Fear or new Covid mutation.

27 Nov 2021

Dear Fellow Investor,

On Friday markets world wide were hit by the fear of a new Covid mutant originating in South Africa. The mass media fear machine went into overdrive.  Dr. Fauci as well  as other health experts, were paraded out to  spread the fear message of possible lockdowns, border restrictions, and the need for more government restrictions and controls.

Fear spread like a forest fire and virtually all markets went into panic mode.  Commodities,  technology and growth shares were hit. The 10 year US Treasury bond saw panic buying as fearful investors rushed to safety.  Gold caught a bid.

Weekly VIX or volatility index traded on the CBOE

Since March 2020 every time the VIX traded above 148, volatility reverted to the mean and stock markets recovered.  The VIX is a fear gage and measures the amount of put options bought mostly by small traders to protect the downside.  It is a sentiment indicator and reflects those small players are usually wrong at tops and bottoms.  Could there be more selling? Of course, but buying dips and managing risk after these spikes is a good strategy. If you are holding quality shares you could add to your positions.

What could turn the market ? If it was announced that infection, transmission  and death rates  drop buyers would return.

Today, I watched a market outlook by  Kong Seh Siang, head of CIMB retail research. He reviewed the budget and the impact of higher taxes on the market.  Large companies earning over 100 million in profits  will  be impacted and the reduction in earnings will have a negative effect. The same goes for the raising of transaction taxes which will impact the short term traders. For investors there is not much impact.

His view on the election in Melaka   in which the BN gained control  was positive as it removes the uncertainty.  Foreign funds have been net buyers in the last 7 weeks as they anticipated a BN win which is good for business. The KLSE is now trading at 1.5 standard deviations below its mean. PE is at 14.1 while the mean is at 17.4. Foreign funds always try to buy value at a discount and that explains their buying. Malaysian shares are on offer.

Going into 2022, he recommends banks including Public Bank and Maybank  due to the likelihood of higher interest rates. He also likes technology and surprisingly rubber gloves due to low valuations. The economy is getting back to normal so he recommends some selected retail counters. If you have an online  CGS CIMB account you can access his picks on the research page.

Weekly continuous chart of Brent Crude trading above its 50 week moving average. The trend is still up despite near term manipulation.  High oil prices signal recovery.

Take care,

Bill.