PETALING JAYA: Foreign ownership of Malaysian equities sank to a record low in August, as foreign investors continued heading for the exit with over RM5.4bil in net outflows since the start of the year.
Speaking to StarBiz, fund manager Danny Wong warned that the foreign selling may not be over yet, with further outflows possible in the coming months even though selling pressure may show signs of stabilising.
Wong, who is the chief executive officer of Areca Capital, attributed the foreign selling largely to rising rates on United States Treasury bonds and Malaysian Government Securities, which led to foreign funds rotating away from emerging-market equities.
Additionally, he observed that perceived risk from political uncertainty following the state elections could have impacted foreign investors’ decision.
The recent rise in Japanese bond yields, which offer a risk-free 3% return, has also attracted substantial fund flows out of capital markets such as Malaysia, Tradeview Capital chief executive officer Ng Zhu Hann told StarBiz last week.
Meanwhile, BIMB Securities director of research Mohd Redza Abdul Rahman said the drop in foreign equity ownership likely reflects a mix of global macroeconomic pressures, regional portfolio reallocations, and domestic market mechanics, rather than a structural deterioration of Malaysia’s fundamentals.
Capital allocation into Asian emerging market equities, he noted, declined broadly amid monetary policy divergence and comparatively attractive yields in the United States.
The US Federal Reserve’s higher-for-longer interest rate posture, in particular, kept capital skewed towards US dollar-denominated fixed income and developed-market equities, he added.
Moreover, global fund managers are also actively rebalancing towards mega-cap tech and semiconductor plays in North Asia such as Taiwan and South Korea, fuelled by the artificial intelligence investment wave.
“While Malaysia is a key player in backend semiconductor Osat (outsourced semiconductor assembly and test) and data centre build-outs, local equity benchmarks like the FBM KLCI remain heavily weighted toward financial services and utilities, causing index-tracking passive funds to underweight the local market,” Redza said.
At the same time, he highlighted the role of domestic institutional funds such as the Employees Provident Fund, Permodalan Nasional Bhd and Retirement Fund Inc, as well as retail investors, which provide resilient support by absorbing the increased foreign selling.
“Strong domestic liquidity buffers prevent valuation collapses, but allow foreign ownership percentages to drift lower over time,” Redza noted.
CGS International (CGSI) Research reported yesterday that foreign ownership of Malaysian equities slipped to a new low of 18.1% in August amid a net foreign fund outflow of RM2bil in the month.
“Foreign investors sat on a net sell position of RM4.9bil for the year, as at end-August, which pushed cumulative outflows since 2024 to RM31.5bil.”
Foreign selling remained persistent throughout August, with 17 of the 19 trading days concluding in net outflows.
Month-on-month (m-o-m), gross selling rose by 25.2% to RM21.6bil, outpacing gross buying which increased by 12.1% to RM19.7bil m-o-m.
Malaysian institutions, meanwhile, shifted to buying in August, recording net inflows of RM1.6bil, while local retail investors also remained net buyers, adding a net RM375mil, according to CGSI Research.
Notably, recent data showing record inflows into Malaysia’s bond market suggest that global investors may not be exiting the country altogether, but rotating from equities to fixed-income assets.
In August, foreign investors poured US$3.9bil into the government and corporate bonds, representing the largest monthly inflow in Bank Negara Malaysia data which goes back to 2016, Bloomberg reported.
Looking ahead, Redza said foreign equity ownership levels should stabilise, and potentially reverse going into the fourth quarter of 2026 and early 2027, citing factors like an increasingly stable ringgit and a supportive macroeconomic backdrop.
“Ringgit stabilisation provides a clearer runway for foreign fund managers to lock in equity capital gains without currency risk,” he said.
Meanwhile, fiscal consolidation measures and policy execution under the National Energy Transition Roadmap and the New Industrial Master Plan, are poised to underpin the nation’s macroeconomic environment, which is backed by gross domestic product growth of around 4.5% to 5%.
However, Redza stressed that macro growth must directly translate to corporate earnings per share (EPS) growth for foreign investors to return.
“Foreign institutional funds are looking for mid-to-high single-digit EPS expansion, particularly across large-cap blue chips (banks, utilities, telecoms, and construction), to justify shifting allocations away from North Asian tech or higher-yielding US dollar fixed income,” he added.
He added that foreign direct investment commitments in digital infrastructure and green energy are currently moving into actual capital deployment stages, which has historically translated into equity re-ratings for linked sectors such as construction, power utilities, real estate investment trusts, and the tech supply chain.
Furthermore, Malaysia’s current low foreign ownership floor and appealing valuations are likely to help support a recovery.
“With FBM KLCI valuations trading near mean historical forward price-to-earnings multiples and offering dividend yields of around 4% or more, the risk-reward ratio for foreign asset allocators is increasingly attractive.
“Once global risk sentiment shifts, even a modest reallocation by regional emerging market funds will yield a notable uptick in foreign participation.”
