Why had the Malaysian stock market done so badly from 2014 to 2018?

In June 2019, the FBM KLCI had fallen in four of the last five years (2014 to 2018).  Why had the Malaysian stock market done so badly?

One of the biggest reasons had to be underlying earnings, which were the main driver of stock prices over the longer term.

Period of 5 years (2014 to 2018)

855 companies were categorised into their respective sectors 

-  To determine the profit trend and the compound annual growth rates (CAGRs) for each sector.  

-  The sector net margin for each year was also tabulated.

Findings:

Total net profit for all companies fell in 2015, 2016 and 2018 - the CAGR of the decline was 6.8%.  

Net profit margin too had contracted sharply over those five years, from an average of 11.3% in 2014 to 7.7% in 2018.

The years in which total net profit fell were also the years in which the FBM KLCI and broader-based FBM EMAS Index ended in the red.

Share prices and P/E valuations

Notably, the share prices declined but the size of the drop was lower than that for earnings.  

The result was the price-to-earnings valuations were higher in 2018 than they were in 2014.  

And this was why the stock market was underperforming - valuations were not attractive even though share prices were lower.

It also meant a turnaround was unlikely until there is a broad-based earnings recovery.

Sector Analysis (2014 to 2018)

Energy (oil and gas) sector fared the worst in terms of profits, given the sharp fall in crude oil prices and resulting collapse in global exploration and production activities.  Brent crude fell from US$110 a barrel at its 2014 peak to below US30 during the lows in 2016.  Oil prices were hovering around US $60 a barrel in 2018.

Plantation companies' profits too were affected by commodity prices falling 15.6% annually, on average, since 2014.  Crude palm oil fell from an average price of RM 2,400 a tonne in 2014 to RM 2,170 a tonne in 2015.  CPO prices recovered to RM 2,630 and RM 2,800 in 2016 and 2017 respectively before dropping back to RM 2,240 a tonne in 2018.

Construction, consumer products and services, properties, transport and logistics, utilities, telecommunications and media and even real estate investment trusts reported negative profit growth between 2014 and 2018.

Healthcare (15 companies)  was the best performing sector with a CAGR of 5.7% in their profits.

Financial services (34 companies) grew at a CAGR of 4.3% in their profits.

Technology (81 companies) expanded just 2% in their profits.

Industrial products and services (239 companies) is the biggest sector by number of companies and its profits were up only 0.4% a year.

Consumer products and services (183 companies), their profits fell 2.3% annually on average.

Property companies' profits declined at an average of 3.1% annually for the past four years.

Summary:

The energy and plantation sectors are heavily influence by external factors.

Overall, the average Malaysian company had not fared well at all from 2014 to 2018.  

Net profit margin for all sectors declined throughout the five-year period from 2014 to 2018.

Underlying earnings were the main driver of stock prices over the longer term.