Regional weakness, US rates keep investors concerned

Exodus of foreign investors continues to take a risk-off approach in expectation of US higher interest rates


Stronger energy prices and an improved capital account surplus will help the ringgit stave off some of the pressure brought on by higher US bond yields and fund outflows from the region.

Renewed concern over the regional financial markets comes as equity markets in Indonesia and the Philippines had another rough day yesterday falling some 2% as an exodus of foreign investors continued to take a risk-off approach in expectation of monetary tightening with higher interest rates in the US on the horizon.

Bursa Malaysia managed to buck the sell-off with the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) closing marginally lower at 1,851.80 points ahead of 14th General Election (GE14) next week.

The calm came after jittery investors’ selling on Wednesday saw the KLCI fall 18 points to close at 1,852.

“The one main difference that keeps the ringgit somewhat isolated when compared to the Philippine peso and Indonesian rupiah are oil prices and a capital account surplus,” Oanda Corp head of trading for Asia Pacific Stephen Innes told The Malaysian Reserve (TMR).

“The peso will struggle due to a large trade and budget deficit in the country, while some 40% of Indonesian bonds are foreign-owned, so the country will see large outflow when US Treasury yields move higher,” he added.

Innes expects to see the ringgit to weaken as well, but to a lesser extent due to macro internal and external conditions, coupled with rising oil prices.

Institutional investors have started reducing their exposure in the emerging markets as the rising US dollar makes riskier investments less attractive, analysts said.

According to MIDF Amanah Investment Bank Bhd’s weekly fund flow report on Monday, investors classified as “foreign” offloaded US$3.33 billion (RM13.12 billion) net worth of investments last week from the seven Asian exchanges the company covers, the second-highest so far in 2018.

Foreign funds were, however, net long by RM24 million in the Bursa Malaysia-listed stocks (excluding off-market deals) last week, the second-lowest weekly inflow so far this year, MIDF Research noted.

The outflows from the regional markets look set to continue this week as Jakarta’s equity benchmark fell 137 points, or 2.2%, yesterday to 5,858 points, while the Manila composite was down 200 points, or 2.9%, at 7,535 points

The Indonesian and Philippine equity markets have been on a downtrend since late January with analysts warning the outflows will drain foreign reserves and put pressure on local currencies in the region.

The Indonesian rupiah tumbled to a 27-month low against the dollar on Wednesday despite the central bank intervening the market since early February to ease heightened volatility.

The Indonesian currency, the Philippine peso and Indian rupee are the underperformers among developing economies globally this year.

The US-China trade tensions have dragged regional markets amid a surge in US Treasury yields.

In the near term, Innes said a stronger greenback narrative and local political uncertainty due to the GE14 will continue to exert pressure on the ringgit.

“Growing election uncertainty continues to keep investors at bay,” he said.

“While the chances of the Opposition pulling off a surprise result remain low, a large-scale knee-jerk negative repricing of Malaysian assets suggests foreign bond buyers will stay on the sidelines.”

In this context of heightened domestic political risk, he said the ringgit will continue to trade defensively.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid believes the US Federal Reserve’s decision on its rates is what really matters as of now.

“Perhaps the old mantra ‘sell in May and go away’ has become prevalent in the immediate terms,” Mohd Afzanizam told TMR recently.

“Sell in May and go away” is a well-known trading adage that warns investors to sell their stocks in May to avoid a seasonal decline in equity markets.

The idea behind this rule is based on stock market history over the past 90 years, two of the three worst months come in May and September, while three of the four best months for the market come in December, January and April.

In addition, October is a month that’s notorious for stock market declines, including the crashes in 1929 and 1987, and the worst of the financial crisis in the fall of 2008.

Kenanga Investment Bank Bhd in a note on Wednesday said domestic factors, including higher supply of bonds, the upcoming GE14 and moderating growth indicators leave behind little comfort for this year’s money supply growth.

“Hence, while we foresee heightened risks of capital outflow, we expect Bank Negara Malaysia to hold from further rate hike and retain the Overnight Policy Rate at 3.25% for 2018 in favour of growth and price stability,” it added.