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  1. Home
  2. / Markets
  3. / Emerging Markets

There's Another Stock Market Rally That Makes Little Sense

Mom and pop investors have gone wild in Malaysia, driving volume to record highs and shares of rubber-glove makers through the roof.
By ALEX FREW MCMILLAN
Aug 21, 2020 | 11:00 AM EDT

The S&P 500 and Nasdaq have lost their senses. To be hitting record highs amid what's likely the world's worst recession shows a complete disjoint with reality. Yes, stocks are forward-looking -- but can they really see that clearly? Visibility is very poor.

Here in Asia, the rally in Malaysia also makes little sense. The Kuala Lumpur Stock Exchange index is up 29.3% since its March 19 low. It's a rapid rebound that nevertheless leaves it up only 0.11% for the year to date, on par with Thailand and a little ahead of Singapore's flat Straits Times.

What's most shocking is the sheer volume of trades. Mom and pop investors have ensured that trading volumes year to date have already topped the entirety of last year's trading by 20%, the Financial Times reports. The FTSE Bursa Malaysia Top 100 index of the largest companies in the country has seen 143.8 billion ringgit (US$34.3 billion) in shares change hands.

Local retail investors accounted for 45.8% of turnover volume in July, according to the stock exchange. They usually account for less than half that, running around 20% of trading in a typical year.

The market's total trading volume in July of 121.9 billion ringgit (US$29.1 billion) was three times the monthly totals last year. The volumes started ramping up when the turnaround in the market came in March, but really intensified in June, July and so far in August.

The greatest fervor is built around four makers of rubber gloves. They have benefitted massively from the huge demand for their product, leaving them scurrying to ramp up production.

Top Glove (KL:TPGC) is the industry leader, with a U.S. listing under TGLVY, and a company I've highlighted before. I also noted that Thai upstart Sri Trang Gloves hopes to take it on.

Does it make sense that Top Glove's shares are up 500.4% this year? Their business is certainly not five times what it was at the end of 2019. In June, it reported profits that were a record, granted. It looks like profits are on track to double from last year, with sales up something like 20%. So based on that simple metric, no. It does not make sense.

The other major Malaysian glove makers are Supermax (KL:SUPM) (shares up 1,271.8% in 2020), Kossan Rubber Industries (KL:KRIB) (shares up 294.2% in 2020) and Hartalega Holdings (shares up just the measly 245.4% in 2020). U.S. investors may be disappointed to hear that all three companies have ditched their U.S. ADRs.

Does the Supermax gain of more than 1,000% make sense? It recorded a record quarter through June, yes. That saw full-year sales up 30% and profits quadruple to a record. So it makes some sense, but not entirely. What does make sense is that investors have cottoned onto the stock, and got excited. Some will buy at any price.

Nomura says glovemakers and other health-care stocks have contributed 17% of total Malaysian turnover in 2020, more than any other sector. Last year, that figure was 4%.

Yes, a maker of rubber gloves is technically linked to the health-care sector. But it's not exactly conducting R&D for cancer or Alzheimer's, or Covid-19 for that matter. You'd imagine that the current passion for rubber gloves, face masks and hand sanitizer may die down at some point, if the coronavirus outbreak ever calms down.

So the glove makers may even go into reverse if there's greater assurance that the virus is under control or there's even a vaccine that works.

Another factor driving the mom and pop investor interest is a government order to banks issued in April that they should give a moratorium on loan payments to many borrowers. Anecdotally it looks like a lot of people have taken that money and put it into the market. But the moratorium is slated to come to an end in October, unless the government extends it.

It's not like the Malaysian economy is instilling confidence. Malaysia reported last week that for the second quarter, its economy shrank a record 17.1%, year on year. That's worse than its performance in aftermath of the Asian financial crisis. The previous record low was back in 1998, when the economy receded by 11.2% in the fourth quarter.

Shares in stock-exchange operator Bursa Malaysia (KL:BMYS) have also been on a rip. Its shares have gained 56.3% in 2020. Business is booming -- as I explained earlier this week it also is for the exchange operator in Hong Kong.

The stock exchange is now wondering how to continue its investor education and promotional efforts without feeding into the retail-trading frenzy. Some of its current programs, such as subsidizing research on smaller-cap companies, tends to end up promoting stocks that appeal to investors in the street. It would like to curtail gearing, which of course is proving popular.

The Malaysian online brokerage Rakuten Trade doubled its total number of accounts in the June quarter alone. It added 50,000 new registrations in those three months, the same number it had registered in the previous three years, since its founding in May 2017.

The company is a joint venture between Japanese e-commerce giant Rakuten (RKUNY) and its Rakuten Securities online brokerage and Malaysian brokerage and commercial bank Kenanga Investment Bank.

The convergence of easier online trading and margin with ramped up interest in the market is a worrying combination. In March, Rakuten Securities launched a pre-approved automated credit facility, RakuMargin, which provides up to 100,000 ringgit after an all-online registration process.

It promoted RakuMargin with a free giveaway of two round-trip tickets to Tokyo. The service has drawn 2,000 clients between March and July, accounts worth a combined 100 million ringgit, with the company saying about 80% are under 40 years old with less than three years of trading experience.

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At the time of publication, McMillan had no positions in any securities mentioned.

TAGS: Emerging Markets | Indexes | Investing | Markets | Stocks | Trading | Asia | Emerging Markets (South America, Asia, Middle East)

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