Example 3: Index -- KLCI
This example is interesting.
Prior to 30th Jun 2015, there were rumours about a possibility of downgrade in Malaysia credit rating by Fitch. First the earliest rumour was during March published in Bloomborg: Fitch Sees More Than 50% Odds of Malaysia Downgrade on 1MDB. Since then, KLCI has been declining continuously.
Next, the "drama" has come to the point where a review will be completed by the end of June. When the due date is approaching, more negatives news about a possible downgrade since 1998 were released, causing fears in the market sentiment.
Now the review outcome was announced. As reported in The Edge, Fitch has maintained Malaysia rating at A- and upgraded the outlook from "negative" to "stable". This is in sharp contrast to the market's expectation.
What now? What did the news tell you prior to the outcome? The coverage was all about a high possibility of downgrade. What will you do if you trust the media? Knowing that the stock market would plummet, you would sell all, hold cash or buy put warrant. However what actually happened was on 1st July 2015, KLCI gained more than 20 points, something that you don't see for at least 6 months.
What about myself? I don't buy any of this news. Think about this:
1. If they really want to downgrade, will they let you know in advance so that you have time to sell? Frankly, although Malaysia is a "commonwealth" country, but "wealth" is not meant to be "common" in reality.
2. Even if there will be a downgrade, provided that the media were covering this, the effect would have been "adsorbed" by the market since then, and the opposite trend may happen just like the case of AUD:USD.
3. Seriously, who cares about Malaysia rating? Perhaps they couldn't care less about this.
This comes from experience though. After reading all rumours, I recalled what happened in August 2011 where US was downgraded without any preceding news. That did cause a small bear in the global market. You will have no time to sell should there be a “real downgrade". This is why I know there would be no downgrade. However I did not dare to all in when the market dropped, but this is still better than previously where I just followed other people to panic sell.
[to be continued]