Foreign Funds in Malaysia

Ever wonder where does the foreign funds in Bursa come from and what makes them come in/or go out of the country? Here are probably some answers.....

Below are some interesting findings from a report done by ECM Libra and published in TheEdge:

1) The United States , the United Kingdom, Hong Kong and Singapore formed about 80% of the total foreign portfolio investment in Malaysia in 2007. Given that a significant amount of overseas portfolio investment that flows to the local shores from Hong Kong and Singapore is reportedly originating from other countries, this suggests that foreign funds in the Malaysian capital market are predominantly from the United States and the United Kingdom.

2) The expected economic performance is a determining factor of the actual inflows of foreign portfolio investment to Malaysia. It is found that the actual inflows of foreign portfolio investment mostly take place six months in advance of the announcement of the nominal GDP for a particular quarter. There is a long-run relationship between the expected economic performance and the actual inflows of foreign portfolio investment to Malaysia.

3) There is a strong herd instinct prevailing among foreign investors in the Malaysian capital market.

4) In deciding whether or not to make portfolio investment in Malaysia, there is no clear sign that foreign exchange rate movement comes into the equation for international investors.

5) Interestingly, the inflows of portfolio investment from the United States, the United Kingdom, Hong Kong and Singapore had together surged significantly since early 2006. It is important to note that they all have started to show signs of weakening since the second half of 2007.

Significance of the findings:-

1) Given that economic performance in 2008 is set to be more lacklustre than last year, the local capital market is expected to be experiencing a drop in the inflows of foreign portfolio investment this year.

2) Against a background of a slowdown in the Malaysian economy, an expected rise in the RM over the short and medium terms alone would not be appealing enough to foreign investors to make portfolio investment in the country.

3) Should there be a massive withdrawal of foreign portfolio funds by any major investing country, others are likely to follow and this may set off capital flight in the local capital market. As alluded to earlier, foreign portfolio investors in Malaysia generally follow the herd.