PETALING JAYA: The Malaysian equities market recorded a whopping RM13bil in net outflows of foreign portfolio funds over a 15-month period, and industry experts remain divided as to whether this negative trend will continue.
According to data released by Bursa Malaysia, the highest outflow in the May 2013 to July 2014 period was in August 2013, when RM6.8bil left the market.
It was due to expectations that the US Federal Reserve would cut its asset purchase programme, which it announced the following month. The Fed signalled that it would be ending its asset purchase in October 2014, with a final reduction of US$15bil (RM48bil) in monthly purchases of US Treasuries and mortgage-backed securities.
However, industry experts are unsure if it will be completed by then.
Following six consecutive months of net outflows since last October, there were three consecutive months of net inflows, leading some economists to reckon that there could be a reversal of the negative position.
However, latest figures showed the market experienced a net outflow of RM300mil in July 2014.
Alliance Research economist Manokaran Mottain still maintains that Malaysia will see a steady inflow of funds.
“In the next three to six months, we still think fund flows will be steady into the region, especially Malaysia,” he said.
One reason for this, he added, was that US data were “not that promising”.
“There is no firm recovery of the US economy yet. As long as there are uncertainties there, fund inflows into Malaysia will continue. But as soon as there are indications that the US is going to raise interest rates, we will see an outflow from here,” he said.
However, Fortress Capital Group chief executive officer Thomas Yong expects more foreign equity outflows for the remainder of the year.
“The Malaysian equity market had been a shelter for investors when there was concern over where growth is. But in the second half of the year, optimism seems to be returning to regional markets, so we may see fund managers switching some of their funds from Malaysia,” he said.
He added that there were indications late last year that regional markets could see a correction, which led to funds taking shelter in Malaysia, which fund managers considered a low-beta market.
Although there could be a reversal in flows, Yong does not expect a major selldown of Malaysian equities.
“Overall, it may not actually mean that our market will see a decrease, but it will limit our market’s upside potential. Additionally, the Malaysian market is more expensive compared with the region in terms of price/earnings valuations,” he said.
Manokaran added that the outflow in July was a knee-jerk reaction to Bank Negara raising the overnight policy rate (OPR).
In mid-July, the central bank raised the OPR by 25 basis points (bps) to 3.25%, acknowledging the need to address financial imbalances.
Economists reckoned there could be another OPR hike of 25 bps either this year or next.
“The 25 bps rise in OPR recently will likely improve Malaysia’s attractiveness among foreign investors, leading to stronger capital inflows, lower bond yields and an appreciating ringgit,” said Manokaran in a recent report. “So, these are plus points for funds to flow into the region.”
Meanwhile, the International Monetary Fund (IMF) recently cut its growth forecast for the United States this year to 1.7% from 2% predicted in June, citing a first-quarter contraction, after a 1.9% advance last year. However, the IMF left its 2015 forecast at 3%.
“The situation in the US is not really confirmed. The IMF lowering its growth forecast as well as indication that interest rate hikes will be deferred to 2015 are not positive news,” said an analyst.
In Malaysia, improved growth projections as well as the recent hike in interest rate led to the ringgit appreciating slightly to RM3.202 per US dollar yesterday.
Manokaran believes that the ringgit will trade between 3.16 and 3.22 to the dollar in the short term and will likely stabilise around 3.25 by the year-end.
In its weekly fund flow report dated July 21, MIDF Research noted that global liquidity continued to ςow into Asian equity despite increasing geopolitical risks.
“Data from the seven Asian exchanges that we track (South Korea, Taiwan, Thailand, Malaysia, Indonesia, the Philippines and India) show that funds classiρed as ‘foreign’ bought, in net aggregate, US$1.67bil (RM5,3bil) of stocks in these markets. However, this was lower than the US$2.63bil (RM8.4bil) purchased the week before.”
Manokaran voiced concern over geopolitical risks, which would only delay recovery in the US and in Europe.
“This may be in line with our expectation of slowing global GDP (gross domestic product) growth,” he said.