1.0 Introduction

Stock market in Malaysia was conducted by Bursa Malaysia. Bursa Malaysia used

the indexes standard by FTSE or Financial Times Stock Exchanged. There are many

company listed in Bursa Malaysia such as Maybank and Petronas. In this

Assignment, our main purpose is to forecast the outlook for 4 months from now

which are end of month of 2011, January, February and March. Our Forecasting is

based on the Rational Expectation Theory and efficiency market hypothesis. There

are many factors that influence our hypothesis such as economic stability,

monetary policy, inflation, dividend, budget 2012 and others.

1.1 Background of stock market in Malaysia

The first formal securities business organization in Malaysia was the Singapore

Stockbrokers' Association, established in 1930. It was re-registered as the Malayan

Stockbrokers' Association in 1937. The Malayan Stock Exchange was established in

1960 and the public trading of shares commenced. The board system had trading

rooms in Singapore and Kuala Lumpur, linked by direct telephone lines (Bursa

Malaysia, n.d).

In 1964, the Stock Exchange of Malaysia was established. With the secession

of Singapore from Malaysia in 1965, the Stock Exchange of Malaysia became known

as the Stock Exchange of Malaysia and Singapore. In 1973, currency

interchangeability between Malaysia and Singapore ceased, and the Stock

Exchange of Malaysia and Singapore was divided into the Kuala Lumpur Stock

Exchange Berhad and the Stock Exchange of Singapore. The Kuala Lumpur Stock

Exchange which was incorporated on December 14, 1976 as a company limited by

guarantee, took over the operations of the Kuala Lumpur Stock Exchange Berhad in

the same year (Bursa Malaysia, n.d).

On April 14, 2004, we changed our name to Bursa Malaysia Berhad, following

our demutualization exercise, the purpose of which was to enhance our competitive

position and to respond to global trends in the exchange sector by making us more

customer-driven and market-oriented. Bursa Malaysia which had been the third

largest stock exchange in the region after Tokyo and Hong Kong (Ali Abbas, 2004).

1.2 Definition

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Short term refers to period or duration in one year or less such 30 days, 3 months

and 6 months (Mishkin, 2009).

Stock market known as common stock represents a share of ownership in a

corporation. It is security that is a claim on the earnings and assets of the

corporation. Holders of common stock or stockholders own an interest in the

corporation consistent with the percentage of outstanding shares owned.

Stockholder receives whatever remains after all other claims against the firm’s

assets have been satisfied. Stockholders are paid dividends as known payments

made periodically, usually every quarter, to stockholder from the net earnings of

the corporation (Mishkin, 2009).

Two type of stocks which are Ordinary Stocks and Preferential Stocks.

Ordinary Stocks you own a share of the company. This entitles you to receive profits

from the operations of the company in the form of dividends. At the annual general

meeting (also referred to as an AGM), you have voting rights. Ordinary stocks are

what you will start to trade in and most traders never venture beyond this.

Meanwhile, the preferential stocks are different because you will receive dividends

before dividends on ordinary stocks are announced. If the company is wound up,

preference stockholders rank above ordinary stockholders in the distribution of

assets. Preference stocks can often have a fixed dividend rate (Bursa Malaysia, n.d).

Bull Market is a stock market in which buyer dominates and where prices

are on a rising trend. Bull markets are characterized by optimism, investor

confidence and expectations that strong results will continue. It's difficult to predict

consistently when the trends in the market will change. Part of the difficulty is that

psychological effects and speculation may sometimes play a large role in the

markets. Meanwhile, Bear Market is a market condition in which the prices of

securities are falling, and widespread pessimism causes the negative sentiment to

be self-sustaining. As investors anticipate losses in a bear market and selling

continues, pessimism only grows (Investopedia, n.d).

Rally is a period of sustained increases in the prices of stocks, bonds or

indexes. This type of price movement can happen during either a bull or a bear

market, when it is known as either a bull market rally or a bear market rally,

respectively. However, a rally will generally follow a period of flat or declining

prices. A rally is caused by a large amount of money entering the market, bidding

up the prices. The length or magnitude of a rally depends on the depth of buyers

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along with the amount of selling pressure they face. For example, if there is a large

pool of buyers but few investors willing to sell, there is likely to be a large rally. If,

however, the same large pool of buyers is matched by a similar amount of sellers,

the rally is likely to be short and the price movement minimal (Investopedia, n.d).

