WHILE there are reasonable avenues for fund inflows into Malaysian equities, this will only meaningfully come to fruition once the impending state elections are done and dusted, according to Hong Leong Investment Bank (HLIB) Research.
Thus far, five of the six states will see their respective assemblies automatically dissolve between June 26 and July 4.
Penang, for example, will dissolve its state legislative assembly on June 28 to enable it and five other states – Kelantan, Terengganu, Kedah, Selangor and Negri Sembilan – which did not dissolve their state assemblies during the 15th General Election (GE15) to hold their state polls simultaneously in July/August this year.
“Our consensus aligned base case assumes no governance changes for the sextet,” projected HLIB Research head Jeremy Goh in an investment strategy note.
“We feel that (the) battered FBM KLCI valuations with five-year P/B (price-to-book value) at -2SD (standard deviation) offers some solace for bottom nibbling to ride on a possible market reprieve in 2H 2023 post state elections. Maintain the FBM KLCI target at 1,500 (15 times price-to-earnings ratio on CY2023 earnings per share).”
Although the research house observed that foreign funds have been underweight on Malaysian equities since July 2020, a reversal of the country to market-weight could see sizable inflows.
“Based on Malaysia’s current 1.4% weight in the MSCI-EM (emerging markets) index (end-May 2023), our regression model projects that a move to market-weight by foreigners would bring their shareholding to 21% (vs 20% currently),” envisages HLIB Research.
“While seemingly meagre at the onset, a one percentage point increase in foreign shareholding could actually lead to +RM15.7 bil in potential foreign inflows to Bursa ceteris paribus.”
For the record, foreigners had net sold Malaysian equities in seven out of the past nine years (2014-2022) with a total outflow of -RM63.6 bil (5M 2023: -RM2.9 bil).
Moreover, HLIB Research also foresees a possible domestic inflow booster following the call by Prime Minister Datuk Seri Anwar Ibrahim to the Employees Provident Fund (EPF) to increase its domestic investments to 70% this year vs 64% last year.
“Should this happen, based on EPF’s RM1 tril AUM (asset under management) as of 4Q 2022, a 6 percentage points re-jig from overseas to domestic could potentially see RM60.2 bil flowing from the former to the latter,” projected the research house.
“Assuming 41% (five-year average) of this sum is allocated to equities, this suggests a possible +RM24.6 bil inflow to Bursa – more than double the total net buys by domestic institutional investors over the past five years (2018-2022: +RM11 bil).”
Added HLIB Research: “In addition, the absence of EPF special withdrawals this year (2020-2022: RM146 bil) could also help liquidity inflows to the market by local institutional investors.” – June 12, 2023
