Reforms key to fund inflows as worst of market volatility is over

Foreign investors adopt ‘wait and see’ approach as Pakatan Harapan-led govt moves to put economy on stronger footing


The heightened volatility on Bursa Malaysia following the 14th General Election (GE14) is starting to normalise with strategists saying the worst of the post-elections correction may be over for now.

The core on fundamental issues like governance and policy reforms that would improve the economy could be key for a rerating of the local equity market.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew believes the post-GE14 volatility has eased, but investors are mixed on the market conditions.

“There’s optimism among local investors, but foreign investors are uncertain given the political progress and global backdrop,” he told The Malaysian Reserve.

Foreign investors have adopted a “wait and see” approach as the Pakatan Harapan-led federal government moves to put the economy on a stronger footing.

“The dull foreign investors appetite has been lingering around since Monday, while domestic investors are more positive as they welcome the change in the country,” Pong said.

Soft economic data out of China, a perky US dollar and rising US Treasury yields have cast a cloud over the emerging markets (EMs) as domestic issues in Turkey and Argentina saw their currencies tum- bling to fresh record lows.

“On top of that, the question lingering around the Cabinet line-up is keeping the foreign investors on the sidelines,” Pong noted.

JP Morgan head of Malaysia equity research Hoy Kit Mak believes a new order of government is perhaps a necessary prerequisite to reconsider long-term underweights EM investors have on Malaysian equities.

“EM investors have been consistently underweight on Malaysian equities since 2009, the entire span of the outgoing regime.

“If investors evaluate a change for the better in governance and policy orientation in Malaysia, it could develop into a meaningful opportunity,” Hoy noted in a report yesterday.

Hoy believes the low expectations and evidence of change could sow the possibilities of a fresh dynamic.

“There are no directly comparable recent precedents in the region. If this does pan out, it will be a reason for investors to view Malaysia differently than from the lens of the last 10 years,” he noted.

According to JP Morgan, government-linked companies (GLCs) and quasi-GLCs make up about 53% of the Malaysian market capital.

“We expect this to be a source of flux in the near term, warranting caution. This potentially complicates portfolio construction, making it difficult to justify more than our current neutral weighting (versus EM).

“We recommend staying close to the consumer (Staples & Autos) who may benefit from fiscal slack on the Goods and Services Tax,” Hoy noted.

Healthcare, real estate investment trusts and telecommunications stocks may also trade better in the near term given their defensive qualities, while exporters will continue to benefit from external demand and a potentially weaker ringgit, Hoy predicted.

Price action on the third trading day was more calm with the local benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) closing up 10 points, or 0.54% at 1,858, as total volume halved to three billion shares from 6.5 billion shares on Monday.

Market breadth was neutral with 492 gainers to 486 losers, while 367 counters were unchanged and 536 untraded.

Data from the local bourse showed that on Monday, foreign funds were net sellers at RM682.6 million, but local institutions were net buyers at RM238.2 million.

On Tuesday, foreign funds stepped up their selling to net RM837.3 million, but local institutions were net buyers at RM661.7 million.

Analysts believe foreign funds selling since Monday has been absorbed by local institutions and retail investors.

An analyst with a local brokerage said the market is still bullish technically and fundamentally.

“As long as it can stay above the 1,790-point level, the market may continue its bullish trend with the index retesting its historical high if the immediate resistance at 1,880 points is broken,” the analyst said.

To recall, during the last 2008 general election, the FBM KLCI was negatively impacted when Barisan Nasional lost its two-thirds majority.

From the period dissolution of Parliament to polling, the FBM KLCI fell 9% and almost all sectors traded higher in the run-up to the GE13 and after.

Market action saw MyEG Services Bhd and George Kent (M) Bhd both had their lower limit prize frozen by Bursa Malaysia yesterday after their shares hit limit down for two consecutive days.

The lower limit for MyEG was RM1.27 and George Kent at RM1.94. Selling pressure on both counters, which are linked to the previous government, look set to continue today as nervous investors look to exit.


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