Government-linked funds scoop up local equities

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KUALA LUMPUR: While foreign institutions were selling, government-linked funds such as the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) have been scooping up local equities, capitalising on the weak market sentiment caused by fresh concern about the country’s economy amid falling crude oil prices and the weaker ringgit.

When contacted, Areca Capital Sdn Bhd chief executive officer Danny Wong, said fallen local equity prices have presented a buying opportunity for government-linked funds. He noted that only during such weak market sentiment that large institutional funds could acquire a sizeable number of shares without triggering a rally in stock prices.

“Taking a pension fund as an example, when the market is on an uptrend, it’s hard to collect sizeable shares, without further boosting its prices,” he said.

According to data compiled by The Edge Financial Daily, the EPF had, from Jan 1 to Jan 27, 2015, recorded substantial net purchases of shares in beaten down oil and gas companies, namely SapuraKencana Petroleum Bhd (fundamental: 1.3; valuation: 1.8), Bumi Armada Bhd (fundamental: 1.4; valuation: 0.6) and Dialog Group Bhd (fundamental: 0.7; valuation: 1.7). (See table)

It also recorded substantial net purchases of shares in banking groups CIMB Group Holdings Bhd (fundamental: 2.1; valuation: 1.35) and BIMB Holdings Bhd (fundamental: 2.7; valuation: 1.8).

Also in the same period, PNB recorded substantial net purchases of shares in government-linked companies (GLCs) such as Sime Darby Bhd (fundamental: 1.3; valuation: 1.3), UMW Holdings Bhd (fundamental: 1.2; valuation: 2.2), Telekom Malaysia Bhd (fundamental: 0.9; valuation: 1.1) and Tenaga Nasional Bhd [TNB] (fundamental: 1.3; valuation: 1.8).

Fund managers said these purchases reflected the funds’ confidence in the long-term prospects of the said major corporations, despite the temporary blip in some of their business operations.

For instance, SapuraKencana, which also recorded net purchases of shares by PNB in January, besides EPF, saw its share price decline sharply since last October, tumbling from about RM4.10 to a low of RM2.10 in December, in line with the sharp drop in global oil prices.

Nevertheless, with recent purchases by local institutions such as the EPF and PNB, the stock has rebounded to about RM2.80 recently. From Jan 1 to 27, EPF and PNB had recorded net purchases of some 37.46 million shares and seven million shares respectively in SapuraKencana.

Meanwhile, among the top net purchases by EPF was CIMB, in which the retirement fund recorded a net purchase of 25.05 million shares during the Jan 1 to 27 period.

CIMB’s share price recovered somewhat after news came out on Jan 14 on the cancellation of the tripartite merger involving the group, RHB Capital Bhd (fundamental: 1.5; valuation: 2.1) and Malaysia Building Society Bhd (fundamental: 2.4; valuation: 1.2).

The banking group had seen a sharp drop in its share price since it unveiled the merger structure on Oct 9 last year, due to market concerns over the viability of the exercise. Hence, following the cancellation of the deal, interests in the stock had been revived to a certain extent.

The EPF is the second largest shareholder of CIMB with total holding of 1.27 billion shares or a 15.13% equity interest.

PNB, on the other hand, had also taken the opportunity to increase its stakes in GLCs such as Telekom by 1.25%, and in TNB by 0.56% during the Jan 1 to 27 period.

Through its trust fund Amanahraya Trustees Bhd-Skim Amanah Saham Bumiputera, PNB is the third largest shareholder of both corporations, with some 12.64% stake in Telekom and an 8.43% stake in TNB.

PNB capitalised on the drop in share prices of both entities at the beginning of the month to increase its shareholdings. For instance, it purchased a block of 15.63 million shares representing a 0.42% stake in Telekom on Jan 5 when the stock was trading at levels of RM6.81. Telekom shares closed at RM6.99 last Friday.

Similarly, TNB shares which closed at RM14.50 last Friday, were trading at levels of RM13.74 to RM13.80 at the beginning of the month (Jan 2 to 7), with PNB snapping up 18.07 million shares during the period, representing a 0.32% stake in the utility giant.

Unlike foreign funds, the weaker ringgit is not a cause for concern for local funds when investing in local equities, said Wong. (The ringgit was traded at RM3.64 against the US dollar as at time of writing).

“When foreign funds exit local equities partly due to concerns of the ringgit, local long-term funds may take advantage to accumulate. [And when the] foreign funds do return to local equities, it will be the local institutions’ turn to take profit; it’s quite a normal cycle for emerging markets,” he said.

According to a report by Maybank IB Research on Jan 29, Bursa Malaysia’s fund flow data showed that foreign investors had net sold RM2.4 billion worth of Malaysian equities since early this year until Jan 22, adding on to a net sale of RM6.9 billion in 2014.

RHB Research Institute head of research Alexander Chia said that government-linked funds with long-term investment horizons typically tend to choose stocks that possess sound fundamentals, decent market liquidity, high corporate governance standards, good growth prospects and attractive yields.

“Over the years, the growing size of these funds and their need to buy on market weakness have earned the Malaysian market a reputation for being “defensive” and “low beta”, as these funds are perceived to be “supporting” the market. However, this perception is somewhat unfair as it is very much a function of the size of their funds,” said Chia.

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This article first appeared in The Edge Financial Daily, on February 4, 2015.