KUALA LUMPUR (March 20): A massive selldown by institutional investors would only have a “mild” impact on the Malaysian market while their domestic funds remain relatively resilient, the latest stress test showed.

Fund managers dumping more than RM6 billion in a single day -- about twice the average daily trading value in 2024 -- across FBM KLCI components would only drag the country’s benchmark equity index down by about 45 points, or less than 3%, in the simulation, the Securities Commission Malaysia (SC) said in its Capital Market Stability Review 2024 published on Thursday. 

“Most counters would experience a moderate impact, with only one counter facing considerable price decline,” the SC said. “Importantly, the aggregated decline remains within the acceptable level" before the first-level circuit breaker is triggered when the 30-stock index falls by 10%, it said.

Fund managers held about 13% of the 30 KLCI component stocks. Results of the stress test come at a time when foreign institutional investors have been dumping Malaysian stocks, resulting in a net outflow of RM4.16 billion in 2024.

Despite being net sellers, foreign investors’ trading participation in the domestic market rose to 36.20% of total trading activity from 29.51% in 2023.

Malaysian funds, meanwhile, would remain resilient even under extreme conditions, the SC said.

If unit trust and wholesale funds are forced to liquidate up to 44.22% of the collective net asset value, their liquidity buffers would remain untouched in the selldown of such scale, the capital market regulator said.

“The stress test results indicated that all tested investment funds would remain resilient to redemption shocks,” the SC said. “The liquidity profile of the investment funds is robust enough to manage periods of sustained large redemptions without significant impact on liquidity buffers.”

Under the stress test’s so-called horizontal slicing approach, where assets are sold proportionally to their holdings within the fund, liquidations were primarily concentrated in highly liquid assets. Relative to their total holdings, cash and cash equivalents were liquidated at 62.01%, while holdings in government securities were cut at 70.28%.

Equities experienced moderate liquidation at 44.34%. Meanwhile, collective investment schemes were liquidated at 28.17%, while corporate bonds and sukuk were sold at 19.79%, reflecting their lower liquidity standing relative to other asset classes.

For more SC 2024 Annual Report stories, click here.