Diagnosing the FBM KLCI

THE FBM KLCI closed 2025 with a modest gain of just 2.3%. What was also significant is that the index posted its first back-to-back positive returns since the great bull run between 2008 and 2013, when it rose for five consecutive years.

While the index provided positive returns, they were modest compared with the spectacular gains on other major Asian bourses, led by the strong 76% gain on South Korea’s Kospi Index.

In fact, most other Asian markets also closed higher, with gains of between 9% for India’s Sensex Index and 40.9% for Vietnam’s VN Index.

Among Asean bourses, Malaysia ranked third as Singapore’s Straits Times Index added 22.7% in 2025, while Indonesia’s Jakarta Composite Index rose 22.1%.

Only the Philippines Composite Index and Thailand’s SET Index performed much worse than the FBM KLCI, falling by 7.3% and 10%, respectively.

Foreign exodus?

The year 2025 was one of the worst in terms of net foreign selling, as some RM22.32bil left the local market.

According to estimates, foreign shareholding in the Malaysian market is now around 19%, with non-strategic stakes accounting for approximately 5% to 6%.

Despite the relatively low ownership, foreign interest in our local bourse remains high, accounting for over 40% of daily trading values.

The 2025 net outflow was the second-highest since RM24.6bil left in 2020. Since 2014, aside from foreign inflows of RM10bil in 2017 and RM4.4bil in 2022, Malaysia has experienced net outflows in 10 of the last 12 years, totalling RM94.8bil.

While in most years foreign net outflows mirrored the market’s performance, this has not been the case in three of the past four years, as shown in the accompanying chart, with the main index only falling in tandem with foreign outflows in 2023.

Similar trend

Data compiled on regional fund flows shows that Asean markets (excluding Singapore) have been generally unloved, with a net foreign outflow of US$15.08bil in 2025.

Vietnam led the outflows with US$5.21bil, followed closely by Malaysia with US$5.17bil.

Interestingly, despite the large outflow, Vietnam remained one of Asia’s best-performing markets in 2025.

Indonesia, too, performed very well, even hitting a new all-time high, although it saw a net foreign outflow of US$1.06bil.

Only the Thai and the Philippine markets closed lower in 2025, with US$2.76bil and US$0.88bil leaving these markets last year, respectively.

This analysis shows that there is no clear trend to suggest that foreign inflows or outflows could directly determine market performance, although in essence, there is some tendency for the market to show a positive trend when the inflows are strong, and vice-versa.

Looking back, all Asean markets (excluding Singapore) also experienced net foreign outflows in 2023 and 2024, totalling US$8.1bil and US$8.25 bil, respectively.

Only in 2022 did these markets register a net foreign inflow, amounting to US$11.1 bil. That year, Thailand and Indonesia accounted for the lion’s share, with US$5.96bil and US$4.27bil, respectively, while Malaysia recorded a net inflow of US$1.09bil.

Realised profits

It is a well-known fact that, among local institutions, the distribution of dividends to members or unit trust holders is a key barometer of how well a fund has been managed.

In the case of the Employees Provident Fund (EPF), only realised profits are distributed as dividends.

As the largest equity portfolio owner of large-capitalised companies listed on Bursa Malaysia, the EPF faces the challenge of realising these profits without putting undue pressure on stock prices.

At the same time, despite strong foreign selling in 2025, the foreign non-strategic stake has remained relatively stable, with end-2025 shareholding at 19%, just marginally lower than the 19.5% recorded at the end of 2024.

A key point in analysing foreign fund flows is that the data captured are market transactions, not direct business transactions (DBT).

Hence, there is a likelihood that some trades realising profits by portfolio managers are conducted via DBT with foreign asset managers.

These holdings are then slowly offloaded into the market by foreign fund managers and repurchased by local fund managers as part of their reinvestment strategy, helping them maintain their shareholding levels.

This cycle of selling and repurchasing large-cap stocks, carried out between local and foreign portfolio fund managers, seems to have created a distortion when it comes to actual portfolio investments in the country.

In a way, it negates the argument that foreign portfolio outflows necessarily lead to a decline in the market index.

Earnings matter

The stock market is fundamentally about investing, and investment decisions are generally driven by expected returns, either through capital gains or dividends.

For companies in mature industries with steady free cash flows, the dividend aspect tends to be more attractive to investors, whereas for growth companies, valuations are largely driven by forward price-to-earnings (PE) multiples.

For now, with earnings for FBM KLCI constituents expected to grow by 7%, any deviation from these expectations will either see a market re-rating or leave the FBM KLCI subdued with mediocre upside.

One of the key reasons for the FBM KLCI’s underperformance has been uninspiring earnings growth, which has caused investors to stay away.

Market de-rating

Over the years, the FBM KLCI has been de-rated relative to regional markets, with its current estimated fair PE multiple of just 14 times to 15 times against 16 times to 18 times a decade ago.

This de-rating is driven by many factors, not just earnings disappointment, including political stability, economic conditions, government finances, the ringgit’s performance, fund flows, governance issues, and structural changes that have marginalised the market in the Asian context.

The lack of excitement around “old economy” large-cap companies listed on the bourse is also becoming a growing concern, highlighting the need to address this perception.

Having identified some of the key issues affecting the FBM KLCI and its performance, next week’s column will explore potential remedies to address the market’s shortcomings.