PETALING JAYA: Whenever the US market surges, Asian markets including the Malaysian bourse will move in tandem although the gains may not be as much.
For instance, regional markets saw more than a 1% hike in their benchmark indices last week following news that the US Federal Reserve remained on course to deliver three rate cuts by the end of this year.
The FBM KLCI recorded a modest 0.2% gain compared with other regional markets such as Japan’s Nikkei, which hit a new record after surging 1.8%, South Korea’s Kospi jumped 2.2%, Hong Kong’s Hang Seng gained 1.75% while Singapore’s Straits Times Index rose 1.1%.
It appeared that the foreign funds had opted to sell their positions in the local bourse and park their funds in these markets.
As it is, Bursa Malaysia saw a reversal in terms of fund flows whereby there was a net outflow of funds to the tune of RM2.4bil in March, according to MIDF Research.
The research house pointed out that Bursa Malaysia saw encouraging foreign funds net inflow at the start of the year as foreign funds turned net buyers on the local bourse since last November.
However, the stock exchange registered the reversal of fund flows this month probably due to the dashed optimism of an early US rate cut or simply profit-taking.
MIDF Research says foreign funds have been net buyers of the eight markets that it tracks.
“Current favourites are South Korea and Taiwan, largely due to the artificial intelligence craze and advanced chips. In Asean, Indonesia continues to see net inflows,” it added.
“In general, whenever the US market rises, the rest of the world rises too. When the United States sneezes, the rest of the world gets a cold,” Asia School of Business deputy chief executive officer Joseph Cherian, who is a professor of practice in finance, told StarBiz.
“As China rose to become the world’s second largest economy, when it sneezed, the rest of the world, especially Asia, got a respiratory infection.
“The markets were previously pretty integrated and highly correlated due to global trade and freer flow of capital around the world.
“With China having serious economic issues, and the world facing various geopolitical and trade tensions, the US market has been benefiting tremendously from the safety factor whereas capital markets in the rest of the world, except for Japan, have been having problems,” he added.
This begs the question of why Bursa Malaysia is losing out to other regional markets.
“The Malaysian market has been having issues. It hit a few highs in 2014 and 2018, and has been on a downward trend since, or at best, range bound for the past two or three years,” said Cherian.
“There have been two things going on in the world. A lot of capital is flowing out of China as it is losing much of its past economic lustre.
“While the reverse is happening in the United States, some of that money has also been flowing into India and Japan, which had seen good market performance,” he added.
Cherian pointed out that Malaysia has not benefited as much.
“Despite good economic performance, capital outflows – and the relatively low interest-rate regime in Malaysia compare with other parts of the world – has caused the ringgit to decline.
“There are also structural problems within Malaysia that have yet to be solved. For example, corruption, inflation, the rich-poor divide, the looming retirement savings crisis, an underfinanced small and medium enterprise sector, and an education system that needs to be upgraded and updated quickly.”
While the issue lay with the structural problems in the country, Rakuten Trade head of research Kenny Yee said the foreign fund outflows from the country were mainly due to rotational plays.
“I can’t think of any valid reasons other than some rotational plays by foreign funds within the South-East Asia markets,” he said.Nevertheless, it is crucial for the government to step up efforts to address some of the key shortcomings to draw foreign funds into the country.
Cherian says: “I see that the current government is trying to fix things on the fly and on a patchwork basis, which is commendable.”
What is probably needed is the various economic task forces of experts from industry, government and the academy to jointly address these issues and then make binding recommendations to policymakers to fix the country’s economic shortcomings, according to Cherian.
“Let me throw in another insight. There is an institution called ‘global financial integrity’ that publishes an ‘illicit financial flows’ country index. It is about black money, or illicit money, flowing out of various countries.
“China always captures the top spot while Malaysia never fails to rank in the top five countries in terms of the value of illicit financial outflows.
“We need to stem this black money problem as well, so as to restore foreign investors’ full faith and confidence in Malaysia,” said Cherian.
Meanwhile, Rakuten Trade’s Yee said the country needs to continue to have positive news flow on projects and foreign direct investments.
“I reckon the Prime Minister is doing a good job. Absence of political bickering would be an added bonus,” he said.
Similarly, MIDF Research expects the world’s equity market to remain bullish mainly due to the possible onset of US Fed interest rate cuts and buttressed by resilient macro and earnings growth.
“Moreover, the prospect of a stronger ringgit vis-a-vis US dollar would attract a returning inflow of foreign funds hence provide a necessary fillip to the local equity market,” it added.
