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KUALA LUMPUR (Dec 24): FBM KLCI’s upside in 2025 could be limited by a slowdown in foreign inflow and the strengthening US dollar, Phillip Capital warned and recommended that investors look at small- to mid-cap stocks.
Foreign funds, historically a key driver of KLCI’s performance, may continue to flow into the US and bypass Malaysia, the research house flagged in a strategy report. Despite inflows in 2017 and 2022, Malaysia has largely struggled with foreign equity outflows over the past 10 years, it noted.
Phillip Capital expects the US Federal Reserve to keep interest rates steady until June 2025 before easing in the second half.
If the Fed raises interest rates, emerging markets, including Malaysia, may face “significant challenges as tighter US monetary policy could trigger capital outflows and put additional pressure on the ringgit,” the research house said.
Phillip Capital has the KLCI on ‘neutral’ as the end-2025 target of 1,750 implies a potential gain of less than 10% from current level.
The benchmark index has climbed about 10% this year, tracking the gains of most Asian market indices. The ringgit, meanwhile, has sharply pared its recent gains, and is just up a little over 2% against the US dollar.
While 2024 has been positive for large-cap stocks, small- and mid-cap stocks of under RM5 billion offer “a better risk-reward, bolstered by strong thematic growth drivers” in 2025, Phillip Capital said.
“We remain confident in the prospects for small-mid cap stocks” as current valuations present timely opportunity to accumulate high quality stocks that would benefit from improving market sentiment and positive news flows, the research house said.
For strategy, Phillip Capital has all sectors on ‘overweight’ except property stocks, which the research house rates ‘neutral’ due to subdued underlying demand.