A SERIES of interest rate cuts and accommodative monetary policies by central banks globally are flushing the market with ample liquidity or “hot money”.

However, the current flow of “hot money” seems to have eluded the Malaysian equity market for now, which is traditionally more resilient, in favour of other riskier markets that could potentially offer better returns.

“Despite net inflows of U$13 billion into major Asian markets this year, foreign investors have continued dumping Malaysian equities, just as hope was rising that the net purchase observed in the week following the Chinese New Year could be sustainable,” says Zulkifli Hamzah, head of research of MIDF Amanah Investment Bank, in a March 9 note.

The outflow of foreign funds has been noticeably strong since the beginning of the year, with overseas investors being net sellers in the local market except for two out of the first 10 weeks of the year as at March 6. This amounts to some RM3.41 billion in cumulative net outflows, or half of last year’s total net outflows of RM6.93 billion.

Conversely, local institutional funds have been net buyers in eight out of the past 10 weeks, which suggests a significant absorption of the outflows. As at March 6, institutions have been net purchasers of RM3.72 billion worth of local equities.

On the macro front, Asian equities have seen more interest as the European Central Bank (ECB) began its U$66 billion-a-month bond buying programme last week, which saw the region’s bond yields plummeting to record lows and prompting investors to look for higher yielding asset classes elsewhere.

In spite of growing interest in Asian equities, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) is currently one of the worst performing among major Asian indices year to date.

Hampered by the weak ringgit and weak oil prices, the Malaysian equity market has faced immense pressure, in contrast to stock indexes in Indonesia and the Philippines that have recently recorded fresh highs.

After an encouraging start to the year, the FBM KLCI has shed gains over the past two weeks, as the latest earnings reporting season came to a close with largely uninspiring results seen in the fourth quarter of 2014.

Since peaking at a three-month high of 1,825.54 points on March 4, the FBM KLCI fell to as low as 1,770 points on March 11. It closed at 1,786.87 points last Thursday.

Corporate earnings among FBM KLCI’s constituent stocks saw marginal growth of 0.1% in earnings per share (EPS) on a year-on-year basis, after factoring in their full year earnings, according to CIMB Research in a recent note (see chart).

The earnings decline began during the second quarter of last year, which coincided with falling oil prices as well as a significant weakening in the ringgit, CIMB notes.

The flattish earnings growth may give investors cause for concern. As at March 12, the FBM KLCI only gained 2.8% this year, well below emerging market peers such as the Philippines and Indonesia with gains of 9% and 6% respectively to date.

While the FBM KLCI has a reputation for lower volatility due to the strong institutional support, some say this is no longer the priority of yield-hungry investors.

“Malaysia is facing a problem in terms of perception as well as fundamentals. The GST implementation and lower oil prices are big factors that could lead to subdued economic growth and have negative ramifications on corporate earnings prospects.

“Foreign investors are now turning to Indonesia or India, where the growth story remains intact,” says the head of research of a foreign-owned investment bank based in Kuala Lumpur.

Another notable development is that the central banks of China, Indonesia, India and Thailand have cut interest rates over the past two months, which prompted fresh interest in their stock markets.

In contrast, Bank Negara Malaysia maintained its benchmark rate of 3.25% this month after a hike of 25 basis points in July last year. The central bank had commented on March 11 that the current rate is supportive of growth and is in line with current inflation expectations.

Economists say Bank Negara is unlikely to cut the interest rate due to the weak ringgit, which has been Asia’s worst-performing currency over the past six months.

“With so much uncertainty and market speculation, a popular question among foreign investors was the direction of Malaysia’s interest rates, given that other countries have been lowering rates.

“We believe the key policy rate will remain unchanged as Bank Negara seems concerned about the risks of destabilising financial imbalances and rising inflationary pressure from the Goods and Services Tax implementation,” says Affin Hwang Capital head of research Ong Boon Leong.

At present levels, the FBM KLCI fetches a valuation of 16.5 times earnings, compared with consensus expectation of around 15 times earnings at end-2015. According to Bloomberg data, the FBM KLCI’s dividend yield for 2015 is projected to be 3.2%, the lowest level in six years.

The bearish tone is reflected by the forecasted year-end level for the FBM KLCI by the major research houses (see table). The majority of the estimates peg the index at between 1,800 and 1,850 points, implying a modest upside of just 3.5% from its March 12 close of 1,786.87 points.

“The end of the earnings reporting season means less scope for potential market catalysts going forward. The market will be hard pressed to find reasons to justify a reversal (from the current downtrend),” says MIDF’s Zulkifli Hamzah.

This article first appeared in The Edge Malaysia Weekly, on March 16, 2015.