PETALING JAYA: The Malaysian stock market is in dire need of liquidity and without the return of foreign investors, revving up the “engine” of the bourse can be an arduous feat.

       With the country plunging into new uncertainty following the Prime Minister’s resignation yesterday and the high number of Covid-19 cases across most states, Bursa Malaysia seems to offer little in attracting foreign investors.

       The fact that Fitch Solutions, the research unit of Fitch Rating, slashed Malaysia’s 2021 economic growth forecast to 0% from 4.9% previously, is of no help to Malaysia’s profile.

       The downgrade by Fitch Solutions came three days after Bank Negara downgraded its 2021 growth forecast to between 3% and 4%, from 6% to 7.5% earlier.

       Rakuten Trade head of research Kenny Yee said the valuations of almost all of the top 10 constituent stocks on FBM KLCI have been suppressed due to incessant selling by foreign funds.

       Rakuten Kenny Yee

       As a result, these stocks are currently trading below their historical price-to-earnings (PE) ratio.

       Speaking during a virtual briefing yesterday, Yee said Bursa Malaysia’s stock valuations have turned attractive but there are not many takers.

       “Apart from the technology and transport indices, the other indices are all trading below their 2015-2019 average PE,” he pointed out.

       Year-to-date till Aug 11, Bursa Malaysia has recorded a net foreign outflow of RM5.9bil. In 2020, net foreign outflow hit a record high of RM24bil.

       Nevertheless, Malaysia is not the only country in South-East Asia to suffer from foreign fund outflows. Year-to-date, Vietnam, the Philippines and Thailand have also faced massive foreign outflows, with the latter two experiencing larger outflows than Malaysia.

       Looking ahead, however, Yee foresees that foreign funds may make a comeback at least by year-end.

       The return of some foreign funds, supported by solid earnings growth as well as alluring valuations, would push FBM KLCI to touch 1,650 points by end-2021, he said.

       This would mean that the barometer index of Bursa Malaysia could increase by almost 150 points in less than five months.

       Ahead of Tan Sri Muhyiddin Yassin’s resignation yesterday, the FBM KLCI fell to an intraday low of 1,493.60 points.

       However, by the time the market closed, the index pared most of its losses and closed at an intraday high of 1,502.90 points - down by 2.21 points or 0.15%.

       Market breadth was negative, with 633 decliners trumping 377 gainers. A total of 422 counters remained unchanged.

       Yee believes that it is a “matter of time” for foreign funds to trickle back to the Asian region.

       RHB Bank Alexander Chia

       “Easy money is no longer available on Wall Street, hence many may seek new avenues.

       “Valuations wise, US equities are currently trading at around 50% above its historical average. Though corporate earnings remain robust, growth should retrace back to normalcy.

       “If I am a foreign fund manager, I will certainly look elsewhere (outside of the US) to put my funds.

       “Although Malaysia may not be at the top of the investment list, it can enjoy some spillover effect if the foreign monies make a U-turn into the Asian region,” he said.

       Since 2015, noticeably after the 1Malaysia Development Bhd (1MDB) scandal erupted, Bursa Malaysia has been continuously hit by foreign fund outflows. The year 2017 was the only year in this period that saw a net inflow.

       As at July 2021, foreign ownership of Malaysian equities have crashed to a historic low of 20.2%, according to UOB Kay Hian Malaysia Research.

       With continued dumping of local stocks by foreign investors, it is no surprise that the market sentiment and performance have been impacted. Between January and July 2021, the market cap of the Main Market has fallen by 4.5%.

       The ACE Market was worse affected as the market capitalisation tumbled by almost 10% in the same period.

       Looking ahead, RHB Investment Bank Bhd analyst Alexander Chia expects further short-term volatility for equities as the market attempts to digest the implications of recent developments in the political and pandemic space.“There are enough ingredients on the table to remain constructive on equities, as we are only in the embryonic stages of a new growth cycle and much of the bad news appears to be already in the price.

       “Nibbling the dip for cyclical and value stocks on market weakness to position for a recovery scenario remains an enduring theme, supported by a defensive posture for tactical reasons,” he said.

       Amid the market uncertainties, Chia recommends investors take a balanced portfolio approach.

       “We note the underlying macroeconomic risks from the prospect of a tighter global liquidity environment that could see further foreign portfolio outflows,” he added.

       Nevertheless, Chia pointed out that the relaxation of business activities allowed under the National Recovery Plan (NRP) is a major relief for the market. This is expected to eventually allow the broader economy to gradually normalise.

       “We expect to see investor sentiment gradually pivot to recognise the gradual re-opening of all remaining industries and sectors,” he said.

       Meanwhile, UOB Kay Hian Malaysia Research said the market should soon price in herd immunity against Covid-19 and for the economy reopening.

       The research house maintained its end-2021 FBM KLCI target at 1,635 points, and advised investors to position for a substantial recovery by the fourth quarter of 2021.

       On the country’s latest political turmoil, UOB Kay Hian Malaysia Research said it would have a limited downside to the already-depressed FBM KLCI.

       “We retain our view that the market has largely priced in risk premiums associated with the constant shifting sands of Malaysian politics.

       “Future government coalitions are unlikely to significantly deviate from the policies adopted by Perikatan Nasional.

       “In essence, the equity market’s valuation has already been pricing in the country’s structural socio-economic challenges that implies persistently high fiscal deficits and sub-optimal domestic reinvestments,” stated the research house.

       Moody’s Investors Service vice president and senior analyst Christian Fang said that a period of political uncertainty may occur in Malaysia given the resignation of the premier.

       However, she expects the country’s credible and effective institutions to limit the impact on its macroeconomic policies and credit profile as demonstrated over past episodes of abrupt political change.

       “The coronavirus pandemic remains the key risk in Malaysia, as the elevated number of new infections and ongoing restrictions – although less stringent compared to the second quarter of 2020 – will continue to weigh on the economic recovery this year.

       “As such, if fiscal deficits remain wide for some time because of further economic stimulus or weak revenue, resulting in a persistent rise in the government debt burden that fiscal authorities are unable to reverse, this has the potential to materially weaken Malaysia’s credit profile,” said Fang.