stability, the stock market will rally. It‟s give the good sentiments for investor.
Back to history when Malaysia had first experienced recession in 1985 and last in 1999. The
history of financial crisis in 1999 starts in the mid may 1997 caused by the currency crisis that
time. Even more drastic than the plunge in the exchange rate, was the collapse of the stock
market. Between July and December 1997, the composite index of the Kuala Lumpur Stock
Exchange (KLSE CI) fell by 44.9 per cent. Following a slight recovery in the first quarter of
1999, the index again fell, this time to an eleven-year low of 262.70 points on September 1,
1998. On the whole, between July 1, 1997 and September 1, 1998, market capitalization in the
KLSE fell by about 76 per cent to RM 181.5 billion. In fact, although it enjoyed the best precrisis
economic fundamentals among countries that were hit by the crisis, Malaysia experienced the
biggest stock market plunge in the region (Mohamed Ariff And Syarisa Yanti Abu Bakar, 1999).
Our economic environment had influence by the international economic surrounding
also. On 2008 economy crisis started in United State caused by subprime crisis. At that time,
Malaysia also effected from this situation. Its lower export activity because the world demand
fall. Thus the Foreign Direct Investment falls and unemployment rate increased. Obviously the
stock market price in Bursa Malaysia that time decrease started from 2007 to 2008. Based on
the graph below the stock market indexes at 1246.8 indexes decreases to 858.22 indexes.
Resource: treasury department (ministry of financial)
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6. The current economic crisis occurs at EU and US because of debt crisis. It also effect
on the Malaysia economic stability this year. But this situation only temporary because it will
recover. According IMF, expected on growth economic rates will increase 4 %. Nevertheless,
economic growth slow because the growth rates among advance country such as Japan slow,
caused impact from tsunami disaster and earthquake. So, outlook for Malaysia economy is in
good condition at 2012. Then, future outlook for stock market indexes will increase moderate
cause by slow economic growth and expected stock market will rally.
2.2.2: Monetary policy
Monetary policy can affect stock process in 2 ways by using the interest rate as medium. First,
when fed lowers interest rates, the return on bonds which is an alternative asset to stocks
declines, an investors are likely to accept a lower required rate of return on an investment in
equity. Decline in ke is the required return on an investment in equity, using the Gordon growth
model lead to a higher value of P0 and raise stock prices. Furthermore, a lowering of interest
rates is likely to stimulate the economy, so that the growth rate in dividends, g is the expected
constant growth rate in dividends is likely to be somewhat higher. The rise in g leads the higher
P0 and rise in Stock Prices ( Mishkin, 2009).
According to Sunny Tan (1989), interest rates are used to stabilize the economy. A rise
of the interest rates can staunch on outflow of capital strengthens the dollar and dampens the
risk of high inflation. But the irony is that high interest rates discourage business activity
involving. When the interest rates falling, shares prices will be nudged up accordingly. Given a
choice, an investor would prefer to place his money in shares which will earn him better returns
in terms of dividend and capital appreciation. The improvement liquidity position of the stock
market is the result of low interest rates offered by the interest- bearing deposits. Investors will
also be encouraged to borrow more to buy stocks and shares when interest rates are low. Thus
prices of stocks and shares are pushed up even higher.
Monetary policy determined the stock prices. It can impact the as asymmetries in bull
and bear markets. Obviously it gives big effects to Bear market rather than bull market.
Monetary policy can give impact to asset prices and stock return (Jansen, 2010). The impact of
a surprise policy action in a bear market for most industries is significantly greater than the
impact of surprise monetary policy in a bull market. Controlling for the capacity for external
finance, stock returns of firms in bear states respond more than firms in bull states. Capacity for
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7. external finance is more important in a bear market, as it partially mitigates the larger impact of
monetary policy in a bear market.
Monetary influences the interest rate. Hence, Bank Negara Malaysia (BNM, the central
bank) is expected to continue to make incremental changes to its main interest rate, the
overnight policy rate (OPR), during the early part of the forecast period as it proceeds with the
normalization of monetary policy. The interest rate of the OPR is influenced by the central bank,
where it is a good predictor for the movement of short-term interest rates. BNM has raised the
OPR three times since March 2010, by a total of 75 basis points, bringing the rate up to 2.75%,
after having cut it to a record low in response to the dramatic downturn in the Malaysian
economy that occurred in 2009. However, the recent sharp appreciation of the local currency,
the ringgit, and signs of slower economic growth suggest that further rises in official interest
rates in the next few months are unlikely.
BMN does not expect inflation to rise to problematic levels, believing that it will remain
moderate in 2011 as strengthening domestic demand is accompanied by only a gradual
acceleration in the rate of price increases. In 2011 we do not expect the OPR to exceed the
high of 3.5% at which it stood during 2007 and much of 2008. But a quickening in the pace of
domestic demand growth from 2012 will prompt BNM to raise the OPR above this level during
the remainder of the forecast period to contain inflationary pressures. Based on the expected
increase the interest rate, the short term stock market will effect and it will effects rally on
Bursa Malaysia.
