Foreign investors are still underrepresented in Malaysia’s (EWM) bond and equity markets. With foreign inflows into emerging markets at 2006 peaks and predicted to touch $970 billion this year, Malaysia has immense potential for growth. “Foreign ownership in Malaysia’s equity and bond markets is still relatively low compared to historical levels. Bursa Malaysia’s benchmark index is still 100 points below the record,” said Danny Wong, CEO, Areca Capital. In May 2017, foreign holdings in Malaysian debt securities rose to RM195 billion from RM185 billion in April, indicating foreign investors are turning towards Malaysia.
Lee Heng Guie of Socio Economic Research Centre recently expressed optimism on flows to emerging markets (ASEA). “The inflows into emerging markets are supported by better macro prospects, improved external balances and progress made in policy reforms,” he said. “Malaysia is no exception. It saw sustained net foreign buying of equities, attracted by positive macro and corporate earnings drivers such as still high gross domestic product growth, strong rebound in exports, ongoing and new infrastructure spending, potential upside in the ringgit and positive sentiment in global markets. “Expectations of the general election also spur interest in election plays and themes,” he continued.In the first quarter of 2017, investors plowed $78 million into the iShares MSCI Malaysia ETF (EWM) compared to the $674 million that went into the iShares MSCI Emerging Market ETF (EEM) (VWO). Malaysia is among the smallest recipient of foreign flows this year, and with a recovery in commodity prices coupled by a rebound in the Malaysian ringgit, analysts expect a turnaround.
Malaysian equity markets have witnessed inflows of RM9.8 billion in 2017 so far, offsetting the RM8.2 billion outflows in 2016. However, bond markets are yet to turnaround as investors have redeemed RM27.5 billion from debt markets since November 2016 to March 2017. In May 2017, investors have put RM6.2 billion into sovereign debt signaling that the worst may be over for Malaysian debt markets.
However, analysts warn of political and global risks that could still impact investments into Malaysia. “Risk averse investors would tend to seek safe haven assets such as US treasuries and shy away from risky assets in EMs including Malaysia, if there are risks that threaten to derail global growth and destabilise capital flows,” said Lee Heng Guie. “These fund managers are realistic enough not to direct a significant portion of inflows here, realising that this market cannot absorb such a sum.”