After 25 months of consecutive equity outflow, foreigners turned net buyers from Aug to MTD-Oct totalling +RM3.5bn. While still premature to say if recent inflows can sustain in the coming months, we opine that foreign shareholding has scrapped the bottom of the barrel, hitting a low of 20.2% in July-Aug before inching up to 20.4% in Sept. Judging from foreign inflows thus far into Oct, we estimate that foreign shareholding could recover further to 20.6% this month (+0.2ppts MoM). From our analysis of the KLCI and foreign shareholding – computing a 69% correlation – a recovery in the latter could provide some market uplift. Stocks with relatively low foreign shareholding (vs their historical levels) that we have BUYs on are Maybank, Tenaga, SDPlant, KLK, IJM and VSI.

Foreigners turn net buyers. After net selling Malaysian equities for 25 consecutive months (since July 2019), the tide finally turned as foreigners became net buyers from Aug-Sept to the tune of +RM1.92bn. Their net buying momentum continues to hold up this month, with consecutive inflows for the past 12 trading days (6-22 Oct), bringing the MTD sum to +RM1.57bn (Aug to MTD-Oct: +RM3.49bn). On the other side of the coin, domestic institutional investors were net sellers between Aug to MTD-Oct at -RM4.67bn while retailers tapered their net buys during that period to +RM1.18bn.

Scrapping the bottom. Foreign shareholding on Malaysian equities hit 20.2% in July and Aug – this marked a record low, even below the GFC’s bottom of 20.7%. With the recent return of foreign inflows, foreign shareholding managed to inch up slightly in Sept to 20.4% (+0.2ppts MoM), which is roughly -1.5SD below mean (22.9%). Judging from trade flow trends thus far this month, our guesstimate is that foreign shareholding could further increase to 20.6% by end-Oct (+0.2ppts MoM).

Still too early but… It may be too premature to tell if the recent foreign inflows can be sustained thru the coming months. However, having net sold Malaysia in 7 of the past 8 years totalling -RM67.3bn (including YTD: -RM2.0bn), we opine that current foreign shareholding levels have scrapped the bottom of the barrel. Judging from our monthly post-GFC analysis between the KLCI and foreign shareholding – computing a pretty decent 69.3% correlation between the 2 variables – a recovery in the latter could help uplift the market. We keep our end-2021 KLCI target unchanged at 1,640 (16.7x PE on mid-2022 EPS).

Low foreign shareholding stocks. Within our coverage, stocks that have low foreign shareholding relative to their historical levels that we have BUY ratings on are: Maybank (TP: RM9.40), Tenaga (TP: RM12.50), SDPlant (TP: RM4.99), KLK (TP: RM25.33), IJM (TP: RM1.96) and VSI (TP: RM1.88).

Source: Hong Leong Investment Bank Research - 26 Oct 2021