World’s Longest Stock Gain Has Top Malaysia Fund Piling Cash

By Choong En Han

Photographer: Charles Pertwee/Bloomberg

Malaysia's policy makers announced a plan to scrap fuel subsidies on Nov. 21 as part of... Read More

The manager of Malaysia’s top-performing stock fund is boosting cash holdings as slowing profit growth weighs on the world’s longest-running bull market.
Eastspring Investments Bhd., whose small-cap fund returned 30 percent in the past 12 months, is holding at least 10 percent of assets in cash across its unit trusts, a historically “high” level, said Chen Fan Fai, the firm’s chief investment officer. Analysts predict profit growth at FTSE Bursa Malaysia KLCI Index (FBMKLCI) companies will weaken to 3.6 percent in 12 months, the slowest among developing nations in Southeast Asia.
The benchmark gauge for Malaysia’s $494 billion stock market is
heading for its first annual retreat in six years, after rising 122 percent from its October 2008 low in the longest bull market among nations in the MSCI All-Country World Index. Exchange data show foreign investors are selling shares at the fastest pace since at least 2010 as profits get squeezed by lower-than-estimated exports, higher interest rates and rising fuel costs.
“We will most likely lag other markets,” Chen, who oversees about 25 billion ringgit ($7.5 billion) in Malaysia, said in an interview in Kuala Lumpur. “Earnings are not as exciting as some other markets and I suppose we lack some kind of a catalyst.”
The Malaysian stock index has dropped 1.5 percent this year, compared with an average gain of 21 percent for equity gauges in Thailand, Indonesia, Vietnam and the Philippines. The benchmark gauge earlier lost as much as 0.2 percent before closing 0.3 percent higher.

Trailing Estimates

About 75 percent of companies in the KLCI that reported earnings for the quarter ended Sept. 30 have trailed behind estimates. CIMB Group Holdings Bhd., Malaysia’s second-biggest banking group, said last week that third-quarter net income dropped 16 percent from a year earlier. Kuala Lumpur Kepong Bhd., the third-largest palm oil producer by market value, posted a 33 percent slide in fiscal fourth-quarter profit.
Malaysia raised borrowing costs for the first time in more than three years in July, becoming the first country in Southeast Asia to increase its benchmark interest rate this year. Policy makers announced a plan to scrap fuel subsidies on Nov. 21 as part of Prime Minister Najib Razak’s efforts to narrow the budget deficit. The government will also implement a goods and services tax of 6 percent in April.
“Consumer discretionary spending is going to slow, as the tax will influence domestic demand,” Gerald Ambrose, who oversees the equivalent of $3.6 billion as managing director at Aberdeen Asset Management Sdn. in Kuala Lumpur, said on Nov. 19. “It is just difficult to buy now and think, ‘My goodness me there is a fantastic upside.’”

Exports Sputter

The nation is also facing weaker demand from overseas. Export growth slowed to 2.8 percent in the third quarter from 8.8 percent in the previous three months. Foreign shipments from electronics to palm oil and petroleum were equivalent to 72.9 percent of gross domestic product in 2013, according to the finance ministry.
Crude plunged into a bear market in October and the Bloomberg Commodity Index of 22 raw materials dropped to the lowest level since July 2009 earlier this month.
Eastspring’s Chen has underweight positions in both energy and plantation companies. His funds own shares of Berjaya Auto Bhd. (BAUTO), a distributor and assembler of cars for Mazda Motor Corp.; KSL Holdings Bhd., a property developer; and Inari Amertron Bhd., a semiconductor packager, according to data compiled by Bloomberg.

Boosting Exposure

Rahul Chadha, the co-chief investment officer at Mirae Asset Global Investments Ltd. in Hong Kong, says he’s been increasing exposure to Malaysia in the second half as share prices decline. The KLCI gauge trades at 15.9 times 12-month projected earnings, a 9 percent premium versus the MSCI Southeast Asia Index. That’s down from about 18 percent at the end of last year, data compiled by Bloomberg show.
On the whole, international investors have been reducing holdings. Net outflows this year have totaled 3.3 billion ringgit, set for the biggest withdrawal since at least 2010, according to data compiled by the Kuala Lumpur stock exchange.
By contrast, foreigners have been buying in the Philippines and Indonesia. Overseas funds added a combined $5.2 billion into the two markets, where earnings are projected to climb next year by 15 percent and 33 percent, respectively.
For Eastspring’s Chen, it’s too early to redeploy cash into Malaysian shares.
“We are waiting for the market to settle down,” he said.