KUALA LUMPUR (Nov 12):  Capital flows into emerging markets (EM) such as Malaysia are expected to remain volatile going into 2025, amid potentially renewed investor interest towards US assets following the recent presidential election won by Donald Trump, said UOB.

Foreign portfolio flows into EMs could be negatively impacted if Trump "follows through with the tariffs pledged during his campaign" such as 10% blanket ex-China import tariffs, the bank said in a note.

This could energize the US dollar, as well as reflate price pressures, it said, pointing to RM61.9 billion of outflows from Malaysia in the five months from November 2016 to March 2017 after Trump won his presidency for the first time.

This year in October, foreign investors pulled out RM13.2 billion from Malaysian assets — the largest monthly portfolio outflow in four years.  

This marked a stark reversal after three months of net inflows. The outflow, which was the biggest since March 2020, was seen across both Malaysian debt securities (RM11.4 billion) and equities (RM1.8 billion), UOB said.

In the debt market, foreign holdings of Malaysian government papers fell, with foreign investors holding 33.2% of total Malaysian Government Securities outstanding, down from 34.8% in September, it said.

Despite this, Malaysia’s cumulative non-resident portfolio inflows for the first 10 months of 2024 remain positive at RM9.1 billion, though this is down from RM16.3 billion during the same period in 2023, the note added.

The RM13.2 billion of foreign portfolio outflows, combined with a 5.8% depreciation in the ringgit against the US dollar, took a toll on Bank Negara Malaysia’s (BNM) foreign reserves, which posted their first monthly decline in six months of US$2.1 billion — their biggest monthly drop since September 2023 — to US$117.6 billion at end-October, it said.

However, as policy shifts "are not an immediate threat", the bank has kept its USD/MYR forecast at 4.33 in 4Q2024, and lower to 4.14 in 4Q2025 "partly driven by [Malaysia's sound economic and financial fundamentals", it said.

Until Trump's inauguration on January 20, investors could watch out for the US Federal Open Market Committee (FOMC) meeting on Dec 17-18, and the reinstatement of the US debt ceiling by Jan 2, UOB said.

At the time of writing, the ringgit traded at 4.4383 against the US dollar, Bloomberg data showed. The local currency is still up 3.56% against the greenback so far this year.

In the equities market, Malaysia's FBM KLCI is down 4.19% from this year's peak of 1,678.8 points on Aug 30. The benchmark index is nonetheless still up 10.57% year-to-date.