An uptick in inflation in the US, rising geopolitical conflicts in the Middle East, and concerns that interest rates in the US will remain higher for longer have spooked investors.
Bait Al Amanah analyst Yugendran Sivakumaran said the US Consumer Price Index (CPI) data for March was higher than expected at 3.5%, a 0.3% increase from February.
“This was unexpected as it was anticipated that inflation would cool off.
“Investors have been worried this may lead to another round of interest rate hikes, which could affect share prices or demand for goods,” he told FMT Business.
Bursa Malaysia recorded massive net selling for the week ending April 20, amounting to RM1.59 billion, the highest weekly net outflow in four years. This was the eighth consecutive week of net selling in Malaysia by foreign investors, said MIDF Research.
Moving forward, Yugendran projects a slowdown in foreign investments over the next couple of months, especially with the hawkish statements made by US Federal Reserve (Fed) chairman Jerome Powell.
“We may see an increase in the Fed rates, which may lead to the ringgit weakening,” he said.
In recent weeks, US central bank officials including Powell have declined to guide interest rate cuts, instead stating that monetary policy “needs to be more restrictive”.
Fed policymakers are aiming for rate cuts based on inflation moving towards 2%, but recent readings suggest price pressures may be shifting in the opposite direction.
Subdued investor sentiment
Kenanga Research economist Afiq Asyraf Syazwan Abd Rahim said the diminished foreign demand for domestic stocks can also be attributed to subdued investor sentiment in regional markets.
He said that in March, foreign investors reversed almost all their net equity purchases from the preceding four months, leading to significant outflows in the local bourse (-RM3 billion versus RM1.3 billion in February).
“The equity market experienced its first net foreign outflow in five months, marking the largest net selling since the first wave of the pandemic in June 2020.
“This decline was primarily driven by the offloading of financial services stocks,” he told FMT Business.
Afiq said recent developments in the US economy, notably the higher-than-expected CPI print and a robust labour market, combined with ongoing geopolitical uncertainty, have not favoured risk-on assets, resulting in outflows.
“Nevertheless, we maintain our view that the Malaysian debt market remains attractive due to the potential for both price and currency appreciation,” he said.