Brace for hot money outflows

KUALA LUMPUR: The trading of shares on Bursa Malaysia and the FTSE Bursa Malaysia KL Composite Index (FBM KLCI), which are close to their all time highs, are prone to a sharp crash should hot money, which have been net buyers of Malaysian stocks for the past six months, liquidate their holdings.

Hot money, also known as foreign purchases into any type of local financial security including equities, can leave for various reasons including any change in the dynamics of the global economy, said OSK Research head of research Chris Eng.

“We believe the hot money that is in the system has already taken into account the risks of any upcoming political risks on the frontier. Thus, any reversal will not be affected much by the general election which is expected to be held soon. However, there will likely be an outflow should global market conditions change and the hot money exits equities and the stock market falls,” Eng said.

“Foreign hot money inflows is a regional phenomenon into Asean stock markets especially in Thailand and the Philippines. I will advise investors to buy on any dips should the FBM KLCI correct 5% or more. This will be a good change to accumulate stocks into your portfolio,” Eng added.

Eng also noted that hot money that has been net buyers on the Bursa Malaysia for the past six months was expected to abate and stop their continued buying moving forward.

Bursa Malaysia's benchmark FBM KLCI, which is trading at near their all-time highs, climbed further yesterday by 5.43 points (0.34%) to 1,598.87 on continued foreign and some local fund buying.

Stock market data released recently showed that hot money inflows continued to flood the country's equity markets for the sixth consecutive month in March pushing the FBM KLCI to its record high at the same time.

Data showed that foreign institutional funds saw net buying of RM3.4bil into the Malaysian stock market last month while local retailers and institutional funds were net sellers selling RM0.6bil and RM2.1bil respectively.

Meanwhile, a RHB Research Institute economics department spokesperson said that hot money in fixed income investments was currently at near its all time historical highs and that when these money flows out, it would mean a weakening of the ringgit and a drop in fixed income securities' prices.

“Investments into fixed income securities totalled RM183bil in February this year, just shy of the historical foreign highs of RM186bil in July last year.

“Any rapid and large withdrawals by foreigners from the system will have a destabilising effect on the market including equities and the ringgit,” the RHB spokesperson said.

“Looking at it historically, a case in point is the most recent outflows which happened when the 2008 subprime property financial crisis unfolded in the United States. There was a continued withdrawal of foreign fund holdings in fixed income securities from RM126bil in April 2008 to RM42bil in March 2009,” RHB said.

The spokesperson noted that during this period of financial outflows, the ringgit had then weakened considerably to RM3.70 per US dollar from RM3.14 in April 2008.

[Source]