Malaysia stocks fell the most in two months after a rally by the benchmark index to a record on the last trading day in 2012 pushed valuations to a two-year high.
The FTSE Bursa Malaysia KLCI Index declined 0.8 percent to 1,674.72 at the close in Kuala Lumpur, its steepest slide since Nov. 2, and snapping five days of gains. The gauge reached a new high on Dec. 31 when it advanced 0.5 percent to 1,688.95. The market was shut yesterday for a holiday. The MSCI Asia Pacific Index rose 1.1 percent today.
The KLCI Index traded at 16.04 times estimated earnings on Dec. 31, the highest level since Dec. 31, 2010. The gauge rose 10 percent in 2012 amid speculation government infrastructure spending will shelter the nation from Europe’s debt crisis and a global economic slowdown. The index’s gain last year is its fourth annual advance, the longest winning streak since 1989.
“Valuations are only sustainable at rock bottom historical levels; current valuations are not cheap,” Alan Richardson, a Singapore-based fund manager who helps oversee about $82 billion for Samsung Asset Management, said by phone today. “Twenty times for Malaysia will be toppish.”
The market gains on Dec. 31 took its 14-day relative strength index to 74.5, the highest since July 20, according to data compiled by Bloomberg. The RSI measures how rapidly prices have advanced or declined during the specified time period. Some analysts see a reading of more than 70 as a signal to sell.
Kuala Lumpur Kepong Bhd. slid 5.5 percent to 22.68 ringgit today after its RSI hit 84.2 on Dec. 31, the highest level since July 11. AMMB Holdings Bhd. led lenders lower after CIMB Group Holdings Bhd. analyst Winson Ng said in a report today industry loan growth will slow this year. AMMB declined 1.9 percent to 6.67 ringgit.
Malaysia’s KLCI Index was the second-worst performer among major Asian markets today after Pakistan’s KSE 100 Index, which slid 2.5 percent.
“It’s mainly profit taking,” Tan Lip Kwang, who helps manage the equivalent of $1 billion at K&N Kenanga Holdings Bhd., said by phone today. “On the last trading day last year, in the last 10 to 15 minutes, some of the key index stocks were pushed up drastically.”
Demand for less risky assets is diminishing as confidence in global growth rises. The U.S. House of Representatives passed legislation averting income tax increases for most U.S. workers after Republicans abandoned their effort to attach spending cuts that would have been rejected by the Senate.
“When Malaysia stocks are up, people say it’s defensive; so when global markets are risk-on, Malaysia will be sold by implication as a source of funds to increase cyclicality elsewhere in Asia,” said Richardson, whose Samsung ASEAN Securities Master Investment Trust beat 97 percent of its peers in the past three years. He said stocks may fall in the first half due to uncertainties over the country’s general elections.
Malaysian Prime Minister Najib Razak must dissolve parliament for elections by April 28. In the last election in 2008, the opposition alliance, led by Anwar Ibrahim, secured enough seats to deny the governing National Front coalition a two-thirds majority which it had held for four decades.
Najib cut income taxes, boosted pay for government workers and extended cash handouts for the poor in his 2013 budget announced in September. In 2010, he unveiled a so-called Economic Transformation Program, identifying $444 billion of private-sector led projects from mass rail to oil storage ventures to promote in the current decade.
Stocks in Malaysia’s benchmark index will weaken ahead of the elections before picking up in the second half, Suhaimi Ilias and Wong Chew Hann, analysts at Maybank Investment Bank Bhd. said in a report today. They predict the KLCI to reach 1,710 by the end of the year.
“2013 will be a political year for Malaysia,” the Maybank analysts wrote in the report. “The key risk is the uncertain outcome of the general elections” and policy risks, they said.