This article first appeared in Capital, The Edge Malaysia Weekly on May 26, 2025 - June 1, 2025

FOREIGN investors are once again pouring funds into Malaysia’s capital markets, reversing months of sell-off amid a firmer ringgit, easing in US-China trade tensions and attractive bond yields. Market experts point to renewed optimism following mutual tariff concessions by the world’s superpowers as being the key catalyst.

BIMB Securities Sdn Bhd director of research Mohd Redza Abdul Rahman says the recent surge in foreign fund inflows into Malaysia’s equity market marks a significant reversal, driven primarily by a de-escalation of trade tensions between the US and China.

“The easing of fears after the US and China agreed to reduce the tariff ‘tantrum temperature’ and offered concessions has provided a much-needed boost in optimism. This has resulted in a flow of funds into big-cap stocks, with investors adopting a more risk-on attitude,” he tells The Edge.

Mohd Redza notes that the shift has particularly benefited sectors such as technology, construction and energy, which typically thrive in a growth-oriented environment. Conversely, there have been some sell-offs in defensive sectors, as investors rotate towards higher-growth opportunities, he adds.

Between October 2024 and March 2025, foreign investors were net sellers of Malaysian equities and bonds to the tune of RM28.3 billion, the capital flight largely attributed to a global risk-off sentiment, rising US Treasury yields and a strong US dollar.

However, foreign funds have re-entered Malaysian capital markets since March, starting with the fixed income market which saw a strong rebound of RM13.4 billion in net foreign inflows in March and April, reversing the total outflow of RM10.6 billion between October 2024 and February 2025.

This was followed by the equity market, which experienced a net foreign outflow of RM19.6 billion over the same period, saw a significant reversal this month, registering RM2.4 billion in net foreign inflows as at May 20.

According to CIMB Securities’ fund flow report, foreign investors recorded a fourth consecutive week of net buying up to May 16, with net inflows of RM1.68 billion — the highest weekly foreign inflows since 2021. The steady return of foreign inflows further eases foreign funds’ net selling position to RM9.41 billion year to date.

“Fund flow analysis for May 9 to 15 showed that foreign investors concentrated their net buying in the financial services and utility sectors, with energy being the only sector to see net selling. The top three stocks to see foreign net buying were Tenaga Nasional Bhd (KL:TENAGA), CIMB Group Holdings Bhd (KL:CIMB) and Malayan Banking Bhd (KL:MAYBANK), while the top three stocks to see net selling were Inari Amertron Bhd (KL:INARI), Yinson Holdings Bhd (KL:YINSON) and IJM Corp Bhd (KL:IJM),” the research house said in a May 19 report.

CIMB Securities highlighted that local institutional investors were net sellers across sectors except construction, technology and energy, with Tenaga, Maybank and CIMB among the top stocks to experience net selling.

Local retail investors were also net sellers, primarily in the industrial and construction sectors, with CIMB, Gamuda Bhd (KL:GAMUDA) and YTL Corp Bhd (KL:YTL) the top three stocks to see net selling.

The return of capital by foreign funds coincided with the ringgit regaining strength and bargain-hunting activity by institutional investors, according to market observers.

“Foreign inflows had turned positive since late April. With the market reaching a point of bargain as well as a weakening dollar, funds have returned in droves since April 23. Since then and up to May 20, net foreign inflows registered some RM3.4 billion, allowing the market to revert to its pre-Liberation Day level,” Datametrics Research and Information Centre managing director Pankaj Kumar tells The Edge.

He adds that while the overall outlook is positive, short-term volatility remains, especially following the US credit rating downgrade by Moody’s, which has caused US Treasury yields to rise.

On May 16, Moody’s downgraded the US sovereign credit rating to Aa1 from Aaa, citing structural fiscal concerns and unsustainable trajectory of US debt. The downgrade added to yield volatility, leading to renewed weakness in US Treasuries and prompting another round of repricing of US government debt.

“The equity market remains fluid to a certain extent as we are also impacted by some form of risk-off in the past week due to the US rating downgrade. However, with the Malaysian benchmark yield at 3.6% and the ringgit back in play, our bonds look attractive. So for now, barring poor quarterly results, the Malaysian bourse seems attractive and sustainable at this stage,” says Pankaj.

