This article first appeared in Capital, The Edge Malaysia Weekly on September 2, 2024 - September 8, 2024

AS sentiment turns more positive on the country’s growth story, the recent strong foreign buying of Malaysian equities has made the headlines. For the week ended Aug 23, foreign funds bought a whopping net RM1.4 billion of Malaysian equities, bringing their year-to-date net buying to RM1.54 billion.

The last time foreign net buying came in above RM1 billion was in May this year at RM1.06 billion.

Local institutions’ net buy so far this year stood at RM3 billion, but retail investors had offloaded a net RM4.56 billion during the same period.

Last week, the local bourse continued to see strong interest in blue-chip stocks, sending the FBM KLCI to a high of 1,684.68 points. At last Thursday’s close, the benchmark index saw a weekly gain of 1.1% to close at 1,653.55 points following profit-­taking activity.

Heavyweight banking stocks were the key contributor, with the FBM Financial Services Index gaining as much as 4% before narrowing to 2.4% in the first four days of the week.

Shares of CIMB Group Holdings Bhd (KL:CIMB) broke the RM8 mark, jumping to an 11-year high of RM8.44. Public Bank Bhd (KL:PBBANK) touched a more than two-year high of RM4.84, while Malayan Banking Bhd (KL:MAYBANK) jumped to a new peak of RM11.

For the week ended Aug 23, Public Bank was the most bought stock by foreigners among the FBM KLCI constituents, amounting to RM377.2 million, according to MIDF Research. This was followed by Maybank (+RM299.8 million), CIMB (+RM250.3 million) and Tenaga Nasional Bhd (KL:TENAGA) (+RM187.5 million).

In contrast, MISC Bhd (KL:MISC) was the largest net sold stock by foreigners at RM57.9 million, alongside YTL Power International Bhd (KL:YTLPOWR) (-RM51.4 million) and YTL Corp Bhd (KL:YTL) (-RM39.6 million).

The recent rating upgrade of Malaysian equities by foreign research houses, coupled with the rally in the ringgit, has helped spur foreign fund flows into the local bourse.

After nearly six years, JP Morgan finally upgraded Malaysia’s rating to “neutral” from “underweight” last month. This was followed by Nomura Global Markets Research’s move last week to revise upward its call on Malaysian stocks to “overweight” from “neutral”, given that an imminent US rate cut will stoke a rally in emerging markets.

Fund managers believe the significant inflow of foreign funds last week could be attributed to a few immediate catalysts.

Fortress Capital CEO Datuk Thomas Yong points to the stronger-than-expected 2Q2024 gross domestic product (GDP) growth, which surged to 5.9% year on year from 4.2% in the previous quarter. “This positive economic performance has likely boosted investor confidence in the Malaysian market.”

He is of the view that foreign investors may have been positioning themselves ahead of US Federal Reserve chairman Jerome Powell’s Jackson Hole speech, which ultimately provided clear signals that rate cuts are on the horizon. “Emerging markets, like Malaysia, should see more fund flows under an easing US monetary policy regime. Before this, several foreign research houses had already expressed increasingly positive sentiments about the Malaysian market.”

Having said that, Yong stresses that the sustainability of foreign fund inflows will depend largely on global risk sentiment and Malaysia’s continued economic resilience. “If these factors remain favourable, it is possible that strong foreign fund inflows could be sustained throughout the year.”

Beyond the positive macroeconomic outlook, he notes that specific themes within the stock market, including increasing foreign direct investment (FDI) commitments driven by supply chain shifts (such as Infineon’s additional RM30 billion investment in its Kulim plant) and growing investments from global tech majors in areas such as cloud and artificial intelligence (AI) data centres should continue to attract foreign interest.

Interestingly, Ang Kok Heng, chief investment officer of Phillip Capital, is of the view that foreign funds may take a longer position in Malaysian equities this time around.

“Foreign funds have been out of Malaysia for so many years, so they have a lot of capacity to buy local stocks,” he tells The Edge.

He believes the strong ringgit has been the key reason in attracting more foreign funds to Malaysian shores.

“Of course, as the US is going to reduce interest rates, eventually a lot of funds are coming in to not just buy stocks but also bonds. They like to invest in countries whose currencies are appreciating. Even if they don’t make money from stocks, they still make money from currency appreciation.”

As banks are a good proxy for a country’s economy, Ang says it is no surprise to see the rally in local banking stocks. “It is easier for foreign funds to get in and out of banking stocks. Most of our banks are listed, and they like to buy banking stocks. I think it is a big trend, and it is not something that they go for the short term.”

Besides banks, he says, construction stocks may benefit from strong foreign buying on the back of robust job awards. Meanwhile, the spotlight is also on consumer-related stocks due to the strengthening of the ringgit.

Though tech stocks have come under pressure, Ang suggests investors buy into the dip as he believes the semiconductor up cycle is underway.

Peter Lim Tze Cheng, founder and chief research officer of Trident Analytics Sdn Bhd, concurs, saying that tech investing is still ongoing globally.

Overall, he sees growing interest in emerging markets, including Malaysia. As such, he believes it is a good time to put capital in the stock market, which is attractive enough for now.

“For Malaysia, the GDP numbers were pretty good. Then we have thematic themes with FDIs coming in, especially in the semiconductor and technology space.”

When asked if there could be another major shock in the global stock market, Yong says there is no certainty on this front. “Following the sudden sell-off on Aug 5 due to the yen carry trade unwinding, the Bank of Japan (BoJ) signalled that it has no appetite to raise rates for now. However, Japan’s inflation rate is rising, and if this trend continues, the BoJ may eventually be forced to raise rates, which could introduce more market volatility.”

For Lim, the key risk is whether the ongoing Middle East conflicts will become a full-blown war.

In its note last month, JP Morgan raised the FBM KLCI target base case to 1,650 points, up from the previous 1,500 points, with a bull/bear scenario of 1,700/1500 points. It highlights that policy reforms, data centre investments and infrastructure build-out have become key tailwinds for Malaysia.

Its key stock picks are Gamuda Bhd (KL:GAMUDA), Tenaga, Frontken Corp Bhd (KL:FRONTKN), IHH Healthcare Bhd (KL:IHH) and Westports Holdings Bhd (KL:WPRTS).

Meanwhile, Nomura, which has advised investors to buy into Malaysian stocks, recommends CIMB (macro play and an improving return on equity trajectory), Gamuda (order book growth and renewable energy exposures) and Pentamaster Corp Bhd (KL:PENTA) (long-term beneficiary of the fast-growing automotive and medical segments).

Nomura explains that its upgrade for Malaysia is premised on solid macro fundamentals; market-support themes such as supply chain shifts/AI/data-centre infrastructure spending; supportive domestic liquidity due to relatively large allocations by local asset owners to local stocks; supportive market internals (very light foreign investor positioning, rising stock market trading volumes, resilient/stable index earnings); and the strengthening of the ringgit.

Meanwhile, Montreal-based investment research and strategy firm Alpine Macro notes that the rally in Malaysian stocks may see more upside as the technical breakthrough in share prices could signal a major turning point in the country’s economic outlook.

“Malaysian stocks have broken out above a falling long-term trend line that has been in place for over 10 years, driven by explosive rallies in the construction and utilities sectors,” it says in an Aug 20 note. 

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