No immediate signs of foreign fund outflow deceleration, say experts

Outflow will continue in the near term, given the lack of market catalysts and expectations for corporate earnings to remain muted


Foreign fund outflows from Malaysia are not expected to slow down anytime soon, with analysts citing foreign investor reluctance due to slower economic growth, concerns over government policy directions and a lack of market catalysts.

As at market close yesterday, some US$626.3 million (RM2.59 billion) of foreign funds exited Malaysian equities from the start of the year, according to Bloomberg data.

For the week ended on April 19, Malaysia saw the largest foreign net outflow in six weeks as foreign funds sold RM433.4 million in local shareholdings, as per a report by MIDF Amanah Investment Bank Bhd, although net selling narrowed to RM72 million for the week ended on April 26.

For comparison with regional peers, foreign fund outflow in Thailand year-to-date (YTD) was at US$311.6 million yesterday, Japan’s was at US$696.9 million and fund outflow in China amounted to US$11.1 billion.

In contrast, Indonesia and the Philippines welcomed inflows of US$901.1 million and US$808.6 million respectively.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew said foreign fund outflow will continue in the near term, given the lack of market catalysts and expectations for corporate earnings to remain muted.

“The peak pace of corporate profit growth is over and at the moment, earnings growth is and continues to be, disappointing. There’s also a very limited potential for surprises at the (local) bourse.

“The investment story is not as compelling as in the 1990s — most of the businesses that can be listed have already been listed. The market lacks the excitement of under-the-radar companies coming for listing — that would have made investors happy,” he told The Malaysian Reserve (TMR).

Bursa Malaysia Bhd has only seen six initial public offerings (IPOs) across the ACE Market and Leading Entrepreneur Accelerator Platform (LEAP) Market YTD.

Of the two highly anticipated Main Market listings this year, QSR Brands (M) Holdings Bhd has deferred its IPO indefinitely following talks with bankers. Leong Hup International Bhd is still in the running to list, having launched its prospectus last Thursday, although it’s worth noting that both QSR and Leong Hup aren’t new to the market — both were publicly listed, before taken private in 2013 and 2012 respectively.

Malaysia’s benchmark stock gauge is also among the worst performers when compared to major indices worldwide. As at market close yesterday, the FTSE Bursa Malaysia KLCI (FBM KLCI) was down 3.15% YTD, while Singapore’s Straits Times Index was up 11.03%, Indonesia’s Jakarta Stock Exchange Composite Index gained 3.74% and Thailand’s Stock Exchange improved 7.93%.

Export-oriented companies which reported significant gains in 2017 and 2018, particularly technology stocks, have been slowing down due to their forefront position in the US-China trade war, while crude palm oil prices have not improved enough to lift palm oil stocks and property companies remain stuck in an oversupply situation.

Oil and gas (O&G) counters have gained slightly due to higher oil prices, but finance stocks — the largest component of the FBM KLCI — are not seeing outright growth amid moderate loan expansion.

Investors are also increasingly impatient for further clarity on government policies before pouring money into the country, although this could somewhat be mitigated with the revival of mega infrastructure projects, namely Bandar Malaysia and the East Coast Rail Link (ECRL).

“The only thing could be the resumption of the ECRL and Bandar Malaysia, which may mean more contract flows. That has a potentially big impact, but the companies to undertake the projects must be well-capitalised.

“Remember the 90s — companies that weren’t adequately capitalised were put in charge of massive projects and had to take on very large loans, which set the stage for difficulties later on,” Pong cautioned.

Malaysian equities and the ringgit were affected by news of the country’s possible exclusion from the FTSE World Government Bond Index, which could trigger a downgrade by sovereign credit rating agencies.

The International Monetary Fund earlier this month lowered its global GDP growth forecast to 3.3% for 2019, its fourth downgrade in nine months. To recap, Bank Negara Malaysia had also revised downward its 2019 GDP growth forecast to between 4.3% and 4.8% from the 4.9% estimated in Budget 2019.

“From an economic standpoint, things are rather lethargic as there seems to be excess capacity,” Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told TMR.

China’s GDP in the first quarter of 2019 (1Q19) was sustained at 6.4% primarily on policy response from the monetary authorities, while economic growth in Singapore and South Korea suggests that demand was softer in the first three months of the year.

“In that regard, the US’ 1Q19 GDP will be closely watched for affirmation of a slowdown. As an open economy, Malaysia is likely to be affected, as reflected by the 5.3% contraction in February exports.

“Two consecutive months of negative Consumer Price Index print suggest aggregate demand is very timid as core inflation is also quite low,” Mohd  Afzanizam said.

He noted that investors’ sentiment towards Malaysian stocks remains flat, despite pockets of opportunities in small- and mid-cap stocks.

“We’ve seen improvement in asset utilisation among O&G firms. Construction stocks are gaining traction following the revival of certain mega projects, and the weaker ringgit should bode well for the semiconductor, rubber glove and furniture industries. However, there seems to be a lack of conviction among foreign investors,” Mohd Afzanizam said.