PETALING JAYA: Stock market experts continue to be optimistic about the prospects of the FBM KLCI, which has had a stellar performance in August after staging a 4.1% increase through the month, although they caution that it may still lag behind other regional bourses.

The premier index actually breached 1,600 points on Aug 25, closing at 1,602.45 before retreating in the days after, although it continues to oscillate within 25 points of the psychological level.

It is supported by positivism emanating from various factors, including US tariff reduction, the US-China trade truce extension, the 13th Malaysia Plan, rate-cut expectations from the Federal Reserve (Fed), and better corporate results season for the second quarter of financial year 2025 (2Q25).

CIMB Research, in a note to clients yesterday, reported that last month, local institutional investors were the largest net buyers, with inflows of RM3.38bil, their second-highest monthly net buy in 2025.

“This lifted their cumulative net buying to RM12.9bil for the first eight months of financial year 2025 (8M25), surpassing the RM11.6bil recorded for the whole of 2024.

“Financial services and utilities were their biggest net-buying sectors, with CIMB Group Holdings Bhd

, Public Bank Bhd

and Telekom Malaysia Bhd

being the top three net buys,” it said.

The sobering news however, was the research unit also reported that foreign investors remained net sellers for the third consecutive month, with outflows of RM3.43bil in August, the second highest monthly net sell after March’s RM4.6bil.

This raised cumulative net outflows to RM16.5bil in 8M25, 3.9 times higher than the RM4.2bil recorded for the whole of 2024.

As a result, CIMB Research said foreign shareholding in Malaysian equities declined by 0.2 percentage point to a new low of 18.8%.

On the bright side, head of Asia equity strategy at HSBC, Herald van der Linde told StarBiz that Malaysia has established itself as a crucial part of the global technology supply chain, with European and American companies moving tech manufacturing facilities into the country.

“Previously, the overhang of US tariffs weighed on sentiment in the market.

“However, with trade talks now concluded and Malaysia joining the 19% to 20% tariff club with other Asean nations except Singapore, it still has allure for foreign direct investments (FDI) within the region, and that is a positive.

“In addition, markets’ anticipation of lower Fed rates have also generally lifted sentiment towards Asian equities, Malaysia included. Overall, we remain ‘neutral’ on Malaysia with a year-end target of 1,600 for the FBM KLCI index,” he noted.

Nixon Wong, chief investment officer at Tradeview Capital, who is a shade more cautious in his expectations, believes overall momentum should still be positive, although gains may moderate.

He pointed out that lower interest rates should continue to support equity valuations, reduce funding costs, and attract yield-seeking flows back into equities, commenting: “Banks may face margin compression as policy rates ease, but this could be offset by loan growth.

“Commodities like plantation as well as oil and gas remain key swing factors given global demand conditions.”

In addition, Wong is of the view that there could be higher interest in domestic demand beneficiaries such as the consumer, construction and property sectors as monetary conditions loosen and government fiscal support remains accommodative.

Looking at the FDI perspective, van der Linde opined that the primary reason foreigners are net selling the FBM KLCI is the strong performance of the Chinese equity market in the past couple of months that has likely attracted foreign capital away from Malaysia and into China.

Secondly, he said investors are also possibly positioning themselves ahead of the potential announcement that Financial Times Stock Exchange (FTSE) may upgrade Vietnam to “emerging market” status.

Since many global funds track FTSE Emerging Markets indices, such an upgrade for Vietnam would prompt passive investment vehicles such as exchange traded funds to automatically buy Vietnamese equities, bringing in billions of dollars in fresh foreign capital.

Active fund managers may also begin to allocate more to Hanoi, as it becomes a “mainstream” emerging market.

Lastly, van der Linde said Malaysia has performed well this year and many funds already have high exposure to its market.

“With interest growing elsewhere, it is likely investors are rotating out of Malaysian equities.

“Yet, a strong interest in artificial intelligence-focused data centres in Malaysia and lower US bond yields could continue to provide support to local equities,” he added.

Meanwhile, Wong told StarBiz that regional peers such as Taiwan, South Korea and India could be drawing stronger inflows given their tech exposure and higher growth prospects, as Malaysia remains underweight in global portfolios.

He said the FBM KLCI’s limited breadth and concentration in large-cap banks or plantations make it less attractive compared to more diversified markets.

“To bring funds back, key factors include stabilisation or appreciation of the ringgit, evidence of structural reforms that boost Malaysia’s growth trajectory, back to those announced policies under the New Industrial Master Plan and National Energy Transition Roadmap,” he said.

Nevertheless, both van der Linde and Wong warn of potential banana skins that may trigger a fallback on the premier bourse, with the former noting that longer-than-expected elevated US bond yields and rates would not bode well for flows into the Malaysian market, in addition to investor rotation out of counters with artificial intelligence themes, which would impact sentiment to a certain extent.

“A general slower growth environment, especially in domestic activities, could also curb enthusiasm.

“However, it is also worth noting that if sentiment towards Asian equities turns for the worse, Malaysia is often considered a stable, defensive market. This has to do with strong domestic appetite for Malaysian equities,” said van der Linde.

A sharper-than-expected slowdown in the United States or China, said Wong, may also mean downgrades for Malaysia’s export oriented, before pointing out that the government fiscal consolidation efforts could also weigh on consumer sentiment going forward.

Concurrently, a head of research for a foreign firm said with Bank Negara Malaysia expected to follow through on rate cuts in the coming quarters, the lower interest rate environment should ease financing costs for corporates and improve consumer sentiment, and this is typically supportive of equities, especially domestic-driven sectors like banking, consumer, and property.

He said the second quarter of this financial year’s results were mixed but showed resilience in banks and utilities, as analysts are projecting modest earnings recovery into year-end, underpinned by lower funding costs, steady commodity prices, and stronger tourism inflows.

Echoing Wong’s view, the research head added: “Other Asean markets such as Indonesia, Thailand, Vietnam or North Asia like South Korea and Taiwan are perceived to offer stronger growth prospects or higher liquidity. Malaysia’s growth story is seen as steadier but less dynamic.

“Furthermore, the FBM KLCI remains heavily weighted toward banks, plantations, and utilities—sectors viewed as low-growth compared to tech-heavy regional peers. This limits excitement for global funds chasing growth stories.”

He said more listings of growth-oriented companies such as in the tech, renewables, consumer sectors would diversify the market away from its traditional heavyweights.

CIMB Research pointed out that regionally, the FBM KLCI was the second-best performing market among MIST (Malaysia, Indonesia, Singapore, Thailand) in August, behind Indonesia’s Jakarta Composite Index.

By sector, construction, technology, and finance outperformed last month, while healthcare, real estate investment trusts, and telcos underperformed.

The FBM KLCI closed marginally lower by 0.37 points yesterday at 1,578.15, as losers outnumber gainers 455 to 327, with 682 counters ending the day unchanged. As many as 2.32 billion shares were traded, worth approximately RM2.3bil.