Inflation causes funds to shift

Friday February 18, 2011
Inflation causes funds to shift
By YVONNE TAN
yvonne@thestar.com.my

Foreign funds moving money from emerging markets to more matured ones

PETALING JAYA: Most emerging equity markets in Asia have been experiencing sell-downs in recent weeks with foreign funds shifting their money to the more matured markets even as inflation in the region becomes more of a concern.

“Funds will continue to flow out from this region largely on the theme on inflation, the worst of which is not over,” Jupiter Securities research head Pong Teng Siew said.

Extreme weather conditions in most parts of food-producing countries such as Russia, Latin America, Australia and China have kept food grain prices at historical high levels globally, pushing inflation levels up. And emerging markets especially those in Asia, where grains are consumed the most, have been most affected.

Low income nations like India and the Phillipines are the worst-hit as it means that the people there now have to spend a huge amount of their limited income on food, leaving little else to buy other things which can help spur economic growth.

Selling of shares in the emerging markets of India and the Philippines was heavy in the whole of last week, compared to their generally low trading volumes with an estimated outflow of US$178mil and US$48mil respectively, based on information compiled by MIDF Research.

Foreign funds turned net sellers in both nations in early January.

In Malaysia, inflation is still relatively low (at 2.2% in December).

However, that has not stopped foreign funds from cashing out of the market following healthy gains last year.

In Malaysia, according to data compiled by Maybank Research, foreign funds had turned net sellers last week, selling off RM1.18bil worth of shares.

OSK Research head Chris Eng said funds were taking profit following the stellar gains last year made by most emerging markets. In the case of the Malaysian market, it yielded a 31% return in US dollar terms.

The profit-taking is exacerbated by a host of factors including the fact that developed economies were starting to look more attractive, having been under-invested since the global financial crisis of 2008/09 and given their path, albeit a rocky one, to recovery now.

“A flight of funds from emerging markets back to developed markets is happening,” Eng said.

Recent Bursa Malaysia data indicates that foreign investor participation in the local stock market dropped as early as last month as foreign buyers' net purchases took a dip. Net purchases of local stocks by foreigners fell to RM100mil in January, a steep fall from RM2.6bil in December.

Net purchases stood at more than RM4bil at the peak in September last year, the data showed.

Still, MIDF Research does not think that this is a case of foreigners cashing out of Malaysia en bloc.

“Amid the selling, some foreign investors have been picking up good stocks at depressed prices,” MIDF said in its report issued on Feb 14.

The 30-stock benchmark FTSE Bursa Malaysia KLCI index has risen 3.23 points or 0.2% so far this week after losing a total of 45.07 points, or 2.93%, in the last three trading weeks of last week, wiping out all its year-to-date gains.