BusinessTimes
Although Malaysia market valuations are very reasonable now, the outlook remains uncertain given the political uncertainties, says a Hong Kong fund manager
FOREIGN fund managers are continuing to cut their exposure in Malaysia, with most saying that while the economic fundamentals remain relatively sound, the political outlook is a big concern.
"Malaysia actually remains a pretty attractive market, but the recent political uncertainties make people like us hesitant to invest," said a fund manager from Hong Kong whose company manages some US$5 billion (RM16 billion) in the region, of which about "several hundred million" has been invested in Malaysia.
Although market valuations are very reasonable now, the outlook remains uncertain, he added.
"It doesn't help that investors are not really going for emerging markets these days, so Malaysia is not necessarily a place people need to be in right now. There's a lot of money sitting on the sidelines," he said.
The market's key benchmark index, the Kuala Lumpur Composite Index (KLCI), has shed 20.5 per cent this year, making it the fourth worst-performing market in Southeast Asia, after Vietnam (-52.6 per cent), the Philippines (-28.2 per cent) and Thailand (-21.4 per cent).
The KLCI closed at 1,148.68 points yesterday.
Political stability has always been one of the reasons foreign investors had bought into Malaysia, and, with that now being questioned, there is bound to be some marginalisation, analysts said.
Several other foreign fund managers contacted by Business Times voiced concern that the government may be too distracted by recent political developments to carry out its job effectively, especially in the implementation of development projects.
"I would say politics is the single biggest thing weighing on the market. We have been a net seller since the general election (in March)," said another foreign fund manager, based in Malaysia.
Political concerns intensified months after the general election when former Deputy Prime Minister Datuk Seri Anwar Ibrahim, now the de facto opposition leader, voiced plans to topple the government by mid-September through parliamentary defections.
The loose opposition coalition, Pakatan Rakyat, currently has 82 of the 222 seats in Parliament.
Anwar is also set to contest a by-election in Permatang Pauh, Penang, after his wife, Datuk Seri Dr Wan Azizah Wan Ismail, stepped down from her parliamentary seat.
Fund managers were quick to add that in addition to political concerns, the market's poor performance was also caused by factors such as the expectations of slower economic and corporate earnings growth in the second half of the year.
Many, however, believed that were it not for the political developments, the stock market would do much better and could possibly outperform the region.
A recent Merrill Lynch fund manager survey on global emerging markets found that more fund managers had an "underweight" stance on Malaysia last month (56) compared to April (44).
In the same period, the number of those holding "overweight" positions fell to 13 from 22.
According to stock exchange operator Bursa Malaysia Bhd, foreign investors accounted for about 42 per cent of trading value in the market in the first half of the year, compared with 37 per cent in the whole of 2007.
But in terms of foreign ownership, it was in the "low 20s per cent", compared to the "mid to high 20s per cent" last year, Bursa Malaysia chief executive officer Datuk Yusli Mohamed Yusoff had said.
Analysts said they did not expect political noise in the country to die down anytime soon. They believed the "last milestone" would probably be the Umno party elections in December.
"We see no quick resolution to the increasingly fragile political backdrop in the near term," Deutsche Bank said in a report early last month. It expects the KLCI to fall to 1,060 by the end of the year.
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