PETALING JAYA: After enduring a bruising year in 2025, with net withdrawals by foreign investors crossing RM21bil, the Malaysian stock market may be heading into a better year.
Analysts are growing more optimistic that foreign funds will return to Malaysian equities, reversing a recent pattern in which foreign investors have rotated out of stocks and into ringgit-denominated debt.
A firmer ringgit – Asia’s best-performing currency this year – is adding to the appeal of local shares.
Beyond that, investors are watching the US Federal Reserve’s (Fed) renewed purchases of short-term Treasury securities, a move some expect to revive risk appetite for emerging markets, including Malaysia.
The Fed has stopped shrinking its balance sheet, commonly referred to as the end of quantitative tightening, and has embarked on a commitment to buying some shorter-tenured securities.
This programme differs fundamentally from quantitative easing (QE) during the Covid-19 period, as it is aimed at managing money market functioning rather than lowering long-term borrowing costs.
While not a policy easing tool, the shift reduces funding stress and signals that liquidity conditions are unlikely to tighten materially.
In a note to clients, Kenanga Research said the Fed releasing some liquidity by buying up short-term debt is not new, having occurred most recently in 2019.
That instance was dubbed “technical” QE, when there were signs of stress in the money market.
“At the time, we saw some capital inflows to Malaysia, but they mainly benefitted the bond markets, while equities didn’t receive any love, with outflows seen.
“Fast forward to today, the conditions seem better at this time for equities, we posit, with a stronger argument that equities could also stand to benefit.
“The additional earnings yield for holding FBM KLCI stocks over buying 10-year Malaysian Government Securities (MGS) back in 2019 was 2.5%, compared to 3.3% currently,” it added.
Kenanga Research also argued that by virtue of Malaysia being a “strong dividends playground” on the back of reasonable inflation expectations, there will be inflows into the country.
That has somewhat played out, it said, judging by the shareholding of banks. As of November, the foreign shareholding of Malayan Banking Bhd
and RHB Bank Bhd were at multi-year highs.
The research house expects that buying into banks will continue to be supported, given that banks offer an enticing 5.2% yield despite the recent surge.
“This still offers a spread over the broader market, as well as over the 10-year MGS, which is higher than before,” it said.
Speaking with StarBiz, BIMB Securities Research director of research Mohd Redza Abdul Rahman also said the local equity market has seen a “slight uptick” of foreign shareholding.
Since the multiyear low of 18.7% seen in September, foreign shareholding has recovered to 19% in November.
“Hopefully, we will see a sustained reversal (inflow) of foreign funds in 2026.
“After a volatile 2025, marked by global trade uncertainties and ‘tariff fears’, several catalysts suggest that ‘smart money’ is returning to the Malaysian market,” Mohd Redza added.
> TURN TO PAGE 2
Among the catalysts is the narrowing yield differentials.
As the Fed continues its easing cycle and expands its balance sheet, the yield advantage of the US dollar over the ringgit is eroding.
This makes Malaysia a “high-quality carry” destination, accentuated with “peace” dividend politically versus peers, according to Mohd Redza.
Another catalyst is Malaysia’s macroeconomic resilience.
“Malaysia’s fundamentals – steady gross domestic product growth, manageable inflation, and a supportive fiscal backdrop – are often cited as supportive for capital inflows.
“While there is an outflow of foreign funds from the equity market, inversely we had seen much of the money flowing into the bond markets – an indication why the outflow hasn’t affected the value of the ringgit against the US dollar – because the money remains in Malaysia.
“Hence, the possibility of the reversal from bond or cash instruments into the equity market is high.”
Mohd Redza also highlighted that foreign investors are increasingly pricing in the results of the Ekonomi Madani reforms.
Specific progress in subsidy rationalisation and fiscal consolidation efforts has improved Malaysia’s sovereign credit credibility.
In addition, Malaysia has successfully translated foreign direct investment commitments into reality.
“In 2026, we expect these ‘hardware’ investments, such as data centres and semiconductor plants, to begin reflecting in the ‘software’ of the stock market through higher earnings in the construction and property sectors.
“In the medium- to long-term, we shall see sectors like utilities and telecommunication benefit from sustained or increased demand once the data centres come online,” added Mohd Redza.
When asked whether Malaysian equities will benefit from the Fed’s purchases of short-term debt, he said there will be a positive impact – although only indirectly and conditionally.
“While the Fed calls these operations ‘reserve management purchases’ rather than classic QE, the practical effect is increased liquidity and downward pressure on short-term yields. This is similar to earlier QE cycles in terms of easing financial conditions,” he explained.
Mohd Redza added that lower risk-free rates, particularly in the United States, can effectively reduce the appeal of safe US assets due to the downward pressure on yields.
Lower yields encourage a search for risk assets outside the United States, encouraging portfolio rebalancing into higher-beta, higher-yield, and higher-return emerging market (EM) equities and fixed-income assets.
Lower risk-free rates will also weaken the US dollar if rate cuts continue and liquidity expands, improving EM asset returns in US dollar terms and making EM assets cheaper for foreign investors.
“A softer US dollar environment has historically benefitted EM allocations. Directionally, Malaysia and other Asean markets should see a reversal of fund outflows,” Mohd Redza pointed out.
This year, up until Dec 19, the Malaysian stock market has seen a net outflow of foreign funds worth RM21.1bil, more than five times the RM4.2bil net outflow seen in 2024.
Net foreign withdrawals from Malaysian equities year-to-date (y-t-d) have surpassed those of Indonesia, Thailand, Vietnam and the Philippines.
If foreign funds do return next year in big numbers, this would provide a major boost to the local bourse, as well as to the benchmark FBM KLCI, which is already on an uptrend.
Currently, the FBM KLCI has hit the highest level in 16 months, surging nearly 20% from the y-t-d low in April.
Analysts told StarBiz that the rally is driven by more than just window-dressing by government-linked investment companies and other local institutional investors.
Improvement in market fundamentals is seen as a strong factor behind the index rally, which is expected to translate into better corporate earnings in 2026.
