Capital outflow from Malaysia and emerging markets stabilising

• Oct 17, 2018

KUALA LUMPUR: Capital outflows from emerging markets (EM), including Malaysia, are expected to stabilise soon, as investors are now taking another look at beaten-down assets in these economies, according to Allianz SE.

According to the chief economist of the Germany-based insurance and asset-management company Dr Michael Heise, indications have emerged that investor sentiment towards EM is stabilising and maybe changing for the better after the rout and sell-off in recent months.

“In my view, we are now at a point where it (capital outflow from EM stocks and bonds) seems to be stabilising,” Heise said.

“We see a little bit of reconsideration (of investments in EM) by some investors that are becoming more critical of big markets such as the United States or European stock markets, which have taken a big hit recently,” he told a press conference in conjunction with the launch of Allianz’s “Global Wealth Report 2018” here yesterday.

Heise pointed out that some investors now view the previous overpricing of EM assets as having been corrected.

“So, now may be an opportunity to shift a little bit back into EM and increase the portfolio share of EM, which is regularly pretty low in most portfolios of institutional investors,” Heise said.

“But this depends very much on the policies of the US Federal Reserve (Fed), which I view is not going to be extremely hawkish. So, this supports the storyline that there may be some recovery on the cards for EM and that capital flows may resume to EM,” he explained.

After three rate hikes so far this year, Allianz predicted that there would be four more rounds of interest-rate increases till the end of 2019 to bring the benchmark rate to a range of 3% to 3.25% by the end of next year from the current 2% to 2.25%.

Heise said the Fed would unlikely increase its interest rates aggressively next year, as they have already reached a high level this year.

On that note, Heise said the ringgit’s value would likely be more stable.

“The picture that I just painted for the portfolio capital flows implies stable development of the ringgit,” he said.

“However, if the US Fed turns too hawkish, one can expect the US dollar to surge further and EM currencies, including the ringgit, to continue falling. But this is not the scenario we’re talking about. In a moderate US Fed scenario, there should be stability of EM currencies,” he explained.

Foreign investors have been pulling out of EM, including Malaysia, in a big way in the past few months, as investors returned to safe-haven markets such as the United States. For instance, based on preliminary data, just last week alone, Malaysia saw foreign funds withdrawing about RM1.05bil net of local equities, the largest weekly foreign net outflow in 16 weeks.

Meanwhile, Allianz said Malaysia’s gross domestic product (GDP) growth would likely slow to 4.7% in 2018, before decelerating further to 4.6% in 2019 amid a challenging external environment and fiscal consolidation initiatives by the government. This compares with the country’s GDP growth of 5.9% last year.

Heise pointed out that while the Malaysian government’s decision to cut down on spending would affect GDP in the short term, fiscal consolidation is necessary for the country to gain stability and economic resilience in the long run.

According to Heise, external factors, in particular, the trade war between the United States and China, would pose a bigger risk to Malaysia’s economic performance in the future.

“The harm that would be done to the two dominant economies of the world is going to have very negative repercussions for all suppliers indirectly, to both of the economies,” he explained.

“There may be some benefits because some companies may relocate out of China into Malaysia or other Asian economies to prevent or avoid tariffs, but this small benefit will be outweighed by the contraction in demand by the two huge economies. Therefore, this really is the biggest risk,” he noted.

On the benefit of rising oil prices for Malaysia, Heise said the current upswing in oil and commodity prices would not be sufficient to buffer the impact of rising US interest rates and the risk of the escalating trade war.

”Presently, the oil markets and the commodity markets are on an upswing, and a lot of it has to do with political reasons such as issues in Iran and problems in Nigeria and Venezuela, and Saudi Arabia of late. So, you should not rely on high oil and commodity prices,” he said

“Should some of these political issues change, then maybe oil prices could also change,” he added.

Meanwhile, RAM Ratings said the foreign capital outflow from the Malaysian bond market rose to RM3bil in September, an increase of 25% from August, mainly due to external factors.

It said in a statement that this was the second consecutive outflow, rising from RM2.4bil in August as the Fed raised the Fed fund rate by 25 basis points to a range of 2% to 2.25%, which was the third hike this year.

“Other than that, the protracted trade dispute between the United States and China continues to accentuate global risk aversion and a flight to safety, with September recording a new slew of retaliatory tariffs by both sides,” it said.

On the domestic front, Bank Negara held the overnight policy rate steady at 3.25%, as anticipated.

RAM’s head of research Kristina Fong said the balance of growth and outflow pressures has placed the central bank between a rock and a hard place, as staying put remains the most optimal policy response.

“We expect this stance to be maintained in the foreseeable future, as uncertainties still cloud domestic and external growth prospects amid continued global liquidity tightening and geopolitical concerns,” Fong said.

For more concrete fiscal guidance on Malaysia’s debt and the fiscal deficit trajectory, domestic and foreign investors will be watching for news from the tabling of the 11th Malaysia Plan review on Thursday and Budget 2019 proposals on Nov 2.

“Domestic macroeconomic strengths are, therefore, not expected to entice any significant foreign capital inflows until more clarity emerges,” she said.

Source: https://www.thestar.com.my/business/business-news/2018/10/17/outflow-stabilising/#BPBW4TlDOdv2o1Ce.99