Summary
Highlights
The year 2025 has been challenging for Malaysian investors, especially those in mid and small-cap stocks. While safe-haven stocks like REITs and banks have performed well, the majority of the Malaysian market (over 70% being small to mid-cap companies) is down double digits. The Kuala Lumpur Composite Index (KLCI) is up 1.44% year-to-date, but mid-cap and small-cap indices show significant declines. This is largely due to foreign funds avoiding these segments, preferring larger, stable, dividend-paying companies.
Foreigners have been major sellers in Malaysia, exiting 21 billion in 2025, a record high. The market is primarily supported by local institutions, as retail investors have also significantly reduced their investments, opting for international markets like the US or crypto. This outflow commenced around 2025, largely influenced by global tariff wars between major powers like the US and China, impacting emerging markets like Malaysia.
Low oil prices, despite ongoing geopolitical conflicts, indicate a global oversupply and reduced consumer spending. This affects Malaysia, as oil and gas contribute 10-15% of its exports. While manufacturing, particularly semiconductor-related exports (40%), is a larger contributor, foreign funds often perceive Malaysia as a commodity-reliant economy, lumping it into a commodity basket due to macro investment perspectives.
China's increasing supply in various components, including testing equipment, directly impacts Malaysian manufacturers. Chinese companies are aggressively expanding to achieve self-sufficiency and maintain employment, driving down consumption at home and increasing exports across sectors like petrochemicals, EVs, and phones. This intensified competition poses a significant challenge for Malaysia, a smaller competitor in similar manufacturing spaces.
Unlike the US market, which sees significant investment in high-tech and AI from global investors, Malaysia lacks strong catalysts in 2025. While 2024 saw growth from data center investments, 2025 has been muted with struggling exports. The strengthening Ringgit, while seemingly positive, makes Malaysian exports less attractive and leads to order losses to countries with depreciated currencies. However, Malaysia is emerging as a solid tourism destination and an attractive place for foreigners to live and set up businesses.
Historically, a year of significant foreign sell-offs is often followed by a year with much lesser sell-offs. The hosts predict that 2026 will not be as bad as 2025, drawing parallels to market cycles where bad years follow good ones and vice versa. There are also optimistic signs in local industries, with companies like glove manufacturers becoming as competitive as their Chinese counterparts. Past data from 2016 and 2021 shows tiny rebounds for mid-cap and small-cap stocks after large sell-offs, suggesting patience for investors might be rewarded in 2026.