(July 24): After years of getting shunned, Malaysia’s stock market is regaining favour with global investors.

International funds turned net buyers of the equities this year as Prime Minister Datuk Seri Anwar Ibrahim drove policies to boost foreign investments in the semiconductor industry and artificial intelligence (AI) data centres. Foreigners had sold about US$11.5 billion (RM53.77 billion) of their holdings on a net basis in the previous six years, according to data compiled by Bloomberg.

The inflows reflect growing conviction among investors that Malaysia is turning a corner after years of lacklustre growth and policy confusion, due to a rapid turnover of leadership. The benchmark equity index is leading peers in Southeast Asia with a 12% advance this year, while the number of initial public offerings (IPOs) have surged. More gains await if Anwar is able cut more subsidies and reduce the fiscal deficit, investors said.

“We see a number of policies with clear objectives that offer direction on where the country is heading,” said Ernest Chew, an Asean portfolio manager at BNP Paribas Asset Management. “We also expect overall earnings growth of Malaysian companies to start accelerating from here with all the policies in place.”

Foreigners have bought US$172.5 million of Malaysian equities so far this year, while selling their holdings in Indonesia, Thailand and the Philippines on a net basis. Construction firm Sunway Bhd (KL:SUNWAY) and utility provider YTL Power International Bhd (KL:YTLPOWR) are the top gainers, as investors laid bets on the major beneficiaries of the tech and data-centre boom.

Malaysia is emerging as a key bet on AI-related services in the region, while its position as a hub in the global chip supply chain boosts exports. The country also stands to gain from companies relocating operations amid escalating trade tensions between the US and China.

“Malaysia offers exposure to some interesting domestic and regional structural growth trends within emerging markets,” said Soo Hai Lim, the head of Asia ex-China equities at Barings. “More concrete fiscal reform could be positive for the long-term outlook of the economy and stock market.”

At the same time, the nation’s institutional funds have deployed more money into the market, after the Ministry of Finance and the central bank called on them to increase domestic investments, to shore up the ringgit when it fell to a 26-year low in February this year. The ringgit has recovered 2.6% since.

The number of IPOs have also surged, with 27 debuts raising a combined US$723 million in proceeds so far this year, according to data compiled by Bloomberg. That money raised is 43% higher than the tally for the same period of 2023.

“Domestic investors investing in the local market is very important,” said Mark Mobius, a veteran emerging markets investor. “More important than just liquidity is the fact that they could encourage new listings, IPOs. This is where the institutions can really play a big role.”

These positive factors have prompted analysts to lift their targets for the FBM KLCI gauge and revised their earnings estimates. JPMorgan Chase and Co’s analysts this month upgraded the market to 'neutral' from 'underweight'.

CIMB Securities expects KLCI company earnings to grow by 11% in 2024 and 8% in 2025, compared to just 5% last year, while Teoh Kok Lin, the chief investment officer at Singular Asset Management, sees earnings per share growth of up to 25% for export-oriented sectors in the next one to two years.

All eyes are now on the government’s fuel subsidy rationalisation plan, which is expected as soon as this year.

While a rollback in support for the country’s cheapest and most commonly used gasoline - which makes up the bulk of Malaysia’s subsidy bill - may trigger inflationary fears and cost the administration some political mileage, a delay would make it a challenge to meet its 2024 deficit target, according to Citigroup Inc.

The government cut blanket diesel subsidies in June, as it sought to pare down an annual RM81 billion ringgit subsidy bill. The removals are seen as crucial for Anwar to meet his target of narrowing the fiscal deficit to 4.3% this year from 5% in 2023.

“Malaysia has a problem in terms of execution and sustainability of policy drives,” said Alan Richardson, a portfolio manager at Samsung Asset Management. “I am hoping the policy drive to attract new economy investments is not just a blip, but the start of a trend.”

https://www.theedgemarkets.com/node/720116