Foreign funds may sell more shares: CIMB

Overseas investors who sold the most Malaysian stocks in at least two years in August may sell more shares even as the government pledges reforms to attract foreign capital, CIMB Group Holdings Bhd said.

Worsening global economic turmoil may cause investors to keep unloading the nation’s equities, according to Terence Wong, head of research at Kuala Lumpur-based CIMB, which was ranked third for Malaysian research in Institutional Investor’s 2010 Asian poll. Promises by Prime Minister Najib Razak to abolish laws allowing the government to detain citizens without trial as well as easing media rules will not be enough to boost confidence, Wong said.

“It’s certainly positive news but foreign investors’ decision to invest in Malaysia or any country for that matter has now more to do with short-term developments in Europe and U.S.,” Wong said. “It’s good news for the longer term but unlikely to affect shorter-term investment decisions.”

Overseas funds sold RM3.8 billion (US$1.2 billion) of Malaysian shares last month, the most since at least October 2009, after four consecutive months of inflows, according to data compiled by the Kuala Lumpur Stock Exchange.

The benchmark FTSE Bursa Malaysia KLCI Index, has slumped 10 percent since June 30, headed for its biggest quarterly drop since the period ended December 2008, amid concerns Europe’s debt crisis will spread and as the U.S. economy showed signs of faltering. The MSCI Emerging Markets Index has lost 16 percent this quarter.

‘Bearish Mood’

The Malaysian stock gauge, down 11 percent from a record on July 8, trades for 13.7 times estimated profit, the lowest level since April 2009. That’s higher than the MSCI Emerging Markets Index’s 10 times.

“If the bearish mood continues, there will be more selling,” Wong said in an interview. “We’re playing catch-up with the other markets; we’re among the most expensive in the region.” The analyst cut on Sept. 5 his year-end forecast for Malaysia’s stock index to 1,580 from 1,700.

The government will abolish the Internal Security Act and the Emergency Ordinance to ensure people can’t be arrested for political affiliations, Prime Minister Najib said on Sept. 15 in a speech broadcast on national television. The government will also ease restrictions on media licenses and public assembly, he said.

Najib, 58, is taking the measures two months after street protests that led to the arrest of more than 1,600 people and a 13 percentage point drop in his public approval level from last year. He has eased some rules to encourage investment, including doing away with a requirement that foreign companies investing in Malaysia and locally listed businesses set aside 30 percent of their Malaysian equity for indigenous investors.

Right Direction

“This is a step in the right direction, moving more towards international standards that foreign investors are comfortable with,” said Alan Richardson, who helps oversee about US$82 billion as a money manager at Samsung Asset Management in Singapore.

The net foreign outflow from Malaysia in August accounted for 31 percent of the total from emerging markets Asia excluding China, suggesting that the Kuala Lumpur market “suffered the brunt of the selling,” Tan Ting Min, an analyst at Credit Suisse Group AG, wrote in a report on Sept. 12.

Before the sell-off, foreign funds piled into Malaysia’s stock market, betting on Malaysia’s efforts to bolster economic growth. About 6.7 billion ringgit of foreign funds flowed into Malaysian stocks from April to July, according to stock exchange data.

Security Act

Prime Minister Najib’s government unveiled an economic transformation program in September 2010 that was aimed at attracting investment. The plan includes US$444 billion of programs this decade ranging from mass rail to nuclear power, led by private and government-linked companies. On July 8, Najib broke ground on a RM48 billion mass rail network aimed at easing traffic congestion in Kuala Lumpur.

The Internal Security Act was introduced in 1960 in the wake of an armed insurgency by Communist rebels, giving the police wide-ranging powers to detain suspects indefinitely. It will be replaced by a law that incorporates more judicial oversight and limits police powers to detain people for preventive reasons, Najib said.

While Najib’s sweeping changes to security laws are among the biggest since independence in 1957, he didn’t revisit earlier promises to roll back policies that favor the ethnic- Malay majority in housing, university places, government contracts and shares of publicly traded companies.

“It doesn’t have anything to do with the stock market; it’s already a fairly advanced economy and I’m not sure if anything political would be a huge catalyst,” said Mark Matthews, Singapore-based head of research for Asia at Bank Julius Baer & Co., which manages about US$205 billion in client assets globally. “It certainly won’t change perceptions of Malaysia in and of itself, but if it is part of an overall trend of a more open-minded stance in politics, maybe it is meaningful in some way.” -- Bloomberg