Outflow of foreign funds from local capital market likely to persist


PETALING JAYA: The outflow of foreign funds from the local capital market, which have been substantial, will likely persist until president elect Donald Trump assumes office and investors get some clarity on policy direction.

While Malaysia’s economic outlook for 2025 remains favourable, a total of RM8.5bil in foreign funds exited the local debt and equity markets over the past two months following Trump’s election win in November and the US Federal Reserve (Fed) becoming more dovish on its rate cutting cycle.

The compelling valuation of the local equity market appears to hold little appeal as investors’ “risk off” mode has been reinforced with the risk-free rate edging closer to 5%,.

This may lead to shift in asset allocation into debt from equity, at a time the US economy continues to show strength with the latest data from the labour market see a pause in the Fed’s easing cycle.

Trump however remains the main attraction for investors.

“The outflows from emerging markets will not be abating until Trump takes office and makes clear his stand on tariffs,” said Ian Yoong Kah Yin, a high net investor.

Data shows foreign investors continued to lower their holdings of Malaysian debt in December, with net outflows increasing to RM1.4bil as compared to outlaws of RM1.1bil in November, driven by a broader shift from riskier assets towards safe-havens, Kenanga Research stated.

The selling led foreign holding of Malaysian debt declining to RM275.2bil in November, with foreign share of total outstanding debt lower to 13.1% (Nov: 13.2%).

As a result, the total net foreign inflows into Malaysia’s debt market fell to RM4.8bil in 2024, a sharp decline from RM23.6bil in 2023.

On a quarterly basis, net outflow from the local capital market amounted to RM21.7bil in the final quarter of 2024 (4Q24) as compared to a net inflow of RM22.2bil in 3Q24, which is the widest quarterly outflow since 1Q20.

The bulk of the outflows in 4Q24 were from local bonds (RM14bil) while equities suffered net outflows of RM7.8bil in the last quarter, data from UOB Kay Hian Global Economics & Markets Research noted.

For the full year of 2024, cumulative foreign portfolio inflows dropped to RM0.6bil versus a peak of RM22.3bil in January-September 2024.

While the external headwinds remain, Kenanga Research expects the local debt market to be supported by domestic funds demand, underpinned by Malaysia’s strong fundamentals, anchored by fiscal reforms, robust growth, low inflation and trade partnerships.

“Bank Negara is expected to keep the overnight policy rate at 3% through 2025, supporting monetary stability and limiting further outflows,” it added.

Despite the FBM KLCI rising some 13% in 2024, foreign investors net sold RM4.2bil of local stocks last year, nearly double the RM2.4bil net sold in 2023.

The bulk of the selling was seen in the last quarter of 2024, much of that could be linked to Trump’s “Tariff Man” rhetoric further amplified by a weak Chinese economy and a weaker ringgit.

They net sold RM2.9bil worth of local stock in December after shorting RM3.1bil worth in November, driven by elevated market volatility and increased risk aversion.

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