Inflow of foreign funds may lift local banks

PETALING JAYA: The net inflow of funds into regional equity markets is partly being funded by the Hong Kong dollar carry trade with liquidity coming from the offshore Chinese yuan channel in the financial hub, analysts say.

MBSB Research said the large conversions of the yuan into the Hong Kong dollar has depressed the Hong Kong interbank offered rate, thus encouraging the proliferation of Hong Kong dollar carry trade as investors borrow Hong Kong dollars, lend in US dollars and then utilise the arbitrage profit to invest in riskier assets such as regional equities.

“Since May, the eight regional Asian equity markets that we tracked have collectively recorded positive foreign net inflows after a streak of outflows since last October.

“It is notable that the resumption of foreign inflows into regional equities coincided with the proliferation of the Hong Kong dollar carry trade,” the research house stated in a report.

Developed regional markets like South Korea and Taiwan have received the largest inflows since May but MBSB Research believes regional emerging markets could attract some of the liquidity as investors rotate some of the money out of developed markets.

It added the FBM KLCI relative underperformance this year was mainly due to fall in bank stocks that have seen RM5.8bil in net selling year-to-date. Banks constitute about 40% weightage in the FBM KLCI,

MBSB Research expects foreign investors, fuelled by the burgeoning carry trade liquidity, will take a positive re-examination of the local Bursa Malaysia Finance Index and fuel positive bank stocks price performance in the second half of this year (2H25) underpinned by attractive valuations.

“A recovery in bank valuations and prices would therefore almost guarantee positive FBM KLCI performance in 2H25, and vice versa,” the research house said.

The Bursa Malaysia Finance Index is currently trading at a forward price-earnings multiple of 9.7 times compared with its 10-year historical average of 11.7 times.

Despite its bullish view, MBSB Research has a “neutral” call on the banking sector due to the presence of industry-wide headwinds, while tailwinds vary on a case-by-case basis. It added that an improved economic outlook remains the core re-rating driver.

Its top sector picks are Public Bank Bhd with a “buy” rating and target price of RM4.77, and Hong Leong Bank Bhd with a “buy” rating and target price of RM23.09, due to their defensive nature and dividend yields that are expected to rise over time.