Malaysia is now being viewed as a “sweet spot” in emerging markets, owing to a more resilient economic backdrop and relative immunity to global shocks such as renewed US tariff threats under the second Trump administration.

“Our markets have been a bit of a laggard for some time, but they’ve also demonstrated a certain level of resilience compared with regional markets. We’ve observed a more stable environment here amid the prevailing volatility,” says Rakuten Trade head of equity sales Vincent Lau.

He projects that the FBM KLCI could end the year higher at about 1,650 points, from about 1,532 points currently. The benchmark index has been on a roller-coaster ride since the beginning of the year, especially after the broad-based sell-offs across global markets as US President Donald Trump’s reciprocal tariffs came into force in mid-April.

Over the past year, the index — which measures the performance of the 30 largest companies on Bursa Malaysia — has declined 4.76%, making it one of the worst performing indices in the region. The FBM KLCI has yet to catch up with its peers such as Singapore’s Straits Times Index, which has gained 17.37%, and the Vietnam Stock Index, which has increased 3.59%. Even Indonesia’s Jakarta Composite Index has performed better than the local benchmark given i ts slight decline of 0.61%.

On the outlook for the rest of 2025, Pankaj says: “Tough question, but funds will move in and out where money can be made. Malaysia is now in a sweet spot among emerging markets as in all likelihood, we are least impacted in the region when it comes to Trump’s tariffs, while our foreign direct investments (FDIs) remain resilient.”

He points out that a firm ringgit, healthy Bank Negara Malaysia reserves and decent gross domestic product (GDP) growth are boosting the country’s investment narrative. Expectations that the central bank may cut interest rates by 25 to 50 basis points in the second half of the year have also helped improve sentiment, especially in the fixed income market. Nevertheless, he cautions that slowing global growth and weaker export demand could still weigh on corporate earnings and investor enthusiasm.

In the first three months of 2025, Malaysia’s economy grew 4.4% year on year, compared with 4.2% in 1Q2024.

Bank Negara governor Datuk Seri Abdul Rasheed Ghaffour said the central bank may revise the growth forecast downwards from an earlier projection of 4.5% to 5.5%, given global trade tensions and policy uncertainties.

“I wish [the GDP forecast revision] would come in one to two months. [Before that] we want to get some clarity and outcome from the current negotiations [on US tariffs] that are taking place,” he said at a May 16 press conference after announcing the 1Q2025 GDP performance.

BIMB Securities’ Mohd Redza reckons that the Malaysian capital markets are expected to brace for a period of elevated volatility over the coming months, even as underlying fundamentals suggest a positive bias for foreign fund inflows. This nuanced outlook stems from the ongoing “pause” in the US-China tariff dispute, set against a backdrop of global currency and interest rate shifts.

“What is certain over the next few months is uncertainty as we are in the 90-day ‘pause’ period for US-China tariffs until early August, and retaliatory tariffs until early July. Furthermore, remarks by Trump about making announcements on trade in the coming weeks mean markets are expected to be volatile. This volatility will naturally extend to the flow of foreign funds into both Malaysian Government Securities (MGS) and Bursa Malaysia,” he says.

Despite this short-term flux, Mohd Redza highlights several factors that paint an optimistic picture for sustained inflows.

“First, the recent downtrend in the US Dollar Index suggests a positive bias for capital inflows, with the ringgit expected to continue its strengthening trend against the US dollar. Second, we anticipate the US Federal Reserve to potentially cut interest rates in the next few months, which would add further downward pressure on the dollar.”

Amid these dynamics, Bursa Malaysia’s foreign shareholding level, currently reported at a multi-year low of 19.3%, is poised for a rebound.

“We are optimistic that we will see a pick-up soon. Domestic capital formation continues to gain momentum, bolstered by the positive outcomes from various government initiatives such as PIKAS 2030 and significant data centre developments. Increased FDIs are already driving construction activities, and once completed, these projects will spur increased activity across other economic sectors, further underpinning the market’s appeal,” says Mohd Redza, who sees the benchmark index ending at 1,690 points this year.

While markets initially reacted with caution to renewed tariff threats stemming from the rhetoric before the US presidential election, recent price action suggests that investors have largely priced in the risk.

