Photographer: Brent Lewin/Bloomberg

World's Longest Bull Run Endures Tumult as Foreigners Return

  • Overseas inflows into Malaysia are biggest in Southeast Asia
  • Kuala Lumpur has lowest volatility among region's markets

Malaysia’s energy exports are tumbling, its prime minister is battling corruption allegations and corporate profits are weakening. With all that, the Southeast Asian nation is also home to the world’s most resilient bull market for stocks.

Overseas funds are piling in at the fastest pace in Southeast Asia. Kuala Lumpur’s benchmark equity gauge has more than doubled from its 2008 lows without succumbing to a 20 percent drop. Tan Ming Han says he knows its secret: the lowest volatility among the region’s markets. It’s an environment where a growing army of investors are willing to miss out on the highest highs if that means they also avoid the biggest crashes.

“Sometimes, too much excitement can cause a panic attack -- especially with volatile markets,” said Tan, senior investment manager at Amundi Malaysia. “Boring is sometimes beautiful.”

Sentiment remains stubbornly buoyant in Malaysia, home to some of the region’s highest dividends, as the country’s $166 billion pension fund underpins demand for equities with share purchases. Even after the FTSE Bursa Malaysia KLCI Index climbed 12 percent from a three-year low in August, it trades near the cheapest relative to global equities in almost a decade.

All that is boosting the appeal of the market for offshore investors, said Tan, who manages the KAF Vision Fund that has beaten 95 percent of peers over the past three years with a 21 percent return.

The stock gauge climbed 0.2 percent at the close, poised for its biggest monthly gain in more than three years. The measure formed a golden cross for the first time in a year, seen as a bullish sign when its 50-day moving average climbed above the 200-day line. Nomura Holdings Inc. raised Malaysia to neutral, citing it as a “preferred defensive market” and the least volatile among emerging equities, strategist Mixo Das wrote in a report Wednesday.

Foreign funds have poured about 4.4 billion ringgit ($1.1 billion) into Malaysian equities in 2016, topping South Korea and Southeast Asian markets, according to MIDF Amanah Investment Bank Bhd., citing stock-exchange data. Inflows for this month are at the highest level since April 2013, according to the report. The move comes after last year’s biggest outflow since the 2008 global financial crisis.

Money is returning amid a backdrop of rebounding equities across Southeast Asia, as accelerating economic growth and calmer currencies attract investors seeking refuge from the volatility rocking markets in China and Japan this year. Philippine shares entered a bull market this month. Indonesia’s benchmark index is up 16 percent from last year’s lows, while Thailand equities have jumped 14 percent from a January low.

“In terms of price to book, Malaysia definitely looks attractive, especially relative to its peers,” said Singapore-based RHB Asset Management Chief Investment Officer Lee Kai Yang, who helps oversee S$2 billion ($1.5 billion) of assets including the RHB Asean Fund, which has returned 5.5 percent annually in the past five years. “We have positioned ourselves in line with the structural story of Asean.”

The Malaysian gauge’s 100-day historical volatility is at a seven-month low at 11, versus 15 for the MSCI All Country World Index and 17 for the MSCI South East Asia Index, data compiled by Bloomberg show.

Global market turbulence last year almost ended Malaysia’s bull run as prospects for higher U.S. interest rates sent equities plunging. The benchmark Malaysian index fell as much as 18 percent, while a gauge of Southeast Asian stocks dropped more than 28 percent. The MSCI All-Country World Index entered a bear market in February. While the Standard & Poor’s 500 Index is still in a bull market, that run started in March 2009, four months after Malaysia’s.

“Malaysia’s bull-market run is primarily driven by institutional support, especially government-linked funds,” said Tan. From 2008 till now, the Employees Provident Fund has seen strong inflows, with assets growing by a compounded annual growth rate of almost 10 percent, he said. 

In February, domestic institutional funds accounted for almost half of the total market value of Malaysian stocks traded, compared with 29 percent for foreign funds, according to data compiled by the stock exchange. 

The investments are coming despite a political crisis. Prime Minister Najib Razak has weathered months of attacks over the $681 million that appeared in his private bank accounts before the 2013 general election. Troubled government investment company 1Malaysia Development Bhd., whose advisory board Najib chairs, is being investigated at home and overseas for alleged financial irregularities and money laundering. 

Attorney General Mohamed Apandi Ali concluded in January there was no evidence of wrongdoing. Najib and 1MDB have consistently denied any wrongdoing. On Sunday, opposition politicians and leading critics of Najib unveiled a fresh campaign aimed at ousting him.

Weakening Growth

Some investors are concerned that rising costs and slowing economic growth will weigh on company earnings. Inflation in January accelerated to the fastest pace since 2014, while crude exports have fallen for 12 straight months. A slump in oil has curbed government revenues and prompted Najib to trim the growth forecast for 2016. Analysts have lowered the 12-month projected earnings growth estimate for the KLCI by about 9 percent since May 2014.

“We are underweight Malaysia currently. General concerns on regional growth moderation, weak consumer and business sentiment have capped investment appetite,” said Constance Wong, Client Portfolio Manager of Emerging Markets and Asia Pacific Equities Team at J.P. Morgan Asset Management.

Yet amid the unflattering headlines from politics to the economy, the absence of wild swings in Malaysian equities remain an appealing characteristic for some investors. 

“The Malaysian market has a lower volatility,” Amundi’s Tan said. “That is why despite it being boring, Malaysia has been able to outperform its peers.”

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