2.2.3: Inflation
Inflation rate is one of factor that manipulate stock market rally. Based on study case „Monetary
Policy Analysis Towards Inflation and Capital Market Performance‟, the analysis show that there
have some significant effects between interest rate and the important things is inflation rate
give indirect and direct influence of macroeconomics variable towards return market. Besides
that, case study from Robert S. Pindyck (1983) inflation rate can causes a large part of the
market decline because the variance of firm‟s real gross marginal return on capital has
increased significantly, increasing the relative riskiness of investor‟s return on equity. Study case
from Spanish by Antonio, et al (2008), about the effects of inflation to stock market prices was
there are the short run responses of daily stock prices on the Spanish market to the
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8. announcements of inflation news at an industrial level. The result was negative to stock prices.
It means that, the investor fall their investment to the stock market.
The current inflation rate for November was last reported at 3.4 percent. So, our
forecasting is inflation rate have negative relationship with stock rally market because it will
discourages investors decrease their investment and it will effect the stock market indexes and
rally will effect.
2.2.4: Dividend
Dividend is one factor that influences stock market rally in Malaysia. According to Bursa Saham
website Malaysia dividend refers to the payment or income that person receives as a
shareholder from the company or by a corporation. It is the portion of corporate profits paid out
to stockholders. Tan. S (1989) the original objective in investing in stocks and share is the
expectation on getting dividend at a fixed period. As situation change so does the investor‟s
expectation.
The dividend pay-out is not guaranteed and where it exists at all, the amount you‟ll be
given will be different from company to company and year to year. For example, high-growth
companies seldom offer dividend because all of their profits are reinvested to help maintain
higher-than-average growth. Conversely, larger companies have less potential for quick capital
growth but are more probable to pay healthy dividends which are steadily rising as the years go
by.
Company‟s Board of Directors has an authority to approved declaration of any dividend
before it is being paid to stockholder. The day that the Broad of Directors announces its
intention to pay a dividend is called as declaration date. On the declaration date, the Board will
also announce a date of records and payment date. They are three types of declaration date of
dividend which are interim, first and final and final dividend. Firstly, interim dividend refer to a
dividend is paid out by the corporation when the directors have received the half year financial
result. Secondly, the first and final dividend is the only dividend paid out for that financial year.
Lastly is the final dividend is paid when the final profits are shown in the final accounts.
On our studied, expected declaration date dividend for stock by companies‟ in Malaysia
will be on March 2012. Based on previous studied “Dividend policy and stock price volatility” in
Pakistan by Muhammad Nishad et al (2002) mention that they are relationship between the
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9. dividend policy and stock price, if the dividend policy is stable high dividend stock will have
shorter duration.
On our hypothesis, before the dividend announcement stock market will be increase
until the time of announcement, after the announcement the stock market expected to be
stable than falls. Once the dividend has been declared, a listed corporation must not make any
subsequent alteration to dividend entitlement. A listed corporation must ensure that all
dividends are paid not later than 3 months from the date of assertion or the date on which
approval is obtained in general meeting, whichever is appropriate.
2.2.5: 2012 Budget
From the evidence that we have found, 2012 budget that have been read out by prime
minister Datuk Seri Najib Tun Razak as a minister of finance on October 2011 it is also the
factors that influence the stock market rally in Malaysia. Berita harian news by Kaladher
Govindan mention that the stock market will be increase because 2012 budget gives all benefit
to all resident of Malaysia whereas to government servants, students, driver taxi and so on.
After the announcement 2012 budget, bursa Malaysia FTSE increase 12.92 more point
or 0.93 percent and close on 1400.05 point with Axiata (+19 cent), Maybank (+18 cent), IOI
Corp (+17 cent) and tenaga (+1 cent) it represent almost the index total rising. Same goes to
Utusan Malaysia news on 9 October 2011, price of stock at bursa Malaysia will expected to
increase after the “Malaysian friendly budget” or “people centric budget” announcement by
government.
2012 Budged also gave impact to the stocks of United Malaya Land Bhd, Malaysian
resources Corp Bhd and Gamuda Bhd and to education stocks such as Seg International Bhd
and help International Corp have a benefit from the announcement of budget 2012. Before the
announcement 2012 budget there is stock market rally happen in bursa Malaysia mention by Dr
Nazri Chief research in Affin Investment bank (Bernama, October 2011)
On our expectation to stock market rally on 2012 budget will raise because of the
benefit that resident and nation will accept on next year. On budged 2012 stated they are many
developments on economy Malaysia will occur on 2012 such as development on infrastructures,
development project and so on. On the other hand, lowers charges income tax give a very
impact to investors encourage them to buy more stocks on along 2012 with outlook our
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10. economic condition is good. So, our forecast on four month future outlook is the stock market
will rally.
