GLOBAL stock markets shot up following the European Central Bank’s (ECB) move to initiate its own quantitative easing (QE) programme to stave off looming deflation in the continent’s mature but struggling economies.

The €1.1 trillion (RM4.5 trillion) asset purchase programme, which will involve up to €50 billion in monthly bond buys until end-2016, is indicative of the prevailing macroeconomic environment in which central banks are willing to inject massive liquidity to boost economic growth as well as stock prices, say experts.

“In our view, this programme goes beyond expectations in terms of size and adds to a number of positive factors at play, which leads us to anticipate an improvement in the eurozone’s economic outlook in 2015,” says Amundi Asset Management global head of research and strategy Philippe Ithurbide.

The ECB’s move indirectly benefits emerging market equities, including Asian ones, as foreign capital continues to search for high yields. There has been a reversal in capital flows in anticipation of the central bank’s QE announcement, with net inflows of some US$3 billion seen in Asian markets as at Jan 23 (see Table 1).

In Malaysia, the rate of outflow has declined sharply in line with the return of foreign capital to Asia. On Jan 23, the day after the ECB announcement, the stock market recorded a net inflow of RM260 million in foreign funds, the highest single-day purchase since June last year, says MIDF Investment Bank head of research Syed Muhammed Kifni in a Jan 26 note. “The outflows reversed abruptly last week as global funds returned to this region, and the weekly net inflows were quite steep. While foreign money continued to exit Malaysia on a net basis, the RM41 million in net outflow between Jan 19 and 23 was the smallest since the start of 2015.”

The argument for foreign capital to return to emerging markets is strong, given the prevailing market conditions in Europe and the US. In Europe, the QE programme is expected to drive sovereign debt yields to new lows, as evidenced by the German 10-year government bond yields hitting an all-time low of 0.34% on Jan 23.

Meanwhile, the benchmark stock indices in the US — the Dow Jones Industrial Average and the Standard and Poor’s 500 — are still hovering near their recent record highs. The strengthening greenback might lower the earnings of US corporations involved in global exports and this does not bode well for their stock prices.

The prospect of a prolonged deflationary environment in Europe, coupled with weak commodity prices, means that equities are still expected to offer the highest yields. The International Monetary Fund (IMF) has forecast the Asean-5 countries (Malaysia, Thailand, Indonesia, Singapore and the Philippines) to record an average GDP growth of about 5% this year, which is unheard of anywhere else in the world, apart from China and India (see Table 2).

With global economic growth diverging — with the US and Asean economies growing while Japan and the eurozone struggle with deflation — central banks will continue to pursue a growth-driven mandate. This implies that they are likely to keep interest rates low as part of a loose monetary policy geared toward stimulating their countries’ economies, and in turn, benefit their capital markets.

“The days of easy monetary policies are likely to continue for a long time, as shown by the ECB and the Bank of Japan. So this will result in a lot of money flowing around, and it will be a key driver for equities to outperform other asset classes,” notes Alliance Investment Bank Bhd head of research Bernard Ching.

However, he cautions, investors should brace for more volatility in the markets. Malaysia is facing several major economic headwinds, namely slowing domestic consumption, fiscal constraints and a weakening ringgit.

The magnitude of inflows of foreign capital into Asean countries provides a clue on the markets that investors are most optimistic about. The Philippines continue to be a highly favoured destination with nearly US$500 million in net inflows in January, largely thanks to its emerging middle class and cheap oil imports.

“In countries such as the Philippines and Indonesia, there are a lot of structural changes going on, which we believe will translate into future earnings growth. The optimism (in those countries) is well justified,” says Eastspring Investments Bhd chief investment officer Chen Fan Fai.

Although Malaysia is still lagging behind peers such as the Philippines and Indonesia in terms of inflows, its stock market seems well supported. Local institutions were net buyers of Malaysian equities in 16 out of the past 21 weeks, protecting it from further volatility seen elsewhere during the past five months.

Given the relative stability of its stock market, foreign investors who are seeking higher-than-average yields and are averse to volatility may still consider Malaysia a promising investment destination.

“We think, in the short term, there will be a rebound in Malaysian stocks. Prices have gone down a lot and valuations are now less expensive. However, there are still a lot of headwinds that could stall growth, so its neighbours might perform better over the long run,” says Chen.

This article first appeared in The Edge Malaysia Weekly, on February 2-8, 2015.

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