Domestic share-buyers help Southeast Asia markets cope with outflows

By Viparat Jantraprap

BANGKOK (Reuters) - Domestic investors are becoming bigger players in Southeast Asian stock markets, thanks to active state-owned funds and rising wealth, helping the region's markets cope with the kind of foreign outflows they've had this year.

While foreign investors have been net sellers of Southeast Asian shares since May when the prospect of the U.S. Federal Reserve ending its ultra-loose monetary policy first roiled markets, domestic investors have been picking up the slack.

Between May and August, foreign investors pulled about $3.2 billion out of Thai shares, $2.5 billion out of Indonesian equities and $127 million out of Philippines stocks, Thomson Reuters data shows.

Foreigners were net sellers of $3.2 billion of Malaysian shares between June and August, according to stock exchange data.

Buying by domestic investors has helped some regional other markets recoup much of their losses. Last month in Malaysia, for instance, local institutions put a net 1.1 billion ringgit ($347 million) into equities and pushed the benchmark stock index (.KLSE) to a record 1,818.93 on October 24.

Local institutions in Thailand pumped about 20 billion baht ($644 million) into the market in September-October, helping the key SET index (SET:^) recover more than half of the 19 percent loss incurred between May and August when taper-related selling peaked.

RISING MUTUAL FUND INVESTMENT

Indonesian domestic investors bought a combined $207 million in September and October, leading the Jakarta's Composite Index's (JKT:^) rise of 7.5 percent during that period. The index shed 17 percent in May-August.

Net domestic buying of Philippine equities was around $608 million in September and October, when the benchmark index (PHS:^) rebounded 8.4 percent after a 14 percent slide in the four months to August.

Helping support domestic investment is the region's rising prosperity, which has given local funds and investors greater means to invest.

The rise of mutual fund investment in Thailand illustrates this development.

Thailand's Association of Investment Management Companies says the number of Thai mutual fund accounts has surged from 628,000 accounts in 2003 to 3.55 million as of June 2013. The amount invested in these funds has quadrupled from 681.35 billion baht ($21.93 billion) to 2.78 trillion baht.

Favourable tax treatment for long-term equity funds and retirement mutual funds has boosted the mutual fund industry.

'MORE UPSIDE THAN DOWNSIDE'

"If you look at the savings rate now compared to the return on equity, it makes sense for retail investors to be involved in the stock market," said Kesara Manchusree, an executive vice president of the Stock Exchange of Thailand. "Of course, there will be times that the market turns down, but if you look at the earnings growth, it's more upside than downside."

Foreign investors' retreat from the region has prompted buying from state-owned pension funds seeking to minimise the impact of the exit from emerging markets.

State pension funds such as Malaysia's Employee Provident Fund, Thailand's Government Pension Fund and Indonesia's PT Jaminan Sosial Tenaga Kerja have helped shore up their respective markets. The Indonesia fund, known as Jamsostek, loaded up on shares in state-owned companies.

Participation by state pension funds and domestic institutions in Southeast Asia "tends to reduce volatility... so some markets like Singapore and Malaysia are quite low beta and more resilient to the volatility of other markets," said Teerawut Kanniphakul, a strategist at CIMB Securities in Bangkok.

Christie Chien, an analyst at Daiwa Capital Markets in Hong Kong, said that domestic investors who don't have many options may choose to invest in their home markets as Southeast Asian economies are "still growing at a decent rate."

For global funds with a broader perspective, "Korea and Taiwan could be better choices," she said.

While local investors have helped Southeast Asian bourses regain much of their mid-year losses, the region's markets could be hit again by outflows when the Fed actually starts cutting its stimulus. But involvement of domestic investors should reduce volatility, analysts say.

(Additional reporting by Andjarsari Paramaditha in JAKARTA and Erik dela Cruz in MANILA; Editing by Richard Borsuk)