Malaysia sees relief after drought of foreign portfolio flows

KUALA LUMPUR: Foreign investors are slowly coming back to Malaysia after a sell-off last year, attracted by reduced political tensions, the market pricing and hopes for better returns after economic growth picked up in late 2018.

Malaysia's stock market fell 6 percent last year as worries about Federal Reserve policy tightening and a U.S.-China trade war weighed on Asian economies. Also, Mahathir Mohamad's shock election win over the coalition that ruled Malaysia for six decades caused some uncertainty.

In the first two months of 2019, overseas investors bought a net $40 million of Malaysian equities, data from Bursa Malaysia exchange showed. They sold $2.7 billion of Malaysian equities in 2018.

"Slowly over the months, they (the government) have shown themselves to be more transparent. They are being methodical about the type of corruption they have to root out and there is going to be much more accountability focusing," said Monem Salam, deputy portfolio manager at Washington-based Amana Funds.

"That is what is guiding the confidence back."

Mahathir's government unveiled a five-year plan to clamp down on corruption and introduced laws to regulate political funding and lobbying.

The measures were aimed to boost investor confidence after a multi-billion-dollar graft scandal at state fund 1MDB helped bring down the previous government. Malaysia reported 4.7 percent annual growth in October-December, the fastest in three quarters.

Inflation is not an issue; in January, consumer prices were 0.7 percent lower than a year earlier. During 2018, the bond market was hit by concerns there would be a higher fiscal deficit and possible sovereign rating downgrades, but the worries have started to wane.

"While a potential rating downgrade is not our base assumption, it did weigh on foreign demand for Malaysian bonds coming into 2019, leaving valuations adrift of their Asian peers," said Yong Shao Fung, a senior portfolio manager at Nikko Asset Management. "That has reversed slightly in the current mild risk-on environment as comparatively high real rates and low/stable inflation outlook make the investment case for Malaysian sovereign bonds relatively attractive. "

Malaysia's 10-year government bond yield has fallen about 20 basis points this year to 3.9 percent.

Higher commodity prices, a pick-up in domestic consumption and favourable developments in foreign relations with trading partners such as China, Singapore and Japan would bolster flows into Malaysian bonds this year, said Credit Suisse analysts.