GE16 speculation could dampen inflow of foreign funds

 The second quarter saw an outflow of RM5.12 billion in foreign funds from Malaysia’s equity market.

Malacca Securities advised investors to stay focused on corporate earnings and not the general election.

PETALING JAYA:

Growing speculation that the 16th general election (GE16) will be called sooner rather than later could reduce the inflow of foreign funds into Malaysia’s equity market, a research house said.

Malacca Securities said that emerging GE16 speculation could introduce “near-term political noise and temporarily dampen foreign inflows”.

It noted that in the second quarter (Q2 2026), foreign funds saw an outflow of RM5.12 billion compared to an inflow of RM1.07 billion in Q1 2026.

This outflow in Q2 saw the FBM KLCI falling marginally by about 1.6%, hovering below the 1,700 psychological level.

Malaysia’s ability to attract foreign funds is also impacted by US markets remaining relatively strong, allowing global funds to continue leveraging the artificial intelligence (AI) super cycle for the time being, it said.

“We believe overall sentiment may stay cautious as there are speculations that the upcoming Malaysian general election will be held either later this year or next year.

“This uncertainty may dampen foreign fund flows, keeping the FBM KLCI below the 1,700 level,” it said in a note.

Nevertheless, Malacca Securities noted that while foreign flows have been cautious in Q2 2026, local institutional money is “holding its ground”.

“Domestic policy tailwinds, a political stability premium, and strong sector-specific earnings momentum continue to offer compelling entry points for investors willing to look past the index noise,” it said.

Structural growth sectors

It said that concentrated conviction in structural growth pockets remains the key focus in Q3 2026.

The structural pillars that matter most would be the National Energy Transition Roadmap, New Industrial Master Plan, the AI super cycle, and the long-term data centre and power infrastructure buildout.

These are multi-year, non-partisan commitments with allocated budgets, tendered projects, and execution already underway, it pointed out.

“We believe the market is largely immune to the electoral outcome. Whoever wins, the capital expenditure (capex) pipeline does not change.

“GE16 introduces short-term noise but no structural discontinuity. Investors are advised to stay focused on earnings, not the election,” said Malacca Securities.

The research house remains positive, noting there are pockets of growth within the construction, consumer, solar, industrial products, technology, and telco sectors.

It said the FBM Small Cap Index rebounded by 5.12% in the second quarter, defying the broader market’s mild dip.

“This resilience was primarily driven by a resurgence in the technology sector as geopolitical tensions subsided alongside healthy trading flows fuelled by a weakening ringgit in recent weeks.

“We expect this upward momentum to carry into July as the seasonality charts point to a further rally, with a historical average monthly return of 3.6% and highly encouraging odds,” it added. - FMT