2.2.6: Election and political
Election and political factor also manipulate the short-term stock market rally in Malaysian. The
past data from journal it proven that political and election have give impact to the short-term
stock market. Case study from Stock Market Volatility Around National Elections by (Jedrej
Bialkowski et al. 2007). The findings from the journal is that Country-specific component of
index return variance can easily double during the week around an election, which shows that
investors are surprised by the election outcome. The magnitude of the election shock also was
contribute by factors of a narrow margin of victory, lack of compulsory voting laws, change in
the political orientation of the government, or the failure to form a government with
parliamentary majority significantly. Besides that, some evidence is found that markets with
short trading history exhibit stronger reaction. Instead of that, same result goes to case study
from Taiwan (Cameron A. Shelton, 2008). On election campaign, the investors will courage to
bought stock market because they have confident to the party that will give incentive to the
economy. So, it has proven that election and political have positive relationship.
In Malaysia, our current political is stable although there have demonstration from
opponent party such as demonstration „Bersih‟ but the government still can control this
situation. Then, our general General election (GE) speculated to be held within the next few
months. GE could cause a spike in the market risk premium (MRP) again like the last GE that
leading to a weaker market (Liz Lee, 2011). Nomura Research in its Malaysian Outlook 2012
report said that GE is the most important event for the market for 2012. It is because MRP rose
by 232 basis points between December 2007 and March 2008. The market also plummeted
10% in the first day of trading after the March 8 election. Although there are good sentiment
for investor from other country but in Malaysia, election and political gave bad to stock market
in Bursa Malaysia.
In nut shell, our forecasting for four month outlook on short-term stock market index at
Bursa Malaysia will not rally because of the election factor. It is because, it not give sentiment
for investor to invest and it will effect stock market index. Maybe, it caused by the uncertainty
of investor to invest because of their political view.
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11. 2.2.7: Festival
Festivals also persuade the rally of stock market in Bursa Malaysia. Within in four month, our
country will celebrate two main festival which are Christmas on 25th December and Chinese
New Year on 24th January.
Chinese New Year (CNY) can causes highest return in March and April (Lei Gao and
Gerhard Kling, 2005). The situations happen in China because Chinese investors are „amateur
speculator‟ who often embezzles business fund for private trading. It means that these funds
are used for short-term speculations before they are paid back prior to weekends.
Correspondently, the Chinese stock market reaches its peaks shortly before the money is
withdrawn. It means that the money is withdraws close to CNY in February and afterwards
additional money flows into the market. Researcher of this journal also conclude that the
Efficient Market Hypothesis can be confirmed for current period as long they are focus solely on
calendar anomalies.
However, Sunny (1989), the Chinese New Year and the Rally are two distinct subjects
which do not come together to make a Chinese New Year Rally. The Chinese investors are too
busy preparing for their once- a year big celebration and have little or no time to get
themselves involved in the stock market. Moreover liquidity at this time of the year is tight.
They prefer to be free from tension and anxiety of monitoring the market during this period of
the year which is considered most significant to them.
Based on the contrast result of Chinese New Year, we had decided that there are
average increasing in the stock market during Chinese New Year. Even though there good and
bad information, we still forecasting the indexes will increased a little. Although their busy to do
their preparations but prosperity is important. They psychology also influence their reaction to
gain more money during festival
One more celebration on December 2011 is Christmas. According to The Star (2009), at
the end of the year, the market will be a bullish market. It is because November through
January tends to be the best three-month span for stocks (The Star,2009). On 2010 the stock
Market in the Bull Market. Moreover, based on US stock market, the end of year is most reliable
rallies of the year because probability is very high. The investor who might normally sell stocks
for tax purposes late in the year could be more likely to hold off this time around. So, Christmas
is not one of major factor of stock market but people may say opposite with this statement. The
true is Christmas is in month of the end of years.
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12. 3.0 Conclusion
As a conclusion, our forecasting for 4 months is average increase but not achieve the highest
value of the indexes on June with had been recorded the over value of indexes at 1579.07
points. Thus, our hypothesis the indexes will not decrease below the undervalue that recorded
on September at 1387.13 points. Our forecasting for December, January, February and March is
on average value between 1472.10 points and 1500 points.
We conclude that based on factors such as monetary policy, economy stability, dividend,
2012 budget, election and political, festival and interest rate that influence stock market is
averages rally. From the graph, our prediction starting on December until March, the graph
indexes increases start December to March. Even though interest rate and inflation rate effects
the rally but we confident that this situation not give big impact to rally. The sentiment from
factor such as economy stability, dividend, election and political, festival and more 2012 budget
will give impact to the investor to invest.
Index Pasaran Saham di KLCI
1600
Outlook forecasting
1550
1500
1450
1400 indexes
1350
1300
1250
Graph 2.1 KLCI Indexes (Source: Bursa Malaysia Key indicator
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