markets

Foreigners Who Loved Malaysia Stocks Are Now an Outflow Risk

Updated on
  • Post-election selling poses risk for stocks: Credit Suisse
  • Nomura says bonds vulnerable to high foreign positioning
Fidelity’a Catherine Yeung weighs in on the impact of Mahathir’s victory in Malaysia’s election on the markets.

Foreigners who helped Malaysia become one of Asia’s most popular stock markets may start pulling their money out now that Mahathir Mohamad is officially the nation’s prime minister.

Rising oil prices and earnings estimates have added to the allure of the nation’s equities this year. Foreign funds have bought a net $635 million of Malaysian stocks in 2018, with China and India the only other Asian emerging markets to see inflows. Uncertainty around the new government means that money could flow out as quickly as it flowed in, analysts said.

Foreigners are now “a potential source of downside risk for Malaysia,” Credit Suisse Group AG strategists Sakthi Siva and Kin Nang Chik wrote in a note on Friday. The country’s stocks are “expensive” after receiving the most inflows in 2018 as a percentage of market capitalization in Asia Pacific, they wrote.

External Risk

Malaysia is the only market after India to have foreigners as buyers of stocks year-to-date in Emerging Asia ex-China

Bloomberg

Tushar Mohata, an analyst at Nomura Malaysia Sdn., forecasts that volatility will increase amid heightened political risk and the possibility that foreign inflows will reverse. He made his model portfolio more defensive and put his target of 1,920 for the KLCI Index under review after Mahathir’s historic election win.

Overseas investors had already started pulling money from Malaysian stocks in the runup to the election, selling a net $303 million of the equities this month through May 8. That followed inflows of $387 million in April.

The popularity of Malaysia’s ringgit sovereign bonds with foreigners may also exacerbate declines when the country’s onshore markets reopen on Monday.

Overseas investors owned around 29 percent of the notes at the end of 2017, second only to Indonesia among six markets surveyed by the Asian Development Bank. Increased fiscal risks and “high foreign positioning” are likely to weigh on Malaysian debt, said Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore.

Outflow Risk

Foreign holdings of Malaysian bonds are second only to Indonesia

Source: Asian Development Bank

Note: Values as of end of 2017

(Changes headline and adds stock flow details in 5th paragraph.)
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