Towards 2026 with a lesson in hand

WITH seven trading days left till the end of 2025, the FBM KLCI has clocked in a marginal gain of 1.4%. This would undoubtedly be considered as a disappointing year for many investors who had high hopes of further gains following the 12.9% on-year returns witnessed in 2024 for the 30-stock benchmark index.

Bullish analysts were predicting the benchmark to close above the 1,750 mark in 2025 at the start of the year, but unfortunately this was not to be. (The FBM KLCI closed at 1,665.90 on Friday.)

From a risk returns perspective, you would probably have been better off putting cash in a fixed deposit account with a bank at zero risk.

A stronger ringgit, cheap valuations, an interest rate cut, a strong pipeline of initial public offerings (IPOs) – supported by sustainable real economic growth, high foreign direct investments and reforms by the federal government – failed to appeal to foreign investors, who offloaded some RM20bil net worth of securities this year, probably rotating the money into regional markets like Taiwan, Japan, South Korea and China, attracted by artificial intelligence (AI) investment boom thematic in play there.

That outflow has been offset by the net inflow of some RM25bil to RM30bil in the local bond market this year.

What’s more surprising is that despite the harsh tariffs announced by US President Donald Trump in early April, global equity markets generally had a good year, posting double-digit returns on their benchmarks and continuing to trade at near record highs following the sharp sell-off seen following the announcement of the tariffs.

Singapore’s benchmark Straits Times Index, for instance, rallied to post 20.67% gains year-to-date, at the time of writing, while the Jakarta Composite is up 21.7%, driven by retail buying. The Ho Chi Minh Stock benchmark is the outperformer in the Asean region, up some 32.38%.

Despite weaker currencies, political uncertainty and inflation concerns, Japan’s Nikkei was up 22.85, the Kospi 66.47% higher, Taiwan TAIEX up 19%, the Hang Seng 27% higher and the Bombay Stock Exchange’s Sunsex 30 index up some 8.16%.

European benchmarks like the German DAX is posting gains of 20.6%, the FTSE 19.9% (London) and the French CAC 40 up 9.9%. Even with the recent selling due to fears of an AI bubble, the US Nasdaq Composite is up 17.5% and S&P 500 up 14%, the third consecutive year of gains.

Nevertheless, with dividends announced, institutional funds like the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) would probably eke out 3%-4% dividend yields year-to-date on investments in the local market.

In US dollar terms, the gains are more respectable at 11% but that is of little consolation.

Hopefully, the local market can hold on to the meagre gains and build on that into 2026. Much of the credit for that has to go to local institutional funds which have been net long on the market for much of the year.

The local market’s underperformance is not a present concern, it has been underperforming for the past decade or more.

What is causing the local market’s underperformance despite all the tailwinds mentioned?

A recent briefing with a local institutional investor would suggest its basics like earnings, dividends, return on equity, scale and lack of new economy growth stocks.

With the exception of a handful of local banks which offer decent dividends and have some scale in which big institutional investors can take positions comfortably and exit, other companies just are not big enough or attractive enough to attract foreign investors’ interest.

The returns many of the companies are posting also don’t match what foreign companies are posting. You only have to look at what companies like Nvidia have been making to realise why there is such a concentrated risk of investments in the “Magnificent 7” stocks.

So while the 60 IPOs on Bursa Malaysia this year managed to raise market capitalisation by some RM40bil, the exchange, along with the corporate players like government investment companies and government-linked companies need to promote firms with better corporate performance whose returns align or outperform the real growth of the economy.

The scale issues could be managed through organic growth over time, while merger and acquisition is a quicker option.

Bursa Malaysia also needs to attract big companies to list on the exchange. Small companies may attract retail interest but not institutional backing.

Local institutional investors like PNB and the EPF, with their ever growing assets under management also need such investments to ensure contributors and unit trust holders get good returns that help their retirement and savings goals.

The government and regulators like Bursa Malaysia Securities also need to up their game to keep the local exchange on the investment radar of global investors. Other exchanges are going all out to value add and attract funds, investors and companies to their markets.

The SingaporeExchange has proposed a string of reforms and incentives to address issues like its low IPO, liquidity and valuation concerns, as well as improving transparency with the aim of making the exchange more attractive compared to regional peers.

Other exchanges are not standing still.

Nasdaq, for instance, is proposing to extend its trading hours to nearly around the clock, five days a week, due the strong interest from across the world in stocks on its platform.

Electronic trading and market access has pushed competition between exchanges to a new level and Bursa Malaysia and local corporates need to respond.

Many analysts are forecasting 2026 to be a year when the benchmark index could break past the 1,700 mark due to the tailwinds from the local economy and more supportive macro environment.

However, 2025 has taught us that all that could count for little if liquidity continues to drain out.