Funds Flow - Mixed picture in Aug (CIMB)

We are somewhat puzzled by foreign funds turning net sellers in Aug despite anecdotal evidence pointing to the contrary and Bursa’s statistics showing foreign ownership spiking up during the month. Nonetheless, we believe foreign funds should turn net buyers in Sep as the KLCI and the ringgit scaled new highs for the year during the month. We continue to OVERWEIGHT Malaysia and retain our end-11 KLCI target of 1,610 points, which is based on a P/E target of 13.8x.

Stocks held by foreign investors
The value of aggregate holdings by foreign investors surged 17.2% mom in Aug against a 4.5% rise for the KLCI. As Aug’s US$112m net outflow by foreigners works out to 3% of foreign investors’ holdings in Jul, this means that stocks held by foreign funds significantly outperformed after last Jul’s underperformance. For our universe of stocks, foreign funds added around 3.6% to their weighting of defensive stocks and 7.3% to cyclical stocks. The biggest fall in weightings came from F&N, Tanjong and Top Glove. Overall, Maybank, Axiata and Sime Darby attracted the biggest increase in weightings during the month.

Valuation and recommendation
The net outflow of foreign funds in Aug was a negative surprise as the KLCI scaled new year highs while the ringgit hit 13-year highs during the month. Furthermore, statistics from Bursa Malaysia showed that foreign funds’ holdings in the market jumped 0.4% pts to 21.2%, the highest since Dec 2008. The only explanation for the divergent indicators is that the holdings of foreign funds are in the big cap blue chips, which performed exceptionally well during the period. Funds flow should return to the black in Sep as the KLCI again scaled new year highs during the month and the ringgit continues to strengthen. Also, we have numerous foreign clients from US, Europe and Asia making a beeline to visit companies in Malaysia after a long absence. No changes to our OVERWEIGHT stance on Malaysia or end-2011 KLCI target of 1,610 points which is based on a target P/E of 13.8x.