MSCI index trim raises market concerns

THE Malaysian stock market’s ability to attract foreign investors has been diminished following the removal of six blue-chip stocks from the MSCI Malaysia Index, the country’s main benchmark index, with no replacements announced.

The changes will take effect at the close of trading on May 29. No explanation was given for the removals.

The affected stocks – Axiata Group Bhd, MR DIY Group (M) Bhd, Nestle (M) Bhd, Petronas Dagangan Bhd, QL Resources Bhd and YTL Corp Bhd – are well known counters with established investor following.

Save for PETRONAS Dagangan, the removals triggered an RM2.35bil selldown this past Wednesday.

It is likely that these stocks will come under short-term selling pressure as passive funds, including exchange-traded funds and index funds, adjust their portfolio to account for these changes.

With only 21 stocks now remaining in the MSCI Malaysia Index, the weighting has become even more skewed towards banking and financial services, which already accounted for nearly half the index before the six removals.

As a result, the index is becoming less representative of both the broader economy and the domestic equity market.

There is also no guarantee that funds exiting the removed counters will rotate into the remaining constituents of the benchmark index, nor into the MSCI Malaysia Small Cap Index.

This raises broader concerns about foreign participation in the domestic equity market, where foreign shareholding has generally been on a declining trend.

Foreign ownership currently stands below 20%, although reports suggest overseas investors are showing tentative interest in 2026.

It goes to show that the Securities Commission and Bursa Malaysia have a lot of legwork ahead of them despite introducing the My Value Up Programme in April to support public-listed companies in elevating their long‑term value creation and transforming them into globally attractive investment propositions.

The next MSCI Malaysia Index review is in August, and it will be interesting to see if there are any more removals or if there are additions to the benchmark index.

While long-term foreign direct investment that generates jobs remains highly valued, shorter-term portfolio inflows are also an important gauge of the vibrancy and competitiveness of the capital market.