2.0 Short Term prospects of Malaysia’s Stock Market Rally

Short term stock market rally in Malaysia influenced by many factors by past data

history, current and forecasting analysis by the next 4 months from now which are

December, January, February and March. Rational Expectation theory is the

guideline to forecast the rally rather than adaptive expectations. Adaptive

expectations only suggest that changes in expectations will occur slowly over time

as past data change and past data history (Mishkin, 2009).

Rational expectation theory was developed by John Muth an alternative

theory of expectations, called rational expectation which is expectations will be

identical to optimal forecasts using available information (Mishkin, 2009). Thus

Efficiency market hypothesis is just an application of rational expectations to the

pricing of stocks and also to the other securities. This hypothesis based on

assumption that prices of securities in financial markets fully reflect all available

information (Mishkin, 2009).

This available information included three categories of information. First is

past data history by using published data to forecast what will happen using the

past history because history can be repeated. Second information about current

information to forecast what will be happen such as the current issues going around

that will effects the reaction to future. Lastly future outlook determines by forecast

using the two information from past data history and current. So our hypothesis is

based on the efficiency market hypothesis by refer the rational expectations theory

to forecasting the indexes for the short term stock market indexes in Bursa

Malaysia.

2.1 Indexes Hypotheses of short term stock market rally

Our Indexes Hypothesis based on previous history of recorded indexes on Bursa

Malaysia (Table and graph 2.1). Based on the table and indexed chart below, there

are average increased indexes started Month January until June. Next, decreasing

indexes started from June to September. Then the indexes increased from

September to October. Bear Market rally started from June to October. Based on 2.1

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graph, future forecasting for December until March refers to efficiency market

hypothesis. Based on table and graph 2.1, the overvalue recorded on June at

1579.07 points. The undervalue from the indexes is on May that recorded 1387.13

points. The average value between and 1472.10 points and 1579.07 points.

Table 2.1 Resource: Bursa Malaysia Key Indicator

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Months KLCI INDEXES

January 1519.94

February 1491.25

March 1545.13

April 1534.95

May 1558. 29

June 1579.07

July 1548.81

August 1447.27

September 1387.13

Octobers 1491.89

November 1472.10

Graph 2.1 KLCI Indexes (Source: Bursa Malaysia Key indicators)

2.2 Factors that influence future outlook

2.2.1: Economic stability

Economic stability important in the stock market rally in short term prospect. If

Malaysia had good economic stability, the stock market will rally. It’s give the good

sentiments for investor. Back to history when Malaysia had first experienced

recession in 1985 and last in 1999. The history of financial crisis in 1999 starts in

the mid may 1997 caused by the currency crisis that time. Even more drastic than

the plunge in the exchange rate, was the collapse of the stock market. Between July

and December 1997, the composite index of the Kuala Lumpur Stock Exchange

(KLSE CI) fell by 44.9 per cent. Following a slight recovery in the first quarter of

1999, the index again fell, this time to an eleven-year low of 262.70 points on

September 1, 1998. On the whole, between July 1, 1997 and September 1, 1998,

market capitalization in the KLSE fell by about 76 per cent to RM 181.5 billion. In

fact, although it enjoyed the best precrisis economic fundamentals among countries

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Indexes

Months

that were hit by the crisis, Malaysia experienced the biggest stock market plunge in

the region (Mohamed Ariff And Syarisa Yanti Abu Bakar, 1999).

Our economic environment had influence by the international economic

surrounding also. On 2008 economy crisis started in United State caused by

subprime crisis. At that time, Malaysia also effected from this situation. Its lower

export activity because the world demand fall. Thus the Foreign Direct Investment

falls and unemployment rate increased. Obviously the stock market price in Bursa

Malaysia that time decrease started from 2007 to 2008. Based on the graph below

the stock market indexes at 1246.8 indexes decreases to 858.22 indexes.

Resource: treasury department (ministry of financial)

The current economic crisis occurs at EU and US because of debt crisis. It

also effect on the Malaysia economic stability this year. But this situation only

temporary because it will recover. According IMF, expected on growth economic

rates will increase 4 %. Nevertheless, economic growth slow because the growth

rates among advance country such as Japan slow, caused impact from tsunami

disaster and earthquake. So, outlook for Malaysia economy is in good condition at

2012. Then, future outlook for stock market indexes will increase moderate cause

by slow economic growth and expected stock market will rally.

