This article first appeared in Capital, The Edge Malaysia Weekly on June 3, 2024 - June 9, 2024

THE Malaysian stock market has been on a more spirited run since the beginning of the year, finally cracking the 1,600-point mark — a level last achieved in April 2021.

On May 23, the FBM KLCI touched 1,629 points, a level last seen on March 11, 2021. The more than 13% gain so far this year puts the bourse as a regional outperformer, a status that has evaded it for nearly a decade. At end-May, the local bourse was one of the biggest gainers in Southeast Asia and in the top 10 in the world.

The FBM KLCI, which comprises the top 30 companies on Bursa Malaysia, has underwhelmed in the past 10 years with the benchmark index finishing lower every year except for 2017 and 2020 (see table).

Has the local stock market got its mojo back? It is perhaps too early to tell with any certainty, but the early signs are encouraging and analysts are of the view that the second half of the year may be even more rewarding.

Areca Capital Sdn Bhd CEO Danny Wong reckons that the market is staging a “rebound”, with support stemming from local institutions. “We are seeing more foreign fund inflows into the local market. Although foreign shareholding in local stocks are still at an all-time low, it is an encouraging sign,” he tells The Edge.

“Local institutional funds are increasing their purchases in the stock market. We expect to see more foreign fund inflows as we move into the second half of this year.”

Having been on a downtrend since April 19, 2018, when the FBM KLCI touched an all-time high of 1,900 points, the local bourse has never managed to repeat the performance.

A big reason has been the shrinking participation of foreign funds as foreign shareholding plunged from 22.4% in 2019 to as low as 13.2% in November 2023. Stock market participants are holding off on the champagne for now because even though foreign funds are trickling in, their shareholding had only inched up slightly to 14% at end-April 2024.

The lack of interest — among foreign funds in particular — has been due to the numerous changes in government since 2018. Four prime ministers in five years has given investors good reason to pause. But recent developments and more market movements have piqued investor interest.

Wong says there are a number of factors driving the local market, including more comprehensive economic policies such as those on renewable energy and semiconductors. Another factor is the slew of foreign direct investments (FDIs) committed by technology giants such as Microsoft and Google.

“We are seeing that the trade diversion is coming to this part of the world and Malaysia is one of the beneficiaries. We expect the technology sector to do better in the coming months,” he says of the US-China trade tensions that have prompted many multinational corporations, especially those in tech, to consider Malaysia as an alternative location.

“Political and global economic uncertainties since 2018 had somewhat affected the local market sentiment. But that changed last year. The political uncertainties are out and the government has been making a slew of announcements that are positive for the country’s economic development moving forward, which is a boon for the market,” he adds.

Hong Leong Investment Bank Research pointed out that foreign investors have contributed to the largest average daily value (ADV) jump to RM1.03 billion on Bursa this year — 70.3% higher than in 2023.

“Our regression model indicates that foreigners’ ‘underweight’ position in Malaysia as at April 2024 was one of the largest in the past decade. This suggests ample room for foreign liquidity to pour into the local stock market. Hypothetically, a move by foreigners from ‘underweight’ to ‘market weight’ could potentially lead to RM20.4 billion in foreign inflows, by our estimates,” the research house said in a May 23 report.

According to a report by MIDF Research, local institutions bought RM76.23 billion worth of stocks in the first quarter of the year compared with RM60.32 billion in the previous corresponding period. At the same time, they sold RM74.05 billion worth of stocks for a net buy of RM2.18 billion against RM1.77 billion a year earlier.

Nonetheless, the research house pointed out in a May 17 report that local institutions had been net sellers for four consecutive weeks to the tune of RM192.5 million. Fortunately, foreign investors continued their net buying for five consecutive weeks to May 24, purchasing RM474.1 million worth of stocks.

Local institution selling resulted in recent corrections, with the FBM KLCI slipping 1.53% to 1,604.26 points last Thursday from 1,629.18 points on May 23.

“It is a healthy correction. The market has been on the run since March,” says Malacca Securities head of research Loui Low Ley Yee, who expects further market consolidation before upward momentum resumes.

“The overall market sentiment is positive, led by the news flow of FDIs, which has been bullish for counters in property, construction and building materials,” he observes.

Retail investors were also sellers and have been since the beginning of the year. For the first four months of 2024, retailers net sold RM4.2 billion worth of stocks. This compares with net buying of RM15.17 billion in 2021 and RM16.4 billion in 2020.

The increase in buying and selling has raised the ADV to RM3.07 billion year to date (as at May 24), 49% higher than 2023’s full year ADV of RM2.06 billion.

A fund manager thinks that many retail investors are taking advantage of the upswing in the market to sell some of the positions held since 2020. “This has increased the liquidity in the market. But it should be noted that local institutions are bullish in the local market,” he says.

Looking ahead, the local stock market is expected to continue its upward trend in the second half of the year on the back of positive news flow, improving corporate earnings and valuations.

Malacca Securities’ Low believes the stock market still has legs, given that valuations are below their historical average.

“The FBM KLCI is currently trading at a trailing 12-month price-earnings ratio (PER) of 16 times, lower than its historical valuation of 17.3 times. There is also a government direction for local funds to increase their investment in the local market,” he says.

“The FDI flow has been encouraging. As such, we expect the upward momentum to continue in the second half of this year.”

Low notes that many local stocks have already recovered to pre-pandemic levels.

“Counters in the property, construction, healthcare and technology sectors have rallied to pre-pandemic levels. Many of the mid- and small-cap companies have already recovered to 2018 levels.”

Further catalysts include FDI inflows on the back of new data centre developments, as well as the new National Semiconductor Strategy, he opines.

The sector that has seen the highest gain so far this year is the utilities sector, which has surged more than 28% year to date (YTD), led by Tenaga Nasional Bhd (KL:TENAGA), YTL Corp Bhd (KL:YTL) and YTL Power International Bhd (KL:YTLPOWR). Bursa’s Utilities Index has gained a whopping 82% year on year (y-o-y).

Property counters have also benefited, with some notching a two to threefold increase in share price since last year. This is especially true for counters with exposure to the Johor market as investors anticipate greater economic activities to come given the special government incentives accorded to the state this year.

Bursa’s Property Index has gained more than 56% y-o-y and 25% YTD, outperforming the FBM KLCI. The bullishness has spilled over into the construction sector, evidenced by the 48.68% y-o-y and 25.26% YTD gain of Bursa’s Construction Index.

Areca’s Wong expects laggards such as the plantation and technology sectors to do better in the second half of the year.

“For the plantation sector, it will depend on how crude palm oil (CPO) prices move. While for the technology sector, the growth will stem from the development of new chips, the Internet of Things, electric vehicles and artificial intelligence,” he says.

Wong anticipates the market to perform better in the second half of the year on the back of growing corporate earnings and more foreign fund inflows.

“In the first half, the market was coming back from the low-base effect. We are more bullish about the second half and expect the market to continue its upward momentum,” he says.

“We believe the foreign fund inflows are still at an early stage. This is especially as the FBM KLCI is trading at an undemanding valuation compared with its regional peers,” he notes, adding that the movement of the ringgit is yet another factor. 

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