Is the presence of foreign funds for real this time?


IN investment, hindsight has little value other than to provide excuses. However, when something from the past looks like being repeated, hindsight can be useful. 

Take the descent of foreign investors on the local stock market over the past few weeks, which many see as one of the reasons for the market having risen significantly.  

The events of the past few weeks bear a resemblance to what happened just over ten years ago, when the stock market exploded.  

I first heard the message just over ten years ago, as a rookie business reporter then. It was played over and over again at seminars and presentations by foreign stockbroking houses. 

In recent weeks, this message has again been played loud and clear; I can’t help but feel a sense of déjà vu. 

So the question is: are the foreign investors really interested, or is it to get investors interested in the market? 

The only certainty so far is the inflow of portfolio funds into the country, as reflected in Bank Negara's statistics on international reserves (see chart).  

The chart indicates a positive trend since last year, the inflow of portfolio funds helping improve our international reserves. But, because Bank Negara does not provide a breakdown, there is no way of knowing the actual amount that has flowed into the country.  

And, anecdotal evidence is few and far in-between. First, it was the rise of oil and gas counters last year, then the investment theme switched to water play, and more recently, to timber stocks, which had been in slumber for some time. 

Also, how could one explain the decision by advisors of CalPERS – the California Public Employees' Retirement System, which had earlier pulled out from the Malaysian market – recommending a return? 

Stock market seminars are the rage now, and all indicate that foreign funds are here – a situation quite similar to that about 10 years ago. 

But, whatever arguments analysts and market observers use to indicate the large presence of foreign funds in the country, and their role in determining market direction, one cannot run from the fact that market fundamentals are now ripe for such exploits. 

First, look at the performance of the local bourse, which has been considered a laggard in the region. Some argue that foreign investors, having made Thailand “a star” performer last year – and having made their money there – are now looking for new play. 

A fund manager said Taiwan and Malaysia were favoured now because these markets had not risen as much, and the upside potential was, therefore, huge. 

At the same time, the local market is strongly supported by local funds, which limits their risks should it fall.  

Second, what could be attracting foreign investors is Malaysia's economic growth. Telling evidence that the economy has picked up can be adduced from the strong cars sales, especially of luxury cars.  

Recently, Proton announced that it would raise production of the new GEN.2 models to 100,000 units to meet demand. Also, most luxury carmakers were predicting a bumper year given the strong orders in the first few months this year. 

SAnother important point foreign investors note is the stable government, which ensures continuity in policy. No foreign fund likes to face the situation where it wakes up the next morning to see its investment reduced to rubble. Although Malaysia has its risks like other countries, the benefits far outweigh the risks. 

More importantly, after the financial crisis, Malaysia's securities regulations had been overhauled, providing further stability for investors.  

And finally, even if foreign investors disagree with the above arguments, one last point will convince them. It is the ringgit.  

Since late last year, economists worldwide, whether independents or from stockbroking houses, had argued relentlessly for China to revalue upward its currency. As Malaysia also pegs the ringgit to the US dollar, this country will follow any move by China closely, they reason. 

So, for foreign investors, even if the stock market fails to shine this year, they will still come out winners if they bet that the ringgit will be revalued upwards. Imagine having their equity investment going up as the ringgit appreciates. 

This alone could be one of the reasons for the calls by many regional economists to the two governments to revalue their currency. 

So far, Bank Negara sees no need for a repeg of the ringgit, but this does not stop some analysts from harbouring hope that the situation can change later.  

In the world of currency trading, where 95% of the activities are dominated by currency speculators, the hope is that China will knuckle down, and Malaysia follow suit. 

This alone is compelling enough for foreign investors to consider Malaysia this time round. For local fund managers or small time investors, the least they can do is to catch the wave. 

If anything can be learnt from the situation ten years ago, it is vigilance. One must get off the wave while the going is still good. 

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