KUALA LUMPUR: Foreign funds are expected to return to Malaysia in view of prevailing low valuations as well as spillover effects as a result of the current bank crisis in the US, said Rakuten Trade Sdn Bhd.
Its head of research Kenny Yee Shen Pin is confident that foreign investors would be looking to diversify their portfolios, with their focus on Asian banks, following the banking debacle in the Western world.
"I believe the foreign funds are beginning to look at Asia, especially the emerging markets, which they have been neglecting for so long.
"I'm not surprised at all if they will make a U-turn over the next couple months to take advantage of the low valuation of the market and also the low currency of the respective countries especially Malaysia," he said at a media briefing on Rakuten's Q2 Malaysia market outlook today.
Rakuten said the recent failure of US banks can be attributed to cheap money and steep hikes in interest rates whereby banks with high exposure in bonds are highly susceptible.
Exacerbating the situation, over 30 US banks halted trading as their value plummeted since Silicon Valley Bank collapse signalling the demise of confidence.
In the latest development, Credit Suisse became the first European bank suffering from liquidity crunch.
Yee said the current financial situation was mostly caused by a knee-jerk reaction from investors, but once things settle down, stock prices would improve and the prices of the banking sector should recover.
Rakuten anticipates Bursa Malaysia's benchmark FBM KLCI to possibly touch 1,630 by end-2023 based on a 15.5 times price over earnings ratio (PER).
Foreign shareholding of Malaysian stocks touched the lowest at end-2021, with only 11.35 per cent but the situation improved underpinned by net foreign inflows 2022.
This year, Rakuten expects foreign shareholding to improve further, taking advantage of Malaysia's low valuations and cheap currency.
Yee believes once foreign funds begin to spill over back into Asia, demand for local currency will improve and the value of the ringgit will be ramped up.
"I think the global financial markets are suffering due to the immediate reaction of what's transpiring in the Western world, so that's why we are seeing a lot of uncertainties over the Asian market.
"Going forward, I think there will be more stability within the Asian markets as we believe there will be an emergence of foreign funds back into Malaysia eventually," he said.
Yee believes the banking crisis is the "crack" that will force fund managers to look elsewhere to invest their funds, which is why Rakuten is confident foreign funds will be coming into Asia as they look for new destinations.
He also emphasised that our local banks were well shielded from the trauma over in the US because they were conservative and well-capitalised, and generally stringent in approving loans, even for domestic consumers.
Rakuten research team vice president Thong Pak Leng said those investors would most likely turn to Asia, as they would not stay in a country if they did not see any growth.
"I think in terms of growth, Southeast Asia or Asia Pacific is the region we will see growth, so money should be coming into this region.
"They cannot stay forever in the US if they don't see any growth," Thong said.
Meanwhile, Yee reiterated that the current situation did not necessarily imply a financial crisis, as only a handful of banks were involved.
For the moment, the situation looks well-contained so it is only a matter of how the banks react at this point.
"In the US there have been efforts to recapitalise the banks and over in Europe, it's just a matter of how the banking sector is going to react.
"At the moment, what we know is there are only a handful of banks facing the liquidity crunch but I'm sure there are a number of banks that are at the borderline, so whether this will be construed as a financial crisis, your guess is as good as mine but at the moment, I guess the current situation will not be the one we experienced in 2008/2009," said Yee.
Rakuten does not expect Bank Negara Malaysia (BNM) to be overly eager in hiking interest rates going forward as this will stifle efforts to boost consumption, expecting the OPR to stay at 2.75 per cent.
"The central bank should maintain interest rates and allow economic activities to create domestic wealth.
"That will attract foreign funds when they see growth," Yee said.
He believes the ringgit will strengthen to around the 4.10-4.20 range by end-2023 on the back of the easing trends in the US.