Funds flow: Taking a turn for the better?

Big inflow in June 2010
We were pleasantly surprised by the return of net buying by foreign funds in June after a six-month hiatus. Moreover, the US$169 million (RM539.11 million) net buying can be considered decent and is the highest since October 2009.

The net buying could continue in July as the KLCI scaled new highs for the year during the month and Malaysia’s defensive qualities are starting to attract foreign interest. We continue to overweight Malaysia and retain our KLCI target of 1,450 points, which is based on a price/earnings (P/E) target of around 15 times.

Foreigners net buyers
Foreign funds were net buyers of Malaysian equities in June. Statistics from Emerging Portfolio Fund Research (EPFR) revealed a decent net inflow of US$169 million, which reduced the YTD net selling by more than half.

This is the first time since November 2009 that foreigners are net buyers. The net inflow in June is the highest since October 2009 and wipes out the total net outflow for 1Q10.

Buying across the board
Malaysia enjoyed net buying across the board by Asia Country, Asia ex-Japan, GEM, International and Pacific funds in June. Net value rose 6% to US$5.72 billion as Malaysia had a good month in June, during which the KLCI gained 2.3%.

June’s net inflow to the local market was similar to those seen by regional peers such as Thailand (US$202 million), Indonesia (US$162 million) and Singapore (US$87 million).
Only Hong Kong suffered an outflow to the tune of US$277 million. In the region, Malaysia is still being sold down the most in the past 2-plus years. Since the March 8, 2008 general election, which triggered a big selloff by foreign funds, these funds have sold down 37% of their holdings compared with up to only 22% for other regional markets.

Malaysia’s weighting in EM Asia has shrunk more than any other country in the region, from nearly 4% before February 2008 to 2.4%.

Stocks held by foreign investors
The value of aggregate holdings by foreign investors surged 9.5% month-on-month (m-o-m) in June against a 2.3% rise for the KLCI. As June’s US$169 million net inflow by foreigners works out to 5.7% of foreign investors’ holdings, this means that stocks held by foreign funds continued to outperform.

For our universe of stocks, foreign funds added around 2.9% to their weighting of defensive stocks and 3.1% to cyclical stocks. The biggest fall in weightings came from KLCC Prop which was taken out of the MSCI.

Overall, Tenaga, Maybank and Axiata attracted the biggest increase in weightings during the month.

Valuation and recommendation
The net inflow of foreign funds in June was a positive surprise as the selldown by foreign funds since December 2009 seemed unrelenting. Statistics from Bursa Malaysia showed that foreign funds’ holdings in the market jumped 0.3 percentage points to 20.6% in June, tying in with that of EPFR.

The net buying could continue in July as the KLCI scaled new highs for the year during the month and foreign interest in Malaysia appears to be picking up as investors seek safety in low-beta defensive markets.

We make no changes to our overweight stance on Malaysia or end-2010 KLCI target of 1,450 points which we continue to base on a mid-cycle P/E target of around 15 times.

This article appeared in The Edge Financial Daily, July 29, 2010.