A study on stock market trends of plantation securities and its relationship to the performance of the Malaysian economy

Abstract

This study is set forth with a twin objective, viz . to test the "follow-the-leader" and "leading indicator" hypotheses as applied to the Kuala Lumpur Stock Exchange's (KLSE) plantation share prices . Simple Pearson product-moment correlation technique, with lags , is used in both parts of the study. In the first part , the general belief that the movements of the KLSE follow those of other leading world bourses and bourses in Malaysia's major trading partners are tested . In general , the results obtained in the June 11976- September 11983 period studied support this conventional wisdom . Slight divergences to this general observation occur in some cases, especially with some of the mini-bourses of Asia and Europe . The strength in the correlation coefficients (r) displayed by the KLSE Plantations index are strong with respect to the constantly referred markets (Wall Street, Tokyo, London, Hong Kong and Singapore) , ranging from 0.794 to 0.983. Lagging observations on the major bourses consistently show significantly high and stable correlations, implying that taking the cues from leading overseas lead is one factor that affect the KLSE's sentiment and direction . However, indirectly this 'follow-the-leader' phenomenon may not be done indiscriminately after all . The 'concealed' underlying forces that shaped the higher values obtained may be attributable to, among others, the dual or multiple- listings of some shares (e.g . Sime Darby) on more than one exchange whose movements are manifested in their respective share price indices ; and expectations in rises in price of rubber, presumably following the interplay of the demand/supply forces for the industrial raw material by rubber goods manufacturers (e . g . B.F. Goodrich) in industrialised economies. The results also highlighted the superiority of some indices over others, e.g. of NYSE Composite index over the widely followed Dow Jones Industrial Average, and FT-Actuaries 500 index over the Financial Times Industrial Ordinary index. The second part of the study deals in brief with the macroeconomic parameters (by components, financial and monetary aggregates, and also rubber prices) to which highly positive correlations are obtained with respect to KLSE Plantations index, i.e. within the 1972-11932 study period. In the 'leading indicator' exposition - using data covering from 1967(I) to 1983(IV) with respect to quarterly GNP, and January 1972-June 1984 with regards to monthly averages of rubber and palm oi 1 prices - the corresponding KLSE Plantations index marginally leads the GNP by two quarters, lags behind rubber prices while palm oi 1 prices tend to act more as an equilibrating factor on the basic trend of the plantation share prices. In general, the scenario on the basic trend.s is one of rubber prices and plantation share prices moving in close concert (with rubber leading the way slightly), followed by the general movements in palm oil prices. This pattern diverges markedly during the 1974-(II)-1977(III) and 1983(IV), periods, i.e. with respect to the inverse relationship between the two commodity prices, with palm oil exerting a 'cushioning' effect to the falling rubber prices and the overall economy. A. closer examination on the stock market crashes in 1973 and 119811 reveal that the economic preconditions prior to the two crashes differed quite markedly. As a whole the plantation shares are relatively not badly-hit by the crashes, thanks largely to the equilibrating effect of the buoyant palm oil prices . Some lessons from the crashes 8.re drawn which may prove to be of importance to policy makers and investing public at large. To sum up, this piece of work is hoped to provide some background to the nature and behaviour of KLSE's plantations sector and the experiences during the stock market crashes. Further studies are called for to substantiate these findings before concrete policy implications can be safely drawn. As such, developing predictive econometric models based on economic fundamentals (including spot and future prices of rubber and palm oil) and evaluating the impact of the takeovers of foreign-owned plantation companies by Malaysian interests are deemed necessary. Show more