Patience is the word for Bursa investments

AGAINST overall confidence in the economy, patience is required for Bursa Malaysia to gradually climb while investors eye fundamentally good stocks.

The rout in emerging markets (EMs), outflows due to a strengthening dollar and dampening effect of the trade war, among other factors, have made the situation worse. Moderation in global growth will likely impact corporate earnings which already saw a lot of companies dipping into the red.

Foreign investors, mostly spurred by quick and strong gains, also fled the local market on uncertainties over government revenue and debt repayment, exacerbated by problems at 1Malaysia Development Bhd. Once the clouds clear up, especially after 100 days for the new government to announce reforms, the investment horizon will likely improve.

Internally, things may get better but against the external challenges, will the foreign funds still bite?

“Malaysia will attract more foreign investors as the new government will do its best to make the country a conducive place for business, with more transparent policies and better governance,’’ says Danny Wong, CEO, Areca Capital.

“Malaysia will only be able to gain the favour of foreign investors step by step, over time. Payoffs from institutional reforms, fiscal prudence and better governance will work more slowly, and lack the immediacy of growth that characterises spendthrift policies,’’ says Pong Teng Siew, head of research, InterPacific Securities.

Foreign investors will benchmark Malaysia against other EMs. “Fundamentally, what will attract investors are sound, sustainable and predictable macroeconomic policies, good growth, fiscal discipline, ability to repay debts and good governance,’’ says Lee Heng Guie, executive director, Socio Economic Research Center.

Financially, the pull factors are high rates of return, steady corporate earnings and good management.

“Maintaining fiscal discipline and sanctity of government contracts will strengthen Malaysia’s appeal. Unfortunately, the global climate will continue to be risk averse,’’ says Vincent Khoo, head of research, UOBKayhian.

Do we actually need these foreign funds? There are mixed views, indicating that the advantage of having these funds remains a question. “Even though Malaysia has a large pool of institutional investors, foreign participation is essential to reflect its credentials,’’ says Thomas Yong, CEO, Fortress Capital.

“Foreign funds like quick returns; unsustainable spendthrift policies that give a ‘steroid’ boost, are usually popular with these funds. There will be a price to pay as foreign funds will quickly dump Malaysian assets the moment cracks appear as a result of such unsustainable policies.

“It is better they leave now than leave in a greater hurry later, and pull the rug from under our feet,’’ says Pong.

Can Bursa sustain on local funds?

“It may be a gradual climb,’’ says Pong. “There is a potential upside of 130 points on the main index in the next 12 months.’’

With the nonparticipation of construction, property and plantation sectors, it may not be an outright bull market; volatility is expected in the short term.

“This is a period when the financial market is trying to digest all sorts of new developments with regard to the new government’s policies, where a comprehensive assessment on the fiscal position, debt and cost of living, among other things, will be made,’’ says Nor Zahidi Alias, chief economist, Malaysian Rating Corp.

There are growing fears (although not all would agree) that the on-off trade war between the US and its allies, after China, could spark a global crisis. Bursa may not be spared.

“It is intensifying; based on past experiences, trade wars will adversely affect global growth,’’ says Zahidi.

“It is already happening; if these tit-for-tat tariffs escalate disproportionately, they will damage the global economy. Trade barriers lead to a domino effect among consumers and trading partners,’’ says Lee.

“The Trump administration is well-known for haggling with trade partners but would stop short of engaging in a full-blown trade war,’’ says Khoo.

Amidst the noise, it is noted that US debt levels have surged tremendously; they do not want to be just consumers.

“The global trade war is a follow-up expression of the unwillingness of the US to supply liquidity to the rest of the world at the expense of its domestic jobs and industrial base. (Global liquidity has shrunk in the past four weeks, seen in the fall in total central bank reserves globally).

“Post World War 2, it had retreated into a consumption-based economy precisely to play the role of consuming goods produced by the rest of the world; its debt levels have piled up so high that they pose risks to the sustainability of that model.

“A reset to the global financial system appears necessary but no substitute to the US dollar has yet emerged and this is a dilemma,’’ says Pong.

Columnist Yap Leng Kuen notes the troubled waters we are in.