This article first appeared in The Edge Financial Daily, on November 9, 2015.

KUALA LUMPUR: Views are split on whether the time is ripe for investors to take position in the stock market ahead of the year-end window dressing activities by funds, while fund managers say the current market condition is still bleak and full of uncertainties.

According to Bloomberg data, over the past 10 years from 2004 to 2014, the FBM KLCI would start to edge up as early as mid-November towards year end. During this period, the KLCI in December increased 1.88% on average, according to data compiled by Bloomberg.

Many have attributed this trend to window dressing activities by portfolio managers.

However, fund managers say window dressing may be tough in a weak market, amid a slowing economy and external uncertainties.

“Some funds can still do so, but it is not easy in a market with this kind of weak sentiment. It is more unusual than the normal years,” Areca Capital Sdn Bhd chief executive officer Danny Wong Teck Meng told The Edge Financial Daily.

He added that it may not be a good time for investors to take position hoping to benefit from some window dressing activities by year end this time as it is an event-driven market.

“December can still be another volatile period,” he said, citing the uncertainties of the US Federal Reserve’s (Fed) rate hike, China’s slowing economy and low crude oil prices.

Last Wednesday, Fed chair Janet Yellen said a rate hike in December is a “live possibility” if data continues to show a solid expansion in the US economy.

But still, Danny said the resolution of 1Malaysia Development Bhd issues by year end, as promised by the government, could be a catalyst for the local bourse.

He added that fundamentally strong large-caps may have limited downside risk as ValueCap Sdn Bhd is expected to receive some funds and may lend some support to the KLCI should there be any further downward trend.

ValueCap should be receiving RM6 billion by the end of this month — part of the RM20 billion additional seed capital for the asset management firm to buy undervalued stocks in the local stock market, according to earlier reports.

In terms of valuation, Danny pointed out that as corporate earnings were not as robust as expected, the lower KLCI does not translate into a lower valuation.

He said the valuation is not cheap for the KLCI compared with other regional stock markets, adding that the KLCI is trading at a price-earnings ratio (PER) of about 14 to 15 times.

He said the third-quarter earnings are expected to be weaker than the second quarter.

“This is not the kind of market where you see a lot of undervalued stocks,” he noted.

Danny suggested investors to take a longer-term view and position that look into 2016.

An analyst at a local fund concurred and said this may not be a good time for investors to buy.

“The overall market sentiment is still weak. The KLCI may dip further by year end and towards next year. No one knows,” she said.

Singular Asset Management Sdn Bhd founder and chief investment officer Teoh Kok Lin said that investors have to be selective in view of the current market.

“One has to be very fairly selective as the economic condition is still soft. [The] global environment is still uncertain,” he told The Edge Financial Daily via phone.

In a market where people are selling down, there will be some opportunities but investors have to be very selective.

He noted that the main concerns are the weakening of the ringgit against the US dollar and the health of the Chinese economy.

He suggested investors to look beyond the local bourse into regional markets in Asean and North Asia to have more choices.

However, research houses have a different view on the KLCI.

“Yes, I think it is time for investors to buy. We have been saying that since August,” said CIMB Research head of research Terence Wong.

Year to date, the benchmark index has declined more than 81 points or 4.5%.

The KLCI once dipped to a 52-week low of 1,503.68 points on Aug 25 but has been recovering in the past few months. Last Friday, the KLCI closed 2.84 points or 0.17% lower at 1,685.7 points.

He told The Edge Financial Daily via email recently that valuations are cheaper than before but Malaysia has never been cheap and always trades at a premium to its regional peers.

On sectors investors can look out for, he suggested construction, utilities and smaller-caps.

“We maintain our end-2015 KLCI target of 1,700 points and end-2016 target of 1,850 points based on an unchanged 15.5 times PER. Preferred sectors are construction for the long list of big projects to be built, utilities for its safety and smaller-caps for bottom-up outperformance,” Terence wrote in a note dated Oct 23.

Meanwhile, in a strategy note dated last Friday, BIMB Securities Sdn Bhd head of research Kenny Yee said despite the uncertainties surrounding the Fed’s rate move, the research house still believes the local bourse will end the year on a firmer note with ValueCap’s RM20 billion remaining as the market enigma.

“The delay in revising the Fed rates has had investors making a return to regional equities, as all major Asean markets closed the month of October on a high,” he wrote.

In tandem with this, he noted that regional currencies also strengthen accordingly. However, the debate on the Fed rates had been revitalised at the time of writing, hence the ongoing uncertainties.

Meanwhile, Yee said corporate results announced so far have been less than exciting with notable underperformers within the telco space.

“We reckon [that] there remains the propensity for further earnings downgrade albeit not much and will monitor the progress of the banking sector as analysts may look to tweak their forecasts lower.

“For now, we are maintaining our growth estimates at 2.6% and 7.6% for this and next year [respectively] with 2015 KLCI target still at 1,750,” he wrote.