KUALA LUMPUR: There seems to be signs that foreign investors are coming back to Malaysia, as evidenced in increased equity purchases and higher value of foreign ownership of Malaysian government securities in March — but analysts are not convinced that the trend is sustainable.

MIDF Research head Zulkifli Hamzah said foreign funds had been gradually rebuilding their equity market positions in Malaysia, but there is no evidence that this is sustainable.

“This is because participation rate is on a decline while the foreign investors appear to be passive and not bidding up prices.

“Having said that, we note that foreign funds have been net buyers for five weeks in a row now,” Zulkifli told The Edge Financial Daily in an email interview in mid-April.

He added that a decline in trading activity is hardly surprising at a time when the prospect of the market is “not so compelling”.

In Zulkifli’s latest weekly fund flow report yesterday, he noted that while the gradual build-up of Malaysian equity portfolios by foreign investors continued for the sixth consecutive week, net foreign accumulation last week was at its lowest in six weeks.

A total of RM163.3 million was mopped up, compared with previous weeks’ quanta of RM203.8 million (as at April 3), RM354.4 million (April 10) and RM307.3 million (April 17).

This happened despite a spike in global money flow into Asia last week.

“Foreign presence on Bursa [Malaysia] eased suddenly last week. Participation rate of foreign investors fell 16% to its third lowest this year. The daily average gross purchase and sale was only RM878 million. It was apparent that the actions had been in the other markets in Asia,” he said in the report.

Taiwan, in particular, pulled in a massive US$2.6 billion (RM9.28 billion) last week, which he said was clearly on euphoric sentiment over technology stocks there.

Nevertheless, last week’s purchases reduced further Malaysia’s cumulative net foreign outflow in year-to-date 2015 to RM2.62 billion, he said, adding that cumulative foreign outflow for the entire 2014 was RM6.93 billion.

In his email, Zulkifli said the local equity market at the moment is distracted by strong showings in China, Hong Kong and South Korea.

“It is made worse by the fact that there is no local catalyst, while political bickering could be a turn-off for many foreign investors. A strong recovery of the oil price and ringgit, whose fates appear to be intertwined, could be a catalyst for a strong return of foreign funds,” Zulkifli added.

Apart from that, external factors like the US Federal Reserve’s impending interest rate hike, the performance of the regional market and the continued weakening of the ringgit before this, have all combined to make Malaysia a less attractive market.

RAM Ratings, which observed on April 15 that foreign ownership of government securities registered an increase in value by 4.1% month-on-month in March, said the current pickup is mostly a reversal of the knee-jerk reaction to the conditions seen in the global market since August.

“That foreign investor sell-off, above and beyond what economic fundamentals would dictate, was further exacerbated by adverse developments towards the end of last year, brought upon by the oil price shock and the perceived negative impact on both fiscal balances and the current accounts.

“Thus, this current pickup in foreign ownership of government securities is mostly attributed to the reversal in the knee-jerk reaction to those adverse developments, which prompted the initial sell-off, as opposed to specific pull factors,” RAM Ratings economist Kristina Fong told The Edge Financial Daily in an email, also in mid-April.

Still, lack of specific pull factors, notwithstanding, she expects foreign ownership of debt securities to continue “on the back of resilient economic fundamentals and attractive yield differentials that will hold for some time”.

Trend-wise, Zulkifli said the flow of fund will be a significant function of the direction of the ringgit.

“In our opinion, if the ringgit can make a steady comeback, it will be a strong incentive for funds to continue to flow in,” he said.

The ringgit strengthened 3.44% to 3.58 against the US dollar yesterday from 3.7075 on March 18, as a rebound in oil prices eased concerns over lower crude’s impact on current and fiscal accounts of the net oil exporter.

It remains to be seen if the ringgit will continue to appreciate steadily in the near term or, as Fong believes is more likely, trend lower than 3.70 on further market volatility.

This article first appeared in The Edge Financial Daily, on April 28, 2015.