2.2.2: Monetary policy

Monetary policy can affect stock process in 2 ways by using the interest rate as

medium. First, when fed lowers interest rates, the return on bonds which is an

alternative asset to stocks declines, an investors are likely to accept a lower

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required rate of return on an investment in equity. Decline in ke is the required

return on an investment in equity, using the Gordon growth model lead to a higher

value of P0 and raise stock prices. Furthermore, a lowering of interest rates is likely

to stimulate the economy, so that the growth rate in dividends, g is the expected

constant growth rate in dividends is likely to be somewhat higher. The rise in g

leads the higher P0 and rise in Stock Prices ( Mishkin, 2009).

According to Sunny Tan (1989), interest rates are used to stabilize the

economy. A rise of the interest rates can staunch on outflow of capital strengthens

the dollar and dampens the risk of high inflation. But the irony is that high interest

rates discourage business activity involving. When the interest rates falling, shares

prices will be nudged up accordingly. Given a choice, an investor would prefer to

place his money in shares which will earn him better returns in terms of dividend

and capital appreciation. The improvement liquidity position of the stock market is

the result of low interest rates offered by the interest- bearing deposits. Investors

will also be encouraged to borrow more to buy stocks and shares when interest

rates are low. Thus prices of stocks and shares are pushed up even higher.

Monetary policy determined the stock prices. It can impact the as

asymmetries in bull and bear markets. Obviously it gives big effects to Bear market

rather than bull market. Monetary policy can give impact to asset prices and stock

return (Jansen, 2010). The impact of a surprise policy action in a bear market for

most industries is significantly greater than the impact of surprise monetary policy

in a bull market. Controlling for the capacity for external finance, stock returns of

firms in bear states respond more than firms in bull states. Capacity for external

finance is more important in a bear market, as it partially mitigates the larger

impact of monetary policy in a bear market.

Monetary influences the interest rate. Hence, Bank Negara Malaysia (BNM,

the central bank) is expected to continue to make incremental changes to its main

interest rate, the overnight policy rate (OPR), during the early part of the forecast

period as it proceeds with the normalization of monetary policy. The interest rate of

the OPR is influenced by the central bank, where it is a good predictor for the

movement of short-term interest rates. BNM has raised the OPR three times since

March 2010, by a total of 75 basis points, bringing the rate up to 2.75%, after

having cut it to a record low in response to the dramatic downturn in the Malaysian

economy that occurred in 2009. However, the recent sharp appreciation of the local

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currency, the ringgit, and signs of slower economic growth suggest that further

rises in official interest rates in the next few months are unlikely.

BMN does not expect inflation to rise to problematic levels, believing that it

will remain moderate in 2011 as strengthening domestic demand is accompanied

by only a gradual acceleration in the rate of price increases. In 2011 we do not

expect the OPR to exceed the high of 3.5% at which it stood during 2007 and much

of 2008. But a quickening in the pace of domestic demand growth from 2012 will

prompt BNM to raise the OPR above this level during the remainder of the forecast

period to contain inflationary pressures. Based on the expected increase the

interest rate, the short term stock market will effect and it will effects rally on Bursa

Malaysia.

2.2.3: Inflation

Inflation rate is one of factor that manipulate stock market rally. Based on study

case ‘Monetary Policy Analysis Towards Inflation and Capital Market Performance’,

the analysis show that there have some significant effects between interest rate

and the important things is inflation rate give indirect and direct influence of

macroeconomics variable towards return market. Besides that, case study from

Robert S. Pindyck (1983) inflation rate can causes a large part of the market decline

because the variance of firm’s real gross marginal return on capital has increased

significantly, increasing the relative riskiness of investor’s return on equity. Study

case from Spanish by Antonio, et al (2008), about the effects of inflation to stock

market prices was there are the short run responses of daily stock prices on the

Spanish market to the announcements of inflation news at an industrial level. The

result was negative to stock prices. It means that, the investor fall their investment

to the stock market.

The current inflation rate for November was last reported at 3.4 percent. So,

our forecasting is inflation rate have negative relationship with stock rally market

because it will discourages investors decrease their investment and it will effect the

stock market indexes and rally will effect.

