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KUALA LUMPUR: Foreign funds appear to be moving into risk assets again especially into emerging market (EM) equities including those in Malaysia.
The interest stemmed from bigger appetite for such assets following expectations based on recent developments that the US Federal Reserve (Fed) might have hit a pause in further interest rate hikes in the near term.
Even as the FBM KLCI appeared to remain stuck below the 1,500 key psychological mark since mid-2022, analysts said any further upward moves would be predicated on the macro environment.
“A big change or expectations on the Fed’s behaviour and for it to potentially move towards a lower rate again could provide this upward catalyst both for risk assets in risk currency and equities,” an analyst told StarBiz.
In the bigger picture, it appeared that the stronger upward momentum could just be getting started, said Rakuten Trade’s head of research Kenny Yee.
“The FBM KLCI had come down quite a bit to near the 1,400 mark as the war in the Middle East broke out and US bond yields rose leading our market to suffer some decline. It appears that the significance of the war is lessen somewhat moving forward,” said Yee.
That aside, he said there is significance from the Fed’s moves as it appeared to be pausing its rate hike cycle indefinitely now.
“Most of global central banks can heave a sigh of relief. We have also seen most regional currencies strengthening as well. I believe most foreign funds would relook at EMs to continue with their portfolio diversification,” he said.
“I expect foreign inflows to continue into the local market. Hence I expect there will be more upside to the benchmark index.My year-end target was 1,560 and it is now not that far from current levels. I would say this is a more conservative figure which was made in September,” Yee added.
If that was to materialise, it would be the first gain for the local market after three years of closing lower year-on-year.
The FBM KLCI closed at 1,463.37 yesterday with a loss of 1.30 points from the previous day.
As investors and fund managers head into the year-end period, there could be further interest from any reallocation of portfolios of the institutions.
“The main catalyst now will likely be the inflows of foreign funds, which have the potential to continue especially when they rev up their reallocation of portfolio assets. EMs will certainly be the main beneficiary due to cheap valuations,” he said.
“The foreign holders of US dollar assets who come into EMs will gain on both fronts – the strengthening in local currency and potentially also asset prices,” he added.
Yee pointed out the valuations on equity markets in EMs is the main pull factor compared to equities in the developed markets such as the United States.
“Most US fund managers are treating Wall Street as a bit overvalued as higher than historical averages. The Dow Jones Industrial Average is trading above 20 times forward price to earnings ratio (PER) compared with 15 times PER average historically. If the US index goes any higher, there will potentially be profit taking activities,” he said.
However, SPI Asset Management’s managing partner Stephen Innes sounded a note of caution on the high expectations for a Fed pause in rate hikes.
“I would not read too much into today’s markets as most prominent investors are now sitting tight, waiting for confirmation from the Fed officials that they are okay with the current state of easing financial conditions,”said Innes.
“Inflation is falling, and this should be the deciding factor, and failing a surprising uptick in the consumer price index, the Fed is effectively done,” Innes added.
He said a positive indicator for risk assets was the fall in US bond yields and given that the US economy remains in a perfect balance – not too hot nor is it too cold – means the Fed could be less of a factor influencing markets moving forward.
“It offers a tremendous amount of breathing room for Bank Negara to focus on growth rather than worry about currency and the bond markets. If global bond yields continue to fall and the ringgit strengthens to below 4.50 level, it may even allow Bank Negara to start discussing rate cuts,” Innes said.
“I think markets will need a little more time to ensure inflation is truly falling and there is no state-to-state escalation in the Middle East, but we could be entering a bit of a watershed moment for local stocks that are deeply undervalued,” he added.
OANDA Asia-Pacific senior market analyst Kelvin Wong said the primary driver of asset prices is the US dollar strength.
“If the Fed continues to indicate a clearer stance on the pause of its current interest rate hike cycle, it is likely to see the ringgit recouping more of its year-long losses against the US dollar, that in turn may trigger a further positive feedback loop into the FBM KLCI where its key short-term resistance stands at 1,500,” said Wong.
He said the focus would be on Fed chair Jerome Powell’s public speeches which could provide some hints about the end of the high rate cycle in the United States.
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