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Market Wary Of Foreign Funds Action
Malaysia Perspective | 25 June 2013

By Yang Ming Wan

With Barisan Nasional returned to power, the stock market rallied in response to the results of the recent elections, casting the limelight on the movement of the billions of Ringgit of foreign portfolio funds that were lying in wait. When the results of this recent election was announced, foreign funds snapped up Malaysian shares over three consecutive weeks right until the last week of May before turning to selling. In fact, that was the first time these foreign funds became net sellers after 24 continuous weeks of net buying.

Compared to the net inflow of over RM 200 billion worth of foreign portfolio funds accumulated over the past four years, the recent sell-off of stocks amounted to just over RM 600 million, which is small change in contrast. Yet, this was the first instance of a net funds outflow since the election. If this phenomena appears again more frequently in the future, it is a sign that foreign investments are on the verge of some serious movements, which would cause the spooked stock market to swing violently in response to any significant domestic and foreign news.

Important Pillar Of International Payments
According to the latest balance of payments (BOP) figures released by Bank Negara for the first quarter of this year, although foreign portfolio funds are still a net inflow, the amount has dropped sharply by 63% from RM 10.4 billion in the last quarter of last year to about RM 3.9 billion. However, as direct investments and other investments remain in a state of outflow, the net inflow of foreign portfolio funds still acts as an important pillar to provide temporary stability to our BOP.

BOP financial accounts in the last two quarters of last year were in the reds by RM 9 billion and RM 10.3 billion respectively, while the full year account suffered a deficit of over RM 23 billion. Thanks to the net inflow of portfolio funds in the first quarter of this year, this account made a tidy recovery with a tiny surplus of nearly RM 1 billion.

Outward bound direct investments in the first quarter of this year continued to stay above the RM 10 billion mark at RM 11.5 billion. Although slightly lower than last quarter’s RM 16.5 billion, the fact that emigrating direct investment funds in one quarter alone would exceed RM 10 billion is significant. Furthermore, this situation has been thus for years. In 2010, RM 49.2 billion of investments have gone abroad in the whole year; this figure climbed to RM 55.3 billion in 2011, before retreating to RM 51.9 billion last year. This mass exodus of investments has more than offset the amount of direct foreign investments coming into our country, which led to all three years suffering a net outflow of direct capital at negative RM 14 billion, RM 9.3 billion and RM 21.7 billion respectively.

In this light, portfolio funds have therefore become an important pillar of stability to our financial accounts, even the international BOP.

RM 228.8 Billion Worth Of Foreign Funds Lying Around
Since the ruling front lost its two-thirds majority advantage during the 2008 election, the spooked stock market would react by falling when the market had its first whiff of the election date, and every time the stock market dipped or softened, portfolio funds would flow in on the back of bargain hunting.

Rumours of a general election had haunted the years after Prime Minister Dato Seri Najib Razak became Malaysia’s sixth prime minister in early April 2009, and every fresh outbreak of this rumour would send the stock market into jitters, during which foreign portfolio funds would also took the opportunity to flow into the market. In the end, when the much anticipated general election came eventually, it came as no surprise and just as the current term was nearly up. By then, stock prices in the Malaysian bourse were comparatively lower than in other markets in the region, thus opening the door for foreign portfolio funds to continue flowing in.

Net inflow of portfolio funds reached RM 48.5 billion in 2010 before cooling off to RM 26.1 billion in 2011. When election rumours reached feverish pitch last year, the market saw a torrent of net inflow of foreign portfolio funds to the tune of RM 58.4billion. Although official figures showed a net inflow of RM 3.9 billion in the first quarter this year, securities firms estimated that the net inflow during the first five months came up to RM 10.9 billion, which means that over the past three and a half years, total net inflow of foreign portfolio funds was a staggering RM 143.9 billion. When we take into account the total net inflow of RM 84.9 billion over 2008 and 2009, the amount of foreign portfolio funds floating around the market comes up to a mind-blowing total of RM 228.8 billion.

Testing The Defenses Of The Market
The advantage of relatively low share prices in Malaysia as compared to other markets in the region has been wiped out by the market rally after the election. Laden down by such a huge amount of foreign portfolio funds lying dormant, the local market will be especially vulnerable to political and economic unrest. This hypersensitivity will cause the market to become unstable with every movement in the domestic and international political and economic situations.

With Malaysia sheltering over RM 200 billion worth of funds, the future direction of this huge sum of money will have the ability to sway the future of the local stock market. Should there be any major changes at home or abroad, the defenses of our local funds will then be put to a punishing test.

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