Foreign fund inflows seen continuing in 2018

In 2017, while the FBM KLCI may have been the second worst performing Asian stock index, after China’s Shanghai Composite, it’s not all gloom and doom.

The Malaysian equity market did in fact do fairly well when compared with three years of negative growth between 2014 and 2016.

Foreign investors have pumped in a net amount of RM10bil into Malaysian equities this year, the highest compared with other countries in South-East Asia.

While RM10bil may seem a huge figure, it should be compared with the total foreign fund outflows from Malaysia’s equity market of RM29.7bil from 2014 to 2016.

Hence the RM10bil inflow this year makes up only around 35% of total net outflows recorded in 2014 to 2016.

In 2016, there was a net foreign fund outflow of RM3.2bil from Malaysian equities, but this was mild compared with the bloodbath that hit the market in 2015, the year in which foreigners took out a net amount of RM19.7bil from the market.

Net outflow of foreign funds in 2014 was recorded at RM6.8bil.

As for the ringgit, many point to it being an unseen gem and can no longer be ignored by investors in 2018.

The currency depreciated by about 35% against the US dollar from January 2014 to September 2015.

According IMF PPP metrics, the ringgit remains significantly undervalued – by more than 60% to the greenback.

The ringgit has gained almost 10% this year, trading at 4.05 per US dollar, making it one of the best performing currencies in the region.

“The Malaysian ringgit benefits from an attractive long-term valuation and from higher commodity prices.

“But there is some lingering political risk around next year’s election,” says Schroders Investment Management Ltd in a report.

The strong pick-up in foreign investments in Malaysian equities could continue into 2018, as global fund managers’ appetite for emerging markets are expected to remain strong, driven by economic growth and low inflation rates.

For instance, according to a Bloomberg survey of 20 investors, traders and strategists, bonds and equities in developing countries will continue to streak ahead, outpacing their developed-nation peers in 2018.

Schroders points out that improving global growth and low inflation will support investment flows into emerging markets.

These funds will especially go into local bonds and specifically into countries with higher real yields such India, Indonesia, China and Malaysia.

“We expect bond markets of more developed countries to perform only somewhat better than the US bond market.

“Taiwan, Hong Kong and South Korea bonds should be more range-bound,” it says.

First half rally