JP Morgan Chase Says Malaysia Is A Safe Refuge

And they’re sorta right, though I wouldn’t put too much credence in the idea of a “weak correlation”. Correlations have a way of reversing just when you least expect them to, and when you can least afford it. To turn that old chestnut on its head, the absence of correlation does not necessarily imply a lack of causality. Correlations are also highly sensitive to the sample you choose – relying on them isn’t a great idea:

Malaysian Stocks Offer Foreigners ‘Safe Refuge,’ JPMorgan Says

July 28 (Bloomberg) -- Malaysia’s stock market is a “safe refuge” for foreign investors seeking shelter from volatility in other Asian markets because of its domestic economy and defensive qualities, JPMorgan Chase & Co said…

…The Malaysian market has “defensive characteristics such as low volatility and weak correlation with major indexes,” he said. “The market is back on a high; we see evidence of foreign monies trickling in based on foreign incremental buying and ownership levels.”

Foreign ownership in Malaysia’s market rose to 20.6 percent at the end of June from 20.3 percent in February, signaling a pickup in net buying by foreigners, Oh said.

What The KLCI Says About Economic Policy

Usually it doesn't.

Teoh Kok Lin makes that point today (emphasis mine):

"BUDGET 2010 was, shall we say, not that warmly received by the man in the street. Some pointed out that the budget gave few goodies to the rakyat or businesses compared with previous years, hence it was not as good and that’s why the stock market was down 0.5% last Monday.

I believe a slight disappointment with the budget played a small role, if any, in the stock market. However, I am perplexed how one can infer from “one-day” stock market movements whether the budget is good or not."

To be more rigorous about it, here are the stats on the log difference in daily closing for the KL Composite Index (sample: January 2000-September 2009):



The two stats of interest are the mean (0.0001) and the standard deviation (0.0096). The observations show that daily changes are approximately normally distributed somewhat more leptokurtic than a normal distribution (from the Jarque-Bera stat "peakier" with a kurtosis stat > 3), with a mean of zero:



Using a 95% confidence interval and the standard deviation of 0.0096, we get:

(1.96 x 0.0096) x 100 = 1.88%

Which means that any movement plus/minus 1.88% is just the normal daily trading range for the KLCI, and doesn't say anything at all about the budget, RPGT, credit card taxes, fuel prices, commodity prices, the US dollar, Tun Mahathir's comments, corruption, politics, or Samy Vellu's hair (or lack thereof).

Edited (changes in blue): The actual distribution of changes has a greater central tendency than a normal distribution. Thanks Hafiz!