Sunday, 8 April 2012

Brace for hot money outflows?

Article in The Star warning for hot money outflows:

"The trading of shares on Bursa Malaysia and the FTSE Bursa Malaysia KL Composite Index (FBM KLCI), which are close to their all time highs, are prone to a sharp crash should hot money, which have been net buyers of Malaysian stocks for the past six months, liquidate their holdings. Hot money, also known as foreign purchases into any type of local financial security including equities, can leave for various reasons including any change in the dynamics of the global economy, said OSK Research head of research Chris Eng."

I would not always blame foreigners so easily. Some foreign investment nominees might simply be rich Malaysians who parked their money overseas and who are now trading through their accounts in the British Virgin Islands, the British Channel Islands and the like.

But the argument gets even weaker when we see the numbers:

Inflow 9.8 Billion, outflow 6.4 Billion, that is a difference of only 3.4 Billion, about 1/4th of one per cent of the market cap of Bursa Malaysia. That does not sound like a worrisome number, it is completely dwarfed by the investments from EPF and PNB. So any warning about a "sharp crash" to be caused by foreigners, I don't see that quickly happening, not based on the above numbers.

I would love to see the comparable numbers of 1993, that was when the Malaysian market was really hot and inflows were huge, by any standard. The market index topped that year at around 1400 points, it took about 18 years for the CI to breach that height. I am afraid the same can't be said for the other indices, that time there was for instance a Second Board, if that would still exist then I am sure the index would currently still be lower than in 1993.

The big crash did come, not in 1994 (that was just a correction to about 900-1000 points) but in 1997 and 1998. What happened in those years was simply unbelievable, unless one witnessed it himself.

Unfortunately, we don't have proper accounts what really all went on (behind the scenes), I have never seen detailed studies from those faithful years. And that is unfortunate, because it means that no lessons will be learned and the same costly mistakes will be made again.

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