This article first appeared in The Edge Malaysia Weekly on June 30, 2025 - July 6, 2025

AT the start of the year, foreign inflows into the stock market were robust, prompting hopes that the continuing trend from 2024 would lead to new highs. Over the months, however, interest began to dissipate and at mid-year, appeared tepid at best.

For the past five consecutive weeks, foreign funds have been pulling back from Malaysian equities, although to be fair, regional peers including Thailand, Indonesia, the Philippines and Vietnam have also experienced some withdrawal of funds owing to a shift in global risk appetite amid mounting macroeconomic concerns.

Yet amid a broader regional sell-off, Malaysia’s benchmark FBM KLCI has been more impacted. The index stuck around the 1,500 psychological level that has not been meaningfully breached since 2022. While other Asean indices have shown greater resilience, the KLCI continues to underperform. On a year-to-date (YTD) basis, the index is down 7%, making it the second-worst performing index in the region.

MIDF research head Imran Yassin Md Yusof believes the retreat in foreign funds should be seen in a regional context.

“Actually, if you peruse the fund flows data, we can see outflows for most regional peers. Based on the fund flows data of the eight markets that we monitor, all are seeing YTD outflows (as at June 20, 2025), with the heaviest being India at US$11.2 billion,” he tells The Edge.

“Earlier this year, we saw foreign outflows for almost all the markets that we tracked. 1QCY25 saw all markets register net outflows. We see this being more of a broad-based effect rather than something specific to Malaysia. This is due to the heightened risks coming from possible policy changes in the US.”

Market sentiment was further dampened this month owing to escalating geopolitical tensions. According to CIMB Research, the KLCI fell 1% week on week (w-o-w) between June 16 and 20, erasing gains built up over the prior two weeks, after a sharp escalation in the Middle East conflict. Brent oil prices surged 11% to US$77 per barrel after coordinated military actions by Israel and the US against Iran, raising fears of a broader conflict and disruptions to global energy supply.

At the same time, investors are still digesting the domestic impact of upcoming fiscal changes. The expanded sales and service tax and a new electricity tariff framework, both effective from July 1, are expected to place pressure on corporate margins and consumer spending.

CIMB says foreign net selling surged 28% w-o-w between June 16 and 20 to RM565 million in Malaysian stocks, with five consecutive days of net outflows — the heaviest on June 20 — coinciding with the FTSE Bursa index rebalancing.

Despite the broader weakness, CIMB highlights that some sectors saw divergent trends. The transport sector led gains, supported by foreign buying in Westports Holdings Bhd (KL:WPRTS), MISC Bhd (KL:MISC) and Avangaad Bhd (KL:AVANGAAD). The plantation sector followed suit, bolstered by local institutional flows into Kuala Lumpur Kepong Bhd (KL:KLK), IOI Corp Bhd (KL:IOICORP) and Johor Plantations Group Bhd (KL:JPG).

On the flip side, the healthcare sector was the worst performer due to persistent foreign selling in IHH Healthcare Bhd (KL:IHH), KPJ Healthcare Bhd (KL:KPJ) and Supermax Corp Bhd (KL:SUPERMX). Industrial names like Press Metal Aluminium Holdings Bhd (KL:PMETAL), Petronas Chemicals Group Bhd (KL:PCHEM) and Scientex Bhd (KL:SCIENTX) also saw notable foreign outflows, the research house notes.

“Malaysia’s market composition with its heavy exposure to financials and traditional sectors such as plantation and oil and gas continues to limit its appeal amid the global rotation into growth and tech-driven assets,” an analyst observes.

Despite the volatile backdrop, MIDF’s Imran remains cautiously optimistic on the remainder of the year.

“Global markets went through a turbulent period in the first half with shocks from tariffs and geopolitics. However, the risks seem to be moderating slightly,” he says. “Should we get a positive outcome out of the trade negotiations with the US, we believe that will remove some of the overhang issues. Hence, the market may perform better in 2H.”

Key events on the horizon include the release of Malaysia’s Consumer Price Index and Producer Price Index data, upcoming initial public offerings and a string of corporate earnings that may provide further market direction.

Additionally, on June 17, Malaysia climbed 11 spots in the World Competitiveness Ranking 2025 to 23rd place, its highest since 2020.

“This notable improvement reflects the country’s ongoing economic recovery and reform progress,” MIDF Research says in its fund flow report last week.

According to the Ministry of Investment, Trade and Industry, the upgraded ranking underscores Malaysia’s positive trajectory towards becoming one of the world’s top 12 most competitive economies by 2033, as envisioned under the Madani Economy framework.

While equity markets struggle, Malaysia’s bond market has emerged as a relatively bright spot.

According to RAM Ratings, foreign investors poured RM13.4 billion into Malaysian bonds in May — the highest monthly inflow since May 2014. This marks the third straight month of strong foreign buying (April: RM10.2 billion), indicating renewed confidence in Malaysian fixed income amid shifting global dynamics.

“The surge in demand was largely driven by improving global sentiment following the easing of US-China tensions, a new UK-US trade agreement and a rotation out of the US market amid a weakening dollar and growing concerns over US fiscal sustainability,” RAM notes.

This appetite has led to a softening in local bond yields, with the 10-year Malaysian Government Securities (MGS) yield falling 12.5 basis points (bps) to 3.56% in May. In contrast, US Treasuries saw yields rise 24bps to 4.41% as fears over US fiscal health spurred a sell-off.

Still, RAM cautions that risks remain. “Uncertainties surrounding the expiration of a 90-day tariff pause, unresolved US debt ceiling negotiations and a cautious US Fed have tempered some of the bullishness.”

The US Federal Reserve’s June decision to hold rates while projecting two cuts by year end suggests a wait-and-see stance, which could affect emerging market flows.

As at mid-June, the 10-year MGS yield edged up slightly to 3.62%, while the ringgit hovered around 4.25 to the US dollar. 

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