Foreign selling to continue on US-China trade friction

KUALA LUMPUR: Foreign selling is expected to continue hitting emerging-market equities, including Malaysia, until year-end, no thanks to US President Donald Trump’s anti-China trade rhetoric and expectations of more US interest rate hikes.

Inter-Pacific Securities Sdn Bhd head of Research Pong Teng Siew said US-China trade war fears had resulted in a high level of uncertainty for the global market, with emerging markets being hit the hardest and seeing a further sell-down.

“Trump’s remarks would affect the global market, but he is so unpredictable. Even our Prime Minister, Tun Dr Mahathir Mohamad, described him ‘mercurial’.

“Therefore, I expect that the selling could possibly continue but it may not be as high as during its peak in May,” he told Bernama.

Trump’s trade flip-flops had put global markets on a roller-coaster ride recently.

On Thursday, the US President turned softer and backed down from the restrictions on China’s investments after the recent threats of slapping tariffs on the latter’s imports into the country.

Back home, Pong said, Bursa Malaysia saw the longest streak of uninterrupted outflows of over two months, since he started to track the fund flow record early 2011.

“The uninterrupted foreign selling began on May 2,2018 and accumulated to RM1.079 billion as of June 28, mainly prompted by the selling in emerging markets,” he said.

However, he noted that the yearto-date foreign withdrawals from Bursa Malaysia was not the worst among the emerging markets, as news reports said India recently saw the biggest foreign outflows in a decade.

“No market has been spared from this kind of fund outflow; in fact, every market is taking turns being hit,” he said.

Nevertheless, Pong noted that the intensity of the selling on the local bourse had slowed down compared with three weeks ago, when the selling neared RM600 million.

“It has come down to RM200 million on Wednesday and Thursday,” he added.

Other than Trump’s remarks, Pong opined that the local market would still be affected by external factors such as the US Federal Reserve (Fed) interest rate increases, whereby expectations of more hikes for this year were likely to further hamper fund outflows from emerging markets due to the weakened emerging currencies versus the greenback.

“One of the things that we can do is to increase our interest rate, but it is too late to do that as Indonesia, Turkey and Argentina have done that but to no avail. Once the selling momentum starts, it will remain hard for rate increases to slow down the selling,” he said.

Asked whether news of the government’s intention to reduce the Federal debt level from over RM1 trillion to RM300 billion help boost investors’ confidence and mitigate fund outflows from the equity market, Pong said a mere statement would hardly make a difference to the market.

“Investors are still waiting for further details on the matter,” he explained.

Echoing Pong’s views, Bank Islam Malaysia Bhd Chief Economist Dr Mohd Afzanizam Abdul Rashid said the stock market and the ringgit would remain in a cautious mode in the near term.

He said the ringgit had been very volatile since April this year, mainly driven by the external sector, especially in the context of US rate hike uncertainties and the extent of trade friction between the US and other countries, including China and those in Europe.

He pointed out that uncertainties in the external environment gave investors the jitters as to what it might devolve into, especially with regards to the growth prospects in the second half of 2018 and beyond.

“The US Treasury yield curve has also been flattening, suggesting the risk of a recession in the US has also increased, albeit, still small at this juncture. Additionally, there is also policy uncertainty on the domestic front.

“So market participants have become risk-averse and, therefore, demand for safe-haven currencies have become more prevalent,” he told Bernama.

Mohd Afzanizam noted that from the technical point of view, the markets had been in an extremely oversold position and price-earnings multiples had also become attractive.

Similarly, he felt the ringgit was in an oversold position and foreigners might look at the Malaysian market again.