2.2.4: Dividend

Dividend is one factor that influences stock market rally in Malaysia. According to

Bursa Saham website Malaysia dividend refers to the payment or income that

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person receives as a shareholder from the company or by a corporation. It is the

portion of corporate profits paid out to stockholders. Tan. S (1989) the original

objective in investing in stocks and share is the expectation on getting dividend at a

fixed period. As situation change so does the investor’s expectation.

The dividend pay-out is not guaranteed and where it exists at all, the amount

you’ll be given will be different from company to company and year to year. For

example, high-growth companies seldom offer dividend because all of their profits

are reinvested to help maintain higher-than-average growth. Conversely, larger

companies have less potential for quick capital growth but are more probable to pay

healthy dividends which are steadily rising as the years go by.

Company’s Board of Directors has an authority to approved declaration of

any dividend before it is being paid to stockholder. The day that the Broad of

Directors announces its intention to pay a dividend is called as declaration date. On

the declaration date, the Board will also announce a date of records and payment

date. They are three types of declaration date of dividend which are interim, first

and final and final dividend. Firstly, interim dividend refer to a dividend is paid out

by the corporation when the directors have received the half year financial result.

Secondly, the first and final dividend is the only dividend paid out for that financial

year. Lastly is the final dividend is paid when the final profits are shown in the final

accounts.

On our studied, expected declaration date dividend for stock by companies’

in Malaysia will be on March 2012. Based on previous studied “Dividend policy and

stock price volatility” in Pakistan by Muhammad Nishad et al (2002) mention that

they are relationship between the dividend policy and stock price, if the dividend

policy is stable high dividend stock will have shorter duration.

On our hypothesis, before the dividend announcement stock market will be

increase until the time of announcement, after the announcement the stock market

expected to be stable than falls. Once the dividend has been declared, a listed

corporation must not make any subsequent alteration to dividend entitlement. A

listed corporation must ensure that all dividends are paid not later than 3 months

from the date of assertion or the date on which approval is obtained in general

meeting, whichever is appropriate.

2.2.5: 2012 Budget

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From the evidence that we have found, 2012 budget that have been read out by

prime minister Datuk Seri Najib Tun Razak as a minister of finance on October 2011

it is also the factors that influence the stock market rally in Malaysia. Berita harian

news by Kaladher Govindan mention that the stock market will be increase because

2012 budget gives all benefit to all resident of Malaysia whereas to government

servants, students, driver taxi and so on.

After the announcement 2012 budget, bursa Malaysia FTSE increase 12.92

more point or 0.93 percent and close on 1400.05 point with Axiata (+19 cent),

Maybank (+18 cent), IOI Corp (+17 cent) and tenaga (+1 cent) it represent almost

the index total rising. Same goes to Utusan Malaysia news on 9 October 2011, price

of stock at bursa Malaysia will expected to increase after the “Malaysian friendly

budget” or “people centric budget” announcement by government.

2012 Budged also gave impact to the stocks of United Malaya Land Bhd,

Malaysian resources Corp Bhd and Gamuda Bhd and to education stocks such as

Seg International Bhd and help International Corp have a benefit from the

announcement of budget 2012. Before the announcement 2012 budget there is

stock market rally happen in bursa Malaysia mention by Dr Nazri Chief research in

Affin Investment bank (Bernama, October 2011)

On our expectation to stock market rally on 2012 budget will raise because of

the benefit that resident and nation will accept on next year. On budged 2012

stated they are many developments on economy Malaysia will occur on 2012 such

as development on infrastructures, development project and so on. On the other

hand, lowers charges income tax give a very impact to investors encourage them to

buy more stocks on along 2012 with outlook our economic condition is good. So, our

forecast on four month future outlook is the stock market will rally.

2.2.6: Election and political

Election and political factor also manipulate the short-term stock market rally in

Malaysian. The past data from journal it proven that political and election have give

impact to the short-term stock market. Case study from Stock Market Volatility

Around National Elections by (Jedrej Bialkowski et al. 2007). The findings from the

journal is that Country-specific component of index return variance can easily

double during the week around an election, which shows that investors are

surprised by the election outcome. The magnitude of the election shock also was

10

contribute by factors of a narrow margin of victory, lack of compulsory voting laws,

change in the political orientation of the government, or the failure to form a

government with parliamentary majority significantly. Besides that, some evidence

is found that markets with short trading history exhibit stronger reaction. Instead of

that, same result goes to case study from Taiwan (Cameron A. Shelton, 2008). On

election campaign, the investors will courage to bought stock market because they

have confident to the party that will give incentive to the economy. So, it has

proven that election and political have positive relationship.

