Confident gallop into 2026

ANALYSTS and fund managers hope the Year of the Fire Horse will bring more foreign inflows into the domestic equity market after what most experts describe as a diarrhoeic 2025.

While confirmed figures for the whole of last year are unavailable, brokerage houses estimate net cumulative outflows from foreign investors in 2025 exceeded RM20bil, nearly five times the RM4.21bil recorded the previous year.

Still, hope springs eternal for Malaysian equity enthusiasts, confident this year will be significantly better, with foreign funds making net inflows of approximately RM1.4bil (up to Jan 28) since the start of 2026.

FDI movements: Cyclical or structural?

South-East Asia chief market strategist at trading platform Moomoo, Isaac Lim, views the foreign fund outflow from Bursa Malaysia in 2025 and the inflow in 2026 as largely cyclical, driven by global market volatility, interest rate shifts in developed markets, and the artificial intelligence (AI)/semiconductor narrative.

“The earlier outflows are tied to broader external conditions like increasing geopolitical tension along with the bullish bet that the AI supercycle still has room for further upside,” he tells StarBiz 7.

While acknowledging the significance of these cyclical factors, he cautions that long-term structural concerns around Malaysia’s market depth and growth opportunities also play a role in foreign capital reallocation.

Lim points out that Malaysia’s equity market and by extension, Asean, is seen as less dynamic compared to its Asian counterparts, especially in terms of growth sectors like technology and innovation.

On the other hand, he notes: “The 2026 pipeline does present opportunities in strategic sectors like digital infrastructure and green energy, but these will need to be coupled with improvements in market liquidity and governance for Malaysia to regain foreign investor interest in the long-term.”

Lim adds that the declining US Federal Reserve fund rates could keep the US dollar softer, leading to continued strength in the ringgit, which is a positive for local investors.

Head of equity sales at Rakuten Trade Vincent Lau similarly subscribes to the rotational nature of foreign funds, while also observing that Malaysia’s relatively low weightage in the MSCI Emerging Markets Index, which hovers around 1.3% to 1.5%, could now turn into a positive factor of sorts for foreigners who are more interested in politically stable countries.

That said, he notes that pro-growth investors will continue to chase the AI theme, highlighting the contrast in the Malaysian equity scene which is still “traditional” and propped up largely by banks and financials.

Investors choose where to park funds

Moomoo’s Lim stresses that while local institutional buying has supported sectors like telecommunications, industrials and technology, there remains a risk that the valuation discovery process could become skewed if domestic players focus mainly on defensive sectors such as banks and utilities, rather than high-growth stocks.

“As Malaysian investors have been allocating more to overseas and regional markets for diversification, it is possible that sector leadership on the local exchange may increasingly gravitate towards income-focused sectors like banks and real estate investment trusts, rather than sectors like tech, which historically benefited from foreign participation.

“With the narrower participation, the performance and draw (of Bursa Malaysia) this year will largely depend heavily on fundamentals.

“This will be telling, especially leading up to the earnings season,” says Lim.

Meanwhile, Lau emphasises that investors are merely being characteristically selective, because the initial public offerings and market debuts of companies that are doing well such as Insight Analytics Bhd, THMY Holdings, ISF Group Bhd have performed strongly.

Lau comments: “Institutional funds are undoubtedly buying into the big caps and blue chips, thereby lending support to the FBM KLCI.

“But these institutional investors are also investing into some other strong names such as 99 Speed Mart Retail Holdings Bhd and Oriental Kopi Holdings Bhd.”

He is confident that there will be net inflow this year among retail investors, despite the abundance in choices, before mentioning that a handful of research houses are expecting the FBM KLCI to hit between 1,700 to 1,800 points in 2026.

“We are also hopeful that the continuous effort by Prime Minister Datuk Seri Anwar Ibrahim will keep yielding more foreign fund inflows into the country,” he tells StarBiz 7.

“This is also underpinned by our strengthening currency, our vibrant data centre scene, and of course, our stable overnight policy rate.

“Together with Singapore, we believe Malaysia should do better this year compared to 2025, and this year we should see net inflows even with FDIs or foreign direct investments.”

Local institutional investor will still drive market

Lim notes that the FBM KLCI will continue to be primarily driven by local institutional investors as well as government-linked investment companies or GLICs, even as foreign participation is appearing optimistic at this point in time.

He believes that this concentration of capital among local institutions has likely reduced market volatility during sell-offs, as they tend to provide stability during times of external uncertainty.

Lau says the significant exodus of foreign funds last year means that the Malaysian equity market is starting the year on a “low base”, before echoing Lim’s statement, saying that GLICs can stabilise the market as they have mandates to invest a majority of their funds within the country.

“It is encouraging that foreign funds are returning, and while we are confident of net inflows for 2026, it is still early days and therefore difficult to predict the level at year-end.

“However, if Malaysia can scale up the AI chain, things would definitely be even brighter,” he says.