KUALA LUMPUR (July 11): After almost six years of maintaining an "underweight" rating on Malaysia, JP Morgan has upgraded its stance on the country to "neutral", according to a recent CNBC interview with Rajiv Batra, its head of Asia-Pacific (ex-Japan/China) equity strategy.
The decision was driven by several key factors, including policy reforms, data-centred investments, and a significant infrastructure buildout.
"What was more exciting for us were all the signs that were in the making last year," Rajiv told CNBC.
He said the pace of progress in Malaysia has been surprising, with the country recording a 4.2% gross domestic product (GDP) growth in the first quarter of this year, and earnings growth tracking around 10% to 11%.
This positive economic performance warranted a re-evaluation and a subsequent upgrade.
"We need to give credit to the country," Rajiv added.
One of the bold steps taken by the Malaysian administration was cutting subsidies, a move often considered controversial and sensitive.
Rajiv noted that the savings from these subsidy cuts are being redirected towards productive uses in the economy, enhancing literacy, reskilling people, and implementing progressive wage policies.
He added that Malaysia is taking inspiration from Singapore in this regard.
"This money will go for productive uses in the economy," Rajiv said.
The upgrade in Malaysia’s rating is also reflective of a governance reset in the wake of the 1Malaysia Development Bhd (1MDB) scandal.
The government has made significant strides in passing pivotal policies and reforms, including the National Energy (NE) transition and the Madani economy budget.
The administration remains committed to fiscal consolidation without sacrificing growth, aiming for a 5% growth rate.
Foreign money is coming back to Malaysia
The changing perception among international investors is evident, as Malaysia has seen foreign investors returning after initial outflows.
"We suffered (US$)7 billion outflows in Asean equities this year. Malaysia started with around (US$)150 (million) to (US$)160 million outflows in the first quarter, but saw a return of (US$)200 million in the second quarter," said Rajiv.
Notably, year-to-date, the bellwether index FBMKLCI has gained 11%, while FBM70 is up 28%.
Meanwhile, the ringgit has strengthen more than 2% against the US dollar from its over two-decade low in February.
The increased interest is further demonstrated by Rajiv’s own observations during recent travels.
"People are warming up to Malaysia and asking where they should invest," he added.
Malaysia, which had fallen off the radar for many foreign investors, is now attracting attention once again.
One reason for this renewed interest is Malaysia’s potential as a technology hub.
"Foreign money is starting to come back to Malaysia," Rajiv said, noting the interest in sectors like chip packaging in Penang, data centres, electric vehicles (EVs), green energy and solar projects.
Foreign investors are recognising the multiple themes and sectors that Malaysia has to offer.
Considering Malaysia’s substantial market capitalisation, comparable to Singapore, Indonesia and Thailand, it is becoming a more attractive destination for foreign investment.
"Foreign investors are taking baby steps and putting money in," he said, although the foreign ownership level remains at only 19%, not yet peaking at the 35% to 40% levels.
Rajiv said JP Morgan’s upgrade reflects a combination of economic growth, effective policy implementation and improving governance, making Malaysia a more promising investment destination.