The rm4.5 trillion asset purchase programme, which will involve up to 50 billion euro in monthly bond buys until end 2016 is indicative of the prevailing macroeconomic environment in which central banks are willing to inject massive liquidity to boost economic growth as well as stock price.
The ECB’s move indirectly benefits emerging market equities, including Asian ones as foreign capital continues to search for high yields. There has been a reversal in capital flows in anticipation of the central bank’s QE announcement with net inflows of some USD3 billion seen in Asian markets as at Jan 23 2015.
In Malaysia, the rate of outflow has declined sharply in line with the return of foreign capital to Asia. On Jan 23 2015 the day after the ECB announcement the stock market recorded a net inflow of rm260 million in foreign funds.
The outflow abruptly sharply late Jan 2015 as global funds returned to this region and the weekly net inflows were quite steep. While foreign money continued to exit Malaysia on a net basis, the rm41 million in net outflow between Jan 19 and 23 2015 was the smallest since the start of 2015.
The argument for foreign capital to return to emerging markets is strong, given the prevailing market conditions in Europe and the US. In Europe, the QE programme is expected to drive sovereign debt yields to new lows.
The prospect of prolonged deflationary environment in Europe, coupled with weak commodity prices, means that equities are still expected to offer the highest yields.
With global economic growth diverging – with the US and ASEAN economic growing while Japan and the eurozone struggle with deflation – central banks will continue to pursue a growth driven mandate. This implies that they are likely to keep interest rates low as part of a loose monetary policy, geared toward simulating their countries economies and in turn benefit their capital markets.
The days of easy monetary policies are likely to continue for a long time, as shown by the ECB and the BOJ. So this will result in a lot of money flowing around, and it will be a key driver for equities to outperform other asset classes.
The magnitude of inflows of foreign capital into ASEAN countries provides a clue on the markets that investors are most optimistic about.
Given the relative stability of its stock market, foreign investors who are seeking higher than average yields and are averse to volatility may still consider Malaysia a promising investment destination.
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