Domestic Institutional Investors to Sustain Gains

Analysts believe local institutional investors can absorb the net selling by foreign portfolio funds on Bursa Malaysia and support the local market to hold on to the 7.4% gains made year-to-date (y-t-d).

Despite the RM1.59bil in net selling by foreign funds last week – the highest in four years – the local benchmark FBM KLCI closed at a 23-month high of 1,561.6 points yesterday on fresh buying by local institutions as sentiment showed signs of improvement ahead of a major week for US corporate earnings and economic data for global markets, which have undergone a correction in the past two trading weeks.

How much higher the local market can go with local funds from here remains uncertain. The downside, however, could be limited, analysts said.

“There will be some limit to the upside when foreign portfolio investors start to net sell Malaysian equities.

“However, some companies’ fundamentals and valuations are too compelling. That has provided support to our local market.

“This has led our market to be seen as defensive (low beta), meaning that it will not draw down as much despite foreign fund net selling pressure, given that it could also be supported by domestic investors,” said Imran Yusof, director and head of the research department at MIDF Amanah Investment Bank Bhd.

Local institutions net bought RM1.79bil worth of local securities last week, which was a six-year high of buying as foreign investors sold.

This was the eighth consecutive week of net buying by local funds.

Domestic funds were net long by RM41.6mil on Monday as foreign funds turned net buyers to the tune of RM115mil, according to Bursa Malaysia’s data.

Over the past three months of the year, foreign investors have accounted for 30%-39% of trading participation on Bursa Malaysia, while local institutional investors, excluding retailers and local nominees, accounted for around 30% to 32%.

This data suggests foreign movements are poised to influence market direction.

The foreign selling on Bursa Malaysia occurred on heightened geopolitical risks and sticky inflation data in the United States, which led to hawkish comments from Federal Reverse (Fed) members that closed the door on a rate cut cycle starting in June that sent the US dollar upwards.

The “higher for longer rate” hawkish outlook has seen the risk free rate rise to about 4.6% in the United States, leading to a risk-off desire for foreign funds to seek exposure to emerging markets (EMs) like Malaysia.

“The elevated US risk free rate might trigger a lesser interest to invest in EMs from the perspective of foreign investors, as the risk premium is discounted.

“We view the hawkish Fed stance lately as a bane for EMs including Bursa Malaysia as the risk premium is not enticing enough, especially after the y-t-d infrastructure-led rally on Bursa Malaysia,” said Kevin Khaw, senior research analyst at iFAST Capital.

The shift in global market expectations was dented further by and below-consensus earnings and leads from tech giants like ASML Holding NV and Taiwan Semiconductor Manufacturing Co Ltd, as well as Tesla Inc’s extensive cost-cutting measures amid a softening demand environment that suggests diminishing growth.

These factors combined triggered selling on markets and prompted a reset of expectations, said Nixon Wong, chief investment officer at Tradeview Capital. He thinks policy measures and the upcoming corporate earnings season could be a catalyst for the local market.

“In the medium term, we foresee a phase of consolidation in the local equity market, awaiting notable policy developments over the next two months and the corporate earnings season.

“Key drivers for market growth in the latter half of 2024 include fiscal reforms, increased development spending, and initiatives outlined in the National Energy Transition Roadmap,” he told StarBiz.

Analysts agreed a pivot by the Fed will be a major catalyst for investors to return to EMs like Bursa Malaysia and the ringgit, which has weakened to RM4.78 now from RM4.71 in late March.

“We anticipate a shift in the dynamic when the Fed rate pivot theme resurfaces and China’s recovery continues, combined with the local growth factors.

“The positive outlook is expected to renew foreign interest in the local bourse, providing momentum for further price growth,” said Wong.

He added factors such as appealing valuations, attractive dividend yields and currency fluctuations are poised to draw the interest of foreign investors.

Wong said investor attention will also be directed towards upcoming government initiatives, including subsidy rationalisation and tax reforms, which hold the potential to influence market sentiment and economic performance in the coming months.

“The clarity in local policies, coupled with a strong emphasis on long-term growth plans, research and development, infrastructure development with a focus on environmental, social and governance or ESG, and fiscal discipline, is instilling higher confidence among foreign investors in the country,” he added.

Khaw believes a more stable political environment in the next couple of years could drive key development, including economic blueprints announced by the government in the Madani Economy to materialise over the medium to longer term.

Although the construction, property and utility counters have already experienced a remarkable rally, some of the government’s key focus sectors such as technology are yet to perform in terms of both earnings and share prices.

“Hence, the upside potential for the selective counters that are poised to benefit from the government’s economic transformation programmes is still a lucrative option for investors to invest in,” he said.

Meanwhile, tech giants like Tesla, Meta, Microsoft and Alphabet are set to reveal their earnings report card this week along with the first-quarter US GDP and personal consumption expenditure (PCE) price index data, all of which will have a big say on the trajectory of markets over the next several weeks.

The PCE data on Friday, in particular, if it beats analyst expectations, could kill any hope for a rate cut by the Fed this year and dent investor sentiment.