Light at the end of the tunnel?

IN March this year alone, foreign shareholders net sold some RM4.63bil worth of positions in the equity market, the largest outflow in a month since RM5.52bil left the market after the Covid-19 pandemic in March 2020.

It was also the fourth largest monthly outflow over the past decade, eclipsed only by the May and June 2018 outflow of RM5.60bil and RM4.93bil, respectively, just after Barisan Nasional shockingly lost in the 13th General Election (GE13).

The first quarter of financial year 2025 (1Q25) now has the ignominy of seeing the largest quarterly outflow recorded on Bursa Malaysia – RM9.96bil – surpassing the previous high of RM9.31bil in 3Q15.

That RM9.96bil is more than all the net foreign portfolio outflows combined between 2021, 2022 and 2024! The combined value is RM9.71bil.

Reasons for outflows

Portfolio investors’ decision to exit or enter a market is driven by a slew of factors, not just domestic but global factors too. These are in essence the pull and push factors.

Emerging Markets (EM), of which Malaysia is one in the eyes of foreign investors, have a greater tendency to experience inflows or outflows, which brings both benefits and risks to the market.

Among the common push factors that matter for portfolio flows are global growth, global liquidity and global risk aversion.

Stronger global growth increases portfolio flows into EM.

The size and effects of the push factors on portfolio flows vary across countries, while commonly identified pull factors are domestic macroeconomic conditions, monetary policy responses, financial sector development, and exchange rate exposures and differences.

How much more?

According to the Securities Commission (SC) Capital Market Stability Review 2024, foreign portfolio holdings at the end of 2024 stood at 19.7%, of which some 32.1% or RM131.2bil were held by non-strategic investors.

Taken as a percentage of the total market capitalisation of RM2.08 trillion then, the non-strategic investors held some 6.3% of the equity market. The balance of 67.9% or RM278.2bil are foreign strategic holdings.

As at the end of March, the total market capitalisation of Bursa Malaysia fell by 10.1% to RM1.871 trillion.

With non-strategic foreign investors off-loading almost RM10bil year-to-date, plus the now lower market value of their holdings, foreign non-strategic holding is probably at about RM108bil, or approximately 5.8% of the total market capitalisation at the end of March 2025.

Hence, foreign shareholding is estimated to have dropped to approximately 19.2% as at the end of last month, which is a new low.

However, it is rather obvious that non-strategic foreign shareholders will not be exiting all of their market exposure positions, no matter what the pull or push factors are but history has shown that foreign outflows can be persistent over some time.

Over the past 12 years, the longest stretch of net foreign portfolio outflow was observed between July 2019 and July 2021, with some RM36.6bil – or an average of RM1.46bil per month – leaving the market.

The FBM KLCI fell from 1,672 points as at end of June 2019 to 1,495 points by the end of July 2021, a drop of 10.6%.

This 25-month unbroken streak of outflows was actually a continuation of outflows that occurred since May 2018, in the aftermath of GE13.

Taken together, the stretch of outflows spanned a period of 39 months (except for three separate months where some RM1.23bil inflow was recorded), and saw a staggering RM56.7bil in total foreign portfolio outflows or an average of RM1.45bil per month.

During the period, the FBM KLCI dropped from 1,870 points, or almost near its all-time high, to 1,495 points, a decline of 20%.

In terms of high-intensity outflows, nothing beats the period between May 2015 and September 2015, where some RM14.9bil left the market over a period of just five months (or an average of RM2.98bil per month), which saw the FBM KLCI falling from 1,818 points to 1,621 points, or lower by 10.8%.

The current stretch of net foreign portfolio outflow of RM17.7bil between October 2024 and the end of last month, or an average of RM2.95bil per month, can be said one of the most sustained selling pressures the market has observed in recent times.

It almost matches the five months that the market experienced post-GE13.

Zero-sum game

Equity flows are a zero-sum game as every transaction carried out in the market has a buyer and a seller.

Hence, while foreign portfolio outflows have been consistent over the past six months, the biggest buying interest has come from local institutional investors which poured in some RM16.4bil over the same period.

From July 2019 to July 2021, the biggest buyers in the market were retail investors, mopping up some RM24.8bil, while institutional investors bought some RM11.8bil worth of equities.

From May 2018, the retail net buying was approximately RM30bil, while local institutions net purchased some RM26.6bil worth of equities.

During the May 2015 and September 2015 period, it was the local institutions that stepped-up to position themselves as the biggest net buyers with an inflow of RM15.3bil.

Will it return?

Foreign flows go with the flow of the market and when the pull and push factors return in favour of Malaysia or even other EM, they will turn net buyers as Malaysia’s fundamentals remain intact, driven by steady economic growth, a benign inflation environment, a robust initial public offering market, an undemanding valuation but this is of course challenged by a smaller earnings momentum.

Government finances too are relatively stronger with sustained current account surplus, lower budget deficit, and baby steps in removing subsidies and increasing tax revenue.

Federal government debt to gross domestic product too remains well under control as economic growth has outpaced growth in taking on additional debt burden.

Hence, while the external negativities are the key push factors, Malaysia will remain on investors’ radar, backed by strong fundamentals.

While we are seeing massive unprecedented foreign portfolio outflows over the past six months, the funds will return when the push and pull factors return in favour of Malaysia and there will be light at the end of the tunnel.