In Malaysia, our current political is stable although there have demonstration

from opponent party such as demonstration ‘Bersih’ but the government still can

control this situation. Then, our general General election (GE) speculated to be held

within the next few months. GE could cause a spike in the market risk premium

(MRP) again like the last GE that leading to a weaker market (Liz Lee, 2011).

Nomura Research in its Malaysian Outlook 2012 report said that GE is the most

important event for the market for 2012. It is because MRP rose by 232 basis points

between December 2007 and March 2008. The market also plummeted 10% in the

first day of trading after the March 8 election. Although there are good sentiment

for investor from other country but in Malaysia, election and political gave bad to

stock market in Bursa Malaysia.

In nut shell, our forecasting for four month outlook on short-term stock

market index at Bursa Malaysia will not rally because of the election factor. It is

because, it not give sentiment for investor to invest and it will effect stock market

index. Maybe, it caused by the uncertainty of investor to invest because of their

political view.

2.2.7: Festival

Festivals also persuade the rally of stock market in Bursa Malaysia. Within in four

month, our country will celebrate two main festival which are Christmas on 25 th

December and Chinese New Year on 24th January.

Chinese New Year (CNY) can causes highest return in March and April (Lei

Gao and Gerhard Kling, 2005). The situations happen in China because Chinese

investors are ‘amateur speculator’ who often embezzles business fund for private

trading. It means that these funds are used for short-term speculations before they

are paid back prior to weekends. Correspondently, the Chinese stock market

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reaches its peaks shortly before the money is withdrawn. It means that the money

is withdraws close to CNY in February and afterwards additional money flows into

the market. Researcher of this journal also conclude that the Efficient Market

Hypothesis can be confirmed for current period as long they are focus solely on

calendar anomalies.

However, Sunny (1989), the Chinese New Year and the Rally are two distinct

subjects which do not come together to make a Chinese New Year Rally. The

Chinese investors are too busy preparing for their once- a year big celebration and

have little or no time to get themselves involved in the stock market. Moreover

liquidity at this time of the year is tight. They prefer to be free from tension and

anxiety of monitoring the market during this period of the year which is considered

most significant to them.

Based on the contrast result of Chinese New Year, we had decided that there

are average increasing in the stock market during Chinese New Year. Even though

there good and bad information, we still forecasting the indexes will increased a

little. Although their busy to do their preparations but prosperity is important. They

psychology also influence their reaction to gain more money during festival

One more celebration on December 2011 is Christmas. According to The Star

(2009), at the end of the year, the market will be a bullish market. It is because

November through January tends to be the best three-month span for stocks (The

Star,2009). On 2010 the stock Market in the Bull Market. Moreover, based on US

stock market, the end of year is most reliable rallies of the year because probability

is very high. The investor who might normally sell stocks for tax purposes late in the

year could be more likely to hold off this time around. So, Christmas is not one of

major factor of stock market but people may say opposite with this statement. The

true is Christmas is in month of the end of years.

3.0 Conclusion

As a conclusion, our forecasting for 4 months is average increase but not achieve

the highest value of the indexes on June with had been recorded the over value of

indexes at 1579.07 points. Thus, our hypothesis the indexes will not decrease below

the undervalue that recorded on September at 1387.13 points. Our forecasting for

December, January, February and March is on average value between 1472.10

points and 1500 points.

12

We conclude that based on factors such as monetary policy, economy

stability, dividend, 2012 budget, election and political, festival and interest rate that

influence stock market is averages rally. From the graph, our prediction starting on

December until March, the graph indexes increases start December to March. Even

though interest rate and inflation rate effects the rally but we confident that this

situation not give big impact to rally. The sentiment from factor such as economy

stability, dividend, election and political, festival and more 2012 budget will give

impact to the investor to invest.

jan febmarc

hap

ril may junejuly

augu

st

septe.

..

oktober

nove...

Dece...

January

Febuary

March

1250

1300

1350

1400

1450

1500

1550

1600

Index Pasaran Saham di KLCI

indexes

Graph 2.1 KLCI Indexes (Source: Bursa Malaysia Key indicator

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13

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