This article first appeared in Capital, The Edge Malaysia Weekly on October 7, 2024 - October 13, 2024

OCTOBER has been historically the most volatile month for stock markets all over the world, and this year is not expected to be any different as various factors come into play to influence the movements of global equities.

Based on an analysis of the performance of major market indices stretching back to 1980, October has seen the highest standard deviation (SD) in terms of index price movements on the S&P 500, Nikkei 225, Hang Seng Index, FTSE 100 and the FBM KLCI.

“I think there’re a lot of potential factors that could affect volatility besides the historical October factor. Geopolitical situations, especially in the Middle East, is one such factor,” says Imran Yassin Md Yusof, head of research at MIDF Amanah Investment Bank Bhd.

Last Wednesday, Iran fired missiles at Israel in response to the latter’s military offensive in Gaza and Lebanon, as well as the assassinations of the leaders of Hamas, Hezbollah and its Islamic Revolutionary Guard Corps, bringing the region closer to an all-out war.

“While Kamala [Harris, the current US vice-president and the Democratic Party’s presidential candidate] is leading in the polls, I’m not ruling out [former US president and Republican Party’s presidential candidate Donald] Trump as yet,” Imran tells The Edge.

From 1980 to 2023, the FBM KLCI had an average SD of 8.96 in October compared with a median SD of 6.1 for the entire year. This shows that the stock market is more volatile in October compared with the rest of the year.

This trend is also observed in the major markets, where the volatility in October was fuelled by fund managers’ portfolio dumping in September. Fund managers optimise their portfolios by getting rid of stocks that do not meet their return targets. When stocks are dumped in September, the shares are often picked up as valuations become more attractive.

However, if there is negative news, be it poor economic data or other factors coming into play, fund managers could sell down their holdings, leading to heightened volatility in the market.

“Hopefully, October 2024 will be different because of the effects of the US Federal Reserve’s maiden policy rate cut [in September]. For Bursa Malaysia, I would expect a steady recovery from the August selldown, under the perspective that the sell-off is not driven by and will not create systemic economic and financial issues,” says Vincent Khoo, director of strategy at UOB Kay Hian Malaysia.

The Fed’s decision to cut its policy rate by 50 basis points (bps) on Sept 18 and its guidance for the federal funds rate to be in the range of 4.25%-4.5% by the end of this year signal the US central bank’s confidence in its economy and its efforts to protect jobs at home.

Economic data releases are closely watched by market players as they indicate the health of the economy and the earnings potential of companies. As such, they influence the performance of stocks. The US non-farm payroll data, released on Oct 4, could indicate whether the world’s biggest economy is headed for a soft landing. (Note: The data was released after press time.)

“If any US economic data misses expectations, we expect to see a negative knee-jerk reaction [in the stock markets],” says Imran.

Loui Low, head of research at Malacca Securities Sdn Bhd, concurs. “People are very optimistic, assuming that the non-farm payroll data will continue to be good. Therefore, they keep on buying [stocks],” he says.

In the event that the non-farm payroll data comes in lower than expected, the stock market’s volatility could be heightened, he points out.

Meanwhile, factors that could affect Bursa-listed stocks include Budget 2025, which will be tabled in parliament on Oct 18, and the movement of the ringgit. The strengthening of the local currency, depending on how much further it appreciates against the US dollar, could have an impact on the country’s export competitiveness, says Low.

Bank Negara Malaysia will release the industrial production index for August on Oct 11 and merchandise trade data for September on Oct 18.

The ringgit had appreciated almost 10%  this year to RM4.168 against the US dollar as at Oct 2, from RM4.5925 at the start of the year. The currency is now at its strongest against the greenback since August 2021.

A stronger ringgit will boost domestic consumption, which could counter the effects of lower exports in the overall GDP print. Therefore, the economic data that will be released in the coming months will contribute to market movements.

“People will sell off the market ahead of the [third quarter] gross domestic product (GDP) data,” says Low. The 3Q2024 GDP data will be released by Bank Negara on Nov 15.

Kaladher Govindan, head of research at TA Securities Holdings Bhd, is more optimistic about the prospects of the local stock market in October. He notes that October has historically been a good month for Malaysia, unless during major economic meltdowns.

“Otherwise, if you zoom in on its month-on-month performance since 1990, the probability of a month-on-month gain in October was 73.5%, with an average return of 1.8%,” Kaladher tells The Edge.

He adds that Budget 2025 expectations could prompt a pre-budget rally. However, what transpires next highly depends on the measures proposed during the budget announcement.

While window-dressing activities in the fourth quarter generally result in a strong period for equities, cautious sentiment ahead of the US presidential election in November and the outcome could be a dampener, says Kaladher.

In a market strategy report released on Sept 26, MIDF Research noted that a stronger ringgit would attract a net inflow of foreign funds into the local equity market, and vice versa.

The research house pointed out that in the second half of 2023, when the ringgit rebounded 1.7% against the US dollar, the local equity market registered RM1.8 billion of net buying by foreign funds. Conversely, in the first half of 2024, when the local currency depreciated 2.7% against the greenback, the equity market recorded RM800 million of net selling by foreign funds.

“Meanwhile, thus far in 2H2024, the ringgit jumped 12.2% against the US dollar, and the local equity market registered RM5.2 billion of net buying by foreign funds. Going forward, we expect the ringgit to strengthen further, hence more foreign fund inflows into our equity market underpinned by Malaysia’s favourable economy and corporate earnings prospects,” said MIDF Research.

While October is considered a highly volatile month for stocks, it is not necessarily a bad thing.

According to an analysis of stock market returns in October since 1980, only in 16 of the 45 years did the S&P 500 turn negative during the month, compared with 24 years for September, when fund managers tend to do their portfolio dumping.

As for the FBM KLCI, the October returns were negative in only 15 of the 45 years. The data also show that October was not necessarily a negative month for equities in major Asian and European stock markets.

In view of the potential volatility, Imran recommends that investors be more selective when it comes to investing in equities in October. One way is to look at the volatility of a given stock, he says.

The Edge uses the stocks’ beta correlation to the FBM KLCI to indicate their respective volatility against the index. A beta of 1 indicates that the stock is moving completely in sync with the FBM KLCI, while a negative beta signals the complete opposite in terms of the share price movements when compared with the benchmark index. A stock’s beta of more than 1 indicates that the share price is moving in tandem with the FBM KLCI at a greater magnitude.

“Stocks with lower to medium volatility could potentially moderate the risk. While the gains may not be as dramatic as high volatility stocks, on the other side, the downside is also not as dramatic,” he explains.

MIDF Research maintains a selection strategy based on the share price volatility of a given stock, supported by a fundamental view of the counter. “Stocks with low volatility tend to not have wild price swings, suggesting stability and reduced risk,” it stated in the strategy report.

The research house likes banking and consumer stocks, as well as real estate investment trusts (REITs), favouring sectors that provide attractive dividend yields and have potential laggards. “As rates soften, we expect investors to look for assets that will provide them with similar or higher yields,” it added.

Banks and REITs tend to pay quite good dividends, and there has been a rerating of regional banks lately, according to MIDF Research. Meanwhile, consumer stocks are seen as laggards compared with the movements of the broader market.

Looking at the top 100 stocks listed on Bursa, banking stocks like Malayan Banking Bhd (KL:MAYBANK), Hong Leong Bank Bhd (KL:HLBANK), RHB Bank Bhd (KL:RHBBANK), Hong Leong Financial Group Bhd (KL:HLFG), Affin Bank Bhd (KL:AFFIN), Alliance Bank Malaysia Bhd (KL:ABMB) and Bank Islam Malaysia Bhd (KL:BIMB) are all trading below 1 beta to the FBM KLCI.

A beta of less than 1 to the FBM KLCI means that the stocks are moving in tandem with the benchmark index, but in a rather muted way. This translates into lower volatility.

Among the top 100 stocks on Bursa, REITs such as IGB REIT (KL:IGBREIT), Pavilion REIT (KL:PAVREIT), Sunway REIT (KL:SUNREIT) and Axis REIT (KL:AXREIT) are also trading below 1 beta to the FBM KLCI.

Consumer stocks such as Nestlé (Malaysia) Bhd (KL:NESTLE), MR D.I.Y Group (M) Bhd (KL:MRDIY), QL Resources Bhd (KL:QL), Fraser & Neave Holdings Bhd (KL:F&N), Guan Chong Bhd (KL:GCB), Farm Fresh Bhd (KL:FFB) and DXN Holdings Bhd (KL:DXN) are also trading below 1 beta to the FBM KLCI.

Malacca Securities’ Low likes sectors that will benefit from the strengthening of the ringgit. Apart from consumer stocks, he prefers those in construction, property development, building materials and utilities.

“Investors should position themselves in construction stocks before the budget announcement. Meanwhile, properties and utilities will be quite safe,” he says.

UOB Kay Hian’s Khoo advises investors to position for a strong rally in the fourth quarter and to ignore the noise and capitalise on the continuing foreign fund inflows. “Thematically, we continue to favour Iskandar 2.0 [Johor-Singapore Special Economic Zone (JSSEZ)], DC (data centre) and AI (artificial intelligence) plays, the green agenda, as well as blockchain,” he says.

He explains that the JSSEZ theme overlaps with the subthemes of DC and AI. He also favours quality dividend yielders, stocks with growth prospects that are reasonably priced, as well as laggards.

UOB Kay Hian’s top picks are Gamuda Bhd (KL:GAMUDA), Inari Amertron Bhd (KL:INARI), IOI Properties Group Bhd (KL:IOIPG), My E.G. Services Bhd (KL:MYEG), RGB International Bhd (KL:RGB), Pekat Group Bhd (KL:PEKAT), Public Bank Bhd (KL:PBBANK) and V.S. Industry Bhd (KL:VS). 

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