FAQ on Foreign Portfolio Flows into Equity Markets
Foreign portfolio flows in and out of a country can impact the performance of a country’s equity market. This FAQ explains the factors that drive foreign portfolio flows and what they mean for investors.
1. What are foreign portfolio flows?
Foreign portfolio flows arise as a result of the purchase and sale of financial assets such as equities by foreign investors in a host country. The main focus of foreign portfolio investment is to seek capital gains or higher yields in the country’s financial markets.
Meanwhile, for the host country, the inflow of foreign funds helps to deepen and enhance the country’s capital markets as it enlarges the pool of opportunities for local companies to access funds. However, foreign portfolio flows can be volatile at times, causing fluctuations in financial markets.
2. What are some of the factors affecting foreign portfolio flows into a host country’s equity markets?
There are many factors that could impact foreign portfolio flows into a host country’s equity markets, such as:
a. Economic prospects
Foreign portfolio investors tend to be attracted to investing in countries with good long-term economic prospects, sound fundamentals and supportive government policies.
b. Corporate earnings outlook
The anticipation of stronger corporate earnings growth may drive foreign portfolio flows into a country’s capital markets. Investors pay close attention to corporate earnings as stock prices ultimately move in tandem with corporate earnings over the long term.
c. Exchange rates
Portfolio investors also consider the exchange rate outlook of foreign countries. If a country’s currency is expected to strengthen, foreign investors are more likely to invest in its financial assets in order to benefit from the currency’s appreciation.
3. Why has Bursa Malaysia experienced net foreign portfolio outflows for several years?
In 2017, higher crude oil prices and domestic economic growth led to a net foreign portfolio inflow of RM11 billion into Bursa Malaysia. Subsequently, over the 2018-2020 period, Bursa Malaysia registered net foreign portfolio outflows (Figure 1) due to the retracement in crude oil prices, lacklustre corporate earnings and the Covid-19 pandemic-related recession of 2020.
For 2021, Bursa Malaysia registered a further net foreign portfolio outflow of RM3.1 billion amid the movement restrictions imposed during the year. However, net foreign portfolio flows turned positive during the August-November 2021 period as the domestic economy stabilised with the lifting of movement controls and the re-opening of businesses.
4. How do foreign portfolio flows impact the stock market?
In general, foreign portfolio flows into a market may help drive stock prices up, resulting in the strengthening of a country’s stock market indices. On the flip side, when foreign funds flow out of the market, the market indices may face downward pressure.
Despite the net foreign portfolio outflows in recent years, participation by local institutional and retail investors has helped to mitigate the effect of foreign investors exiting the market.
It is useful for investors to understand the impact and factors affecting foreign portfolio flows and their effect on the stock markets. As foreign portfolio flows into equity markets can be volatile, investors are advised to diversify across different geographical regions and asset classes. Over the longer term, the performance of equity markets should be underpinned by their respective corporate earnings outlook and macroeconomic fundamentals.
This article is prepared solely for educational and awareness purposes and should not be construed as an offer or a solicitation of an offer to purchase or subscribe to products offered by Public Mutual. No representation or warranty is made by Public Mutual, nor is there acceptance of any responsibility or liability as to the accuracy, completeness or correctness of the information contained herein.