More turmoil ahead for Malaysia's stock market as foreigners CUT holdings

AS oil prices continued to slip, foreigners concerned over Malaysia's fiscal position trimmed equity holdings to push the stock market 2 per cent lower and just below the psychological 1,700 level.

Analysts warned of further headwinds. The freefall in oil prices has hit the petroleum-producing nation the hardest in the region despite the government's assurances that the economy is diversified enough to withstand external shocks.

Oil-related earnings now contribute 30 per cent to government revenue from nearly 40 per cent in 2009.

There are concerns that fiscal deficit targets might not be met given that the 2015 budget was based on oil prices of US$100 (S$131.26) per barrel, compared to about US$62 at present.

The local currency has also taken a beating against a resurgent greenback, losing about a tenth since the start of the year and could conceivably shed more if the outflow continues.

Malaysia is particularly vulnerable to portfolio outflows because foreign investors have large positions in financial assets, especially in Malaysian Government Securities (MGS). In October, they held 46 per cent of MGS - albeit off the peak of 49.5 per cent in May 2013 - and 24 per cent of local equities.

In a strategy report dated Dec 15, AllianceDBS head of research Bernard Ching said year to date net portfolio outflow amounted to RM17.5 billion (S$6.6 billion), with RM11 billion of it in the third quarter.

Analysts say the economy is resilient enough to weather the drop in oil prices. Moreover a reduction in fuel subsidies would offset the fall in oil revenue. Any shortfall could be plugged by trimming the operating expenditure or addressing leakages in spending.

Although a weaker currency is expected to benefit exporters, exports need to improve given the narrowing trade balance, which some economists fear if not arrested, could result in a current account deficit next year. A twin deficit could invite a ratings downgrade and make servicing the huge public debt even more onerous.

The possible upside for exports notwithstanding, Putrajaya is already battling public discontent over rising prices.

Subsidy rationalisation measures have pushed inflation to over 3 per cent this year from about 2.8 per cent last year.

But consumers maintain inflation in the cities is much higher, and made worse by the depreciation of the ringgit which has led to imported inflation. Besides the rout in oil and gas stocks, consumer stocks were also sold down on Monday on expectations of slowing demand. Companies with large exposure to domestic consumption have on the whole reported flat revenues or disappointing earnings this year.

Aeon Credit was one of the biggest losers, shedding 86 sen or 7.5 per cent to RM10.58.

"Subsidy rationalisation measures have pushed inflation to over 3 per cent this year from about 2.8 per cent last year." - Asiaone