• Foreign institutional investors bought a net of RM550mn of local market last week

• The trend is expected to continue steadily

It was a stunning week for FBMKLCI thanks to the steady and impressive return of foreign investors who accumulated a net of RM550mn of local stocks last week. It was an uninterrupted buying momentum for the whole week, the highest being last Tuesday (RM162mn), ahead of the Fed policy decision on Thursday. The buying momentum moderated to RM48.7mn on Thursday before rebounding to RM121mn the day after (Friday). This is in line with our expectation amid the US that could be close to the end of its interest rate upcycle. Though the Fed warned of further rate hikes (possible) - we think that the cycle could be close to its peak and hence, foreign investors repositioning their portfolio that skews towards the emerging economies (EMEs). How long will this last? We think this could be a long haul amid EMEs that borne the brunt of intensified selling pressure since the Fed cut the FFR massively since the spark of COVID-19 pandemic. To begin with, the Fed is expected to normalize the FFR by close to 100 bps by next year though will begin only in late 2Q24. That is equivalent to 4x reduction of FFR by 25 bps each, potentially deflating the USD, a boost to Ringgit. In any case, should the Fed revise upward the FFR to its terminal rate of 5.75% versus 5.50% currently, the FFR is more than 150 bps higher than its neutral rate. The looming cut in FFR is a preamble of profit taking activity in US markets and hence, a ‘liquidity driven’ rally into EMEs. Additionally, we think that the USD is overbought which means that the EMEs currencies are oversold. In sum, the rapid capital inflow that we are seeing now. More importantly, the development on US CPI and unemployment along with its consumers sentiment survey outcome are merely ‘noises’ which does not negate the fact that the Fed will surely loosen the policy rate in the near future as it is markedly above its neutral rate. Any attempt to keep the FFR too high for too long will choke the economy, unnecessarily. Though the August US CPI and unemployment remain a distance compared to the Fed target but with 500bps increases in FFR since last year and another one or two adjustments later should be sufficed to clamp and dent inflation. Note that the Fed expects its inflation to reach its target of circa 2.0% only in 2026 versus 3.7% now. More importantly, the downtrend in US CPI is encouraging thanks to August numbers that is convincingly higher than the July numbers of 3.2%. US unemployment is also showing a healthy trend amid August numbers of 3.7% that is not far compared to the Fed year end 2023 target of 4.5%. US’s JOLTS September numbers, due to be released on 3rd of October is to watch out for. We urge investors to ride on this wave as foreign buying momentum may be for a long haul. Foreign investors could also be encouraged by the government’s effort to reduce wastages and subsidy expenditure (i.e., SRI) and hence, a leaner fiscal expenditure. The government’s initiative to bring down fiscal deficit to circa 3.5% by 2025 will also bode well for sentiment and hence, the steady foreign buying momentum that we are seeing now.

Source: BIMB Securities Research - 25 Sept 2023