“With markets back to levels before Liberation Day, it seems the tariff uncertainties are behind us. I believe the market has now priced in a 10% rate across all nations, while for China it may be a little more,” says Pankaj.

As such, Southeast Asian markets like Malaysia may benefit from diverted capital flows, especially if China or Hong Kong sees renewed capital outflows due to US sanctions or heightened trade tensions.

On the other hand, Hong Leong Investment Bank Research is less bullish as it expects the market to remain in consolidation mode, with investors looking for fresh catalysts from upcoming corporate earnings results.

“The tariff-driven global slowdown continues to cast a shadow over domestic economic activity and earnings prospects. Given the Trump administration’s track record of policy unpredictability and reversals, markets are e   pected to remain highly reactive to trade-related headlines in the near term, until a durable, mutually beneficial trade agreement is secured between the US and its key trading partners, including Malaysia,” it said in a May 22 report.

The performance of the ringgit has also played a pivotal role in the recent surge in foreign interest. The local currency, which struggled throughout 2024, has shown signs of stability in recent weeks. Currently trading at 4.26 against the US dollar, it is up 4.85% year to date.

“With the ringgit back in play, it’s adding another layer of attraction for foreign investors who see relative currency stability as a green light. This is particularly important for bond investors looking to mitigate currency depreciation risks,” says Pankaj.

Kenanga Research economist Afiq Asyraf Syazwan Abd Rahim sees the appreciation in the ringgit reigniting foreign interest in Malaysian assets, with currency gains now seen as a meaningful return driver.

“Malaysia is emerging as a tactical play, driven not just by forex strength, but by stable macro fundamentals and a credible central bank. With Bank Negara holding its policy stance while global peers begin easing their monetary policies, the country offers an attractive real yield differential. This has spurred selective foreign inflows into bonds and equities as investors seek income stability and currency upside in a shifting global monetary landscape,” he tells The Edge. 

Afiq says the research house has revised its forecast for the ringgit to 4.08 against the US dollar from 4.45 to factor in the structural shifts in the global forex and capital landscape that is diversifying away from the greenback.

“It is not just due to short-term flows. The US dollar is steadily losing its dominance —its reserve share fell to 57.8% in 2024 (from 66% in 2015) — as central banks diversified into gold, euro and non-dollar assets, which accelerated after sanctions on Russia and the return of US trade protectionism,” he adds.

“De-dollarisation is picking up pace with platforms like Project mBridge enabling real-time cross-border settlements without the US dollar. Regionally, Malaysia-China trade in yuan/ringgit is rising, while Asean local currency settlement frameworks are gaining traction.

“The ringgit stands to benefit as a secondary forex play, not a core hedge, but one that offers potential forex gains amid relatively stable macro fundamentals and a credible central bank. Bank Negara’s decision to hold interest rates steady, while global peers prepare to cut, enhances Malaysia’s real yield appeal.”

The fixed income market has also seen a notable pickup in interest, particularly among yield-hungry investors. With Malaysian government bond yields hovering around 3.6%, they remain attractive relative to their regional peers.

According to RAM Rating Services Bhd, the foreign inflows were driven primarily by demand for MGS and Government Investment Issue (GII), which saw RM9.7 billion in net inflows in April, more than triple the RM3 billion in March.

Malaysian Treasury Bills (MTB) and Malaysian Islamic Treasury Bills (MITB) recorded inflows of RM480 million, reversing an outflow of RM252 million in the previous month, the rating agency said in a May 20 statement.

Beyond the immediate impact of the global trade truce, Malaysia’s role as Asean chair in 2025, coupled with a strategic weakening of the US dollar and anticipation of Fed rate cuts, could further bolster foreign capital, according to Mohd Redza.

“Being the Asean chair this year helps to fuel this positive sentiment even more and bodes well for Visit Malaysia 2026. The anticipated influx of tourism dollars directly contributes to our economic strength,” he says.

Mohd Redza points to the interplay of currency and interest rate dynamics. “The weakening US dollar and growing concerns about looming Fed rate cuts have significantly enhanced the attractiveness of MGS for foreign funds. This inflow has a direct positive impact on the value of the ringgit.”

While global uncertainties persist, barring any major external shocks or domestic political disruptions, the trajectory for the rest of 2025 appears tilted towards continued, albeit cautious, capital inflows. 

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