PETALING JAYA: Although foreign investors have been net sellers of both the equities and bond markets so far this year, the outflows are expected to reverse in the next few months.
Analyst and fund managers said the outflow of money was not only unique to Malaysia and that there were several external factors that have contributed to investors selling down on emerging market currencies.
MIDF analyst Adam Rahim expected the situation to be better for Malaysia when the new government announces its economic policies and firms up the list of Cabinet ministers.
He said Malaysia has seen the least amount of outflows from the equities market from January this year until June 15 compared with other markets in the region.
“There is a political factor to the outflows. But the political factor is not that big if compared to a slew of external factors that are affecting the flow of funds out of emerging markets.
“The trade wars between the US and China, uncertainties over (President) Donald Trump’s decision, the Federal Reserve raising interest rates and the US dollar strengthening are among the factors,” said Adam, who tracks the flow of funds in the region.
Between January and June 15 this year, the net outflow of foreign funds totalled RM4.23bil (US$1.06bil).
In the region, the worst performer is Taiwan, which has seen a net outflow of US$6.23bil from the equities market up to June 15 this year.
Thailand has seen an outflow of US$5.12bil, followed by Indonesia with an outflow of US$3.15bil and South Korea with an outflow of US$2.99bil.
Adam also pointed out that the outflow of funds from the equities market was no different from the previous general election in April 2013 where foreigners came in a big way a few days after the outcome and later pulled back until the year ended.
“On the first trading day after the GE13, foreign flow of funds was RM1.43bil in a single day. Later the money started flowing out,” he said.
In 2013, the currencies of emerging markets came under pressure because the US signalled that it was ending its ending its quantitative easing policies, which caused a flow of funds back to that country.
While Malaysia is least affected in the equities market, it is the worst performer in the bond market with a net outflow of US$2.8bil (RM11.2bil) up to end May this year.
In contrast, Thailand and South Korea have seen an inflow of funds into their respective fixed-income markets of US$400mil and US$5.1bil up to May this year.
But fixed-income strategists are optimistic on Malaysian bonds, going forward, as they see an appreciation of the ringgit.
Maybank KE fixed-income analyst Winson Phoon said for investors with medium to long-term view, it was actually a good time to buy into Malaysian bonds.
But they would have to bear with the short-term volatility as the new administration continued to unveil negative information about the state of the country’s finances, said the Singapore-based Phoon.
“We see the release of these negative information as a kitchen sinking exercise; we expect this to go on in the first few months under the new government but after that, things will normalise,” he added.
Senior currency trader and analyst with OANDA, Stephen Innes, described the current level of ringgit as a good point to take position with investments in fixed income.
He said the ringgit did not react negatively when there was a trade war between the US and China, unlike other currencies such as the South Korean won and the high-yielding Indian rupee.
Innes pointed to two factors that would lead to a stronger ringgit in the months to come.
Firstly, he felt that the political risk was likely to be contained in the short term. The other factor, said Innes, is that the price of oil would likely go up to about US$85 per barrel.
“I like the ringgit for the longer haul,” said Innes.
CIMB fixed-income research said it expected the new policy direction under the Pakatan Harapan-led government to aid the local bond market. It further noted that Malaysia’s debt levels remained manageable.
“There has also been the ongoing debate regarding the reclassification of contingent liabilities but our core view to this is that Malaysia continues to focus on debt reduction, which is important to paving the fiscal and debt pathway towards an improved position,” CIMB said.
“Furthermore, Finance Minister Lim Guan Eng has come out to share that the target fiscal deficit-to-GDP ratio will remain intact at 2.8% for 2018.
“All in, we are positive on the details and we think these should aid sentiment in the Malaysian bond market and thus far, yields have been rather well-behaved,” it added.
According to CIMB, macro conditions in Malaysia were still supportive of the local bond market. It noted that Bank Negara’s monetary policy statement post-election sounded sanguine on economic prospects.
“While awaiting the government’s fiscal reforms, we maintain our 2018 GDP growth forecast of 5.2%,” CIMB said.
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