Why SellDown In Malaysian Equities Market ...

Asian markets fell sharply while currencies also weakened as foreign funds reduced their shareholdings in emerging economies and headed back to developed markets.

The slide in Malaysian equities was also in line with the current (Aug 2013) regional markets, including Indonesia and Thailand on weakening economic growth. There were rising concerns about a contagion effect from Indonesia.

World shares sank as unease about an expected cut in U.S. stimulus and a related rise in bond yields left markets on edge.

Such concerns are also spooking Malaysian investors with Malaysia's own current account surplus witnessing a narrowing trend over the past few quarters.

Economists predict that Malaysia’s current account surplus will continue to shrink on sluggish exports. Some also did not rule out the possibility of a current account deficit in the second quarter 2013. If that happened, it would be the first since 1997.

Malaysia also is vulnerable to the US Federal Reserve's (Fed) plans to scale back on its loose monetary policy because foreign funds holds a large chunk of its bonds. Foreigners held an estimated 46.8% of domestic debt securities worth RM228.9 billion in June, down from 49.5% in May 2013.

 Foreign funds were also net sellers of Malaysian stocks for the past three weeks. In the last three weeks, a total of RM2.1 billion had left Malaysia equity.

The Fed's meeting on Wednesday as a potential "flashpoint" for the equity market as it may contain "insight" of the the Fed's level of commitment to scale back on its asset purchases come September 2013.

Market turbulence was bound to pick up further as the Fed starts to switch policy direction. People will start to wonder whether there is anything in the fixed income world that is really safe.

Things may only settle down once the Fed’s plans become clear. The base case is that the Fed will announce the start of a modest and gradual tapering at its Sept 2013 meeting. By then, it should be fully prized in, so it seems logical that we would see some degree of stabilization.

If we also get a continued improvement in Chinese economic data, then Asian currencies could find a more solid floor but for now (Aug 2013), having gained so much on the back of Fed from 2009 to 2012, some of that is being given back.