KUALA LUMPUR: The push for government-linked investment companies (GLICs) to reduce their overseas investments and focus more on the domestic market acts as a major driver for a robust local stock exchange.
Malaysia's top six GLICs, namely the Employees' Provident Fund (EPF), Permodalan Nasional Bhd (PNB), Kumpulan Wang Amanah Persaraan (KWAP), Armed Forces Fund Board (LTAT), Lembaga Tabung Haji (TH), and Khazanah Nasional Bhd, collectively manage nearly RM1.9 trillion, according to Rakuten Trade Sdn Bhd's head of research, Kenny Yee Shen Pin.
According to him, the relocation of funds from these GLICs will also play a major role in supporting the country's economic growth.
Yee said that at the moment, it is a good move because the local market is performing better than the overseas market, particularly in the US.
"Assuming 10 to 15 per cent of these total funds are invested in overseas equities, which can amount to RM90 billion, and assuming that for every 10 per cent of this figure brought back to Malaysia, we may potentially see an injection of RM20 to RM30 billion into the local bourse.
"The amount can play a very significant role in laying a solid foundation for our market. The amount could be more, but the signs are definitely very positive," he said during the firm's third quarter (3Q) market outlook media briefing yesterday.
Yee added that this shift, coupled with the recent increase in trading volume, may signal exciting developments ahead for the local stock market.
He said that if these funds are redirected to the local market, the initial focus would likely be on index-linked stocks, particularly the top 10 Kuala Lumpur Composite Index (KLCI) constituents, like banks and telecommunications companies.
"Over the medium term, I expect returns to be higher as the potential rewards in Malaysia appear better," he added.
Additionally, Yee shared that the overall fund flows in Malaysia can be described as predominantly dictated by foreign ones.
"Of late, due to the clawing back of funds from overseas investment, local institutions are playing a very proactive role in supporting the market and providing a more stable platform for KLCI," he said.
Regarding the index, he said that the FTSE Bursa Malaysia KLCI (FBM KLCI) is projected to hit 1,730 by the end of 2024, based on a price-to-earnings ratio (PER) of 16.5 times and 16 per cent earnings growth, up from the previous target of 1,660.
He noted that this expectation is fueled by improved market sentiment, which has led to a higher valuation in the market preview PE.
"Previously, the 1,660 targets were valued at the market PE around 15.5 to 16 times, and they were also driven by better corporate earnings growth and a higher PE. That is why our target for the KLCI this year has increased to 1,730," he added.
Meanwhile, Yee said that foreign shareholding has been on an improving trend since the COVID-19 pandemic, having fallen to a low of 11.3 per cent during that period.
"As of now, the foreign shareholding has improved to above the 17 per cent level, and foreign shareholding can easily surpass the 20 per cent level and even test the 25 per cent threshold, which is another encouraging sign for Malaysian corporates," he added.
Regarding the ringgit, Yee believes it will strengthen to around the 4.50/55 range by the end of 2024, supported by the easing interest rate trend in the US and EU, along with an improving investment climate domestically.
"I expect there will be one rate cut from the Federal Reserve, as many anticipate, after the US presidential election in May, which will likely bring the ringgit to around the 4.50/55 range," he said.