Bonds outshine stocks

Oct 09, 2025

8 min read

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PETALING JAYA: Net inflows of foreign funds into local equity and bond markets are expected in the fourth quarter (4Q25) with the lowering of interest rates by the US Federal Reserve (Fed), market experts say.

Year-to-date, net foreign fund outflows from the equity market amounted to RM16bil. The bond market, however, has seen a year-to-date net foreign fund inflow of RM11bil. The differing flow directions have their reasons, analysts said.

Tradeview Capital chief executive officer Ng Zhu Hann said the Hang Seng Index, for example, is up by more than 30% year-to-date.

In comparison, the FBM KLCI has not revisited its historic peak since 2018 and has largely remained range bound around the 1,600 level, which would be “very disappointing for any potential investors”.

“If you look at Japan, or even Singapore and Indonesia for that matter, their markets are hitting record highs this year while the local benchmark is down some 1.5%. This makes our equity market less appealing.

“Our bond yields are generally very attractive compared with other parts of the world, offering stable returns of around 3.5% to 4.5%, especially for sovereign bonds.

“This is appealing to investors in comparison with markets like Japan, which for the longest time was offering yields of below 1%.

“Even today, at a record high, Japan’s bond yields are only around 3.3%. Bonds in other developed markets offered only 2% to 3% yields, and only in recent years, due to the Fed’s rate hikes, were they pushed higher,” he told StarBiz yesterday.

In a briefing this week, World Bank lead economist for Malaysia Dr Apurva Sanghi said one possible reason for the stronger appeal of Malaysian bonds’ over equities is cyclical growth.

He noted 40% of the FBM KLCI weightage consist of bank stocks and these counters have underperformed due to expectations of lower interest rates that compress profit margins.

“More importantly, structural weaknesses in the economy, such as the lack of large, innovative firms, especially in technology, are present in the FBM KLCI. This limits the local equity market’s appeal to global investors,” he said.

Apurva added, in contrast, Malaysia’s bond market is “deep and liquid” and real returns have been attractive recently due to low inflation that has boosted real yields.

Ng concurs the FBM KLCI is still dominated by what is referred to as “old economy” stocks like banks, plantation and real estate, unlike “new, innovative and exciting” technology stocks that are seen in developed markets like the United States, Europe and Japan.

However, Malaysia’s equity market challenges cannot be attributed solely to the lack of technology stocks he said.

“We have a very good pipeline of semiconductor-related companies, even if they are not at the front end of the industry. The issue is that their market capitalisation is not big enough to qualify for the FBM KLCI.

“If a company is not among the top 30 index-linked stocks, foreign funds tend to not pay attention to it.

“Only Inari Amertron Bhd was briefly included. This is the crux of the issