Malaysia has seen 4 times more foreign capital outflow from stock market this year. What’s at play?

Bursa Malaysia is dominated by large companies, particularly financial institutions and plantation companies, that are majority owned by government-linked institutions, a feature that investment analysts noted dilutes the exchange’s appeal with foreign investors who like markets with high levels of liquidity and robust trading.

Another major challenge facing the stock market is concerns over corporate governance and regulation that industry executives noted has been compromised in the past when alleged transgression of market rules involved politically well-connected companies and stock controlled by government-linked entities. 

“Over the years, the Malaysian market has gained a reputation where politically connected companies can escape disclosure or punishment. It is hard to change that perception,” said a chief executive officer of a large regional private equity investment company who declined to be named.

In the meantime, the outflow of funds continues.

Muhamad Irfan Norazly of MBSB Investment Bank noted that foreign investors were net sellers on every trading day last week, posting net outflows of RM962.8 million.

Local institutions, such as the Employees Provident Fund, continued to prop up the local stock market, recording purchases in stocks and other equities of RM1.3 billion last week, he said.

RHB Research has cautioned that Malaysia could be vulnerable to outflows of foreign capital should domestic risks and the external environment worsen, given the high foreign ownership levels in the domestic debt market.

“This could result in the weakening of the ringgit, reduced domestic liquidity, higher yields and steeper funding costs for the Government,” it added in its note on Oct 7. 

Economist Anthony Dass of FSG Advisory told CNA that the Anwar administration needs to accelerate structural reforms in the economy and improve governance in the regulatory system if the shine is to be brought back to the country’s financial markets.

“We need to see improvements in corporate earnings and efforts to ensure a stable policy path together with a shift from commodity companies and low-value listings to stocks that are in higher-margin sectors,” he said.