Foreign selling of Malaysia’s local equity remains. Year-to-date, foreign outflows came to slightly more than RM11 billion compared to last year’s outflows of RM11.1 billion and RM11.7 billion in 2018 respectively. The strongest selling was recorded in mid-March (RM482 million and RM520.4 million outflows on 13th and 16th March) along with FBM-KLCI suffered daily most decline of 5.3% and 4.8% to trade below 1,400 for the first time since early 2011, before it found a bottom at 1,219.7 on 19th March. Since then, the index rebounded and fluctuated around 1,370 to 1,410 range.

As foreign selling continues, local interests play significant role in driving market direction. Local players as a percentage to total trading interests rose from an average 75% pre-13th March to a recent high of 87% in early April. Of that local players, retail shares increased from an average 27.3% to a high of 40.2% in early May 2020, suggesting the rising influence of retail trades over trading direction of FBM-KLCI - a simple explanation to alternative income argument during this Movement Control Order (MCO) period. It was reported that broking account activations surged during this period. Rakuten Trade said more than 11,000 new accounts were activated (100% m-o-m), of which more than 64% was during the first phase of the MCO period alone. Another driver is that retail investors see the current market climate as a trading opportunity to “bottom fish” small to mid-cap stocks that have saw substantial drop in share prices. At the same time, I saw rising subscription of “paid recommendation” by market professionals and algorithm trading.

I believe that significant absence of foreign money in local markets is a prime driver for the performance divergence between Dow Jones and FBM-KLCI. From their lowest point, Dow Jones rose almost 31% compared to FBM-KLCI’s 13.3%. While some observers are arguing about the impact of depressive crude oil prices, tension in political front, BNM’s policy easing among as key determinants to local equity, these variables have been taken as part of investing consideration. Until a sustainable return of foreign funds, local equity will continue to be subjected to volatility and panic buying and selling activity. Side-way trading will be the outlook for rest of the year. It is highly dangerous if our local market transformed itself to be a hybrid beast – part bull and part bear!!!

Local institutional funds at best are playing supporting role, in my view. Government-related funds are reshaping their investment portfolio, largely in favour of sustainable dividend flows to support their major shareholder and defensive global strategy. On the other hand, private institution funds, especially insurance, mutual funds and absolute return funds are responding to further liberalisation of capital account of balance of payments with increasing freedom for both in-and-outflows of funds as well as alternative investments like money market instruments, private-debt securities and other financial derivatives.

Risk of being marginalized will rise over time if this market is a playground for retailers and hedge funds. Surplus liquidity in the system has increased judging from changes in net domestic asset (NDA) and changes in net foreign asset (NFA) in contrast of BNM’s degree of sterilization operations and movement in money velocity in recent years. Declining net worth in illiquid assets such as property or land over the past few years will increasingly force these asset owners into financial assets to take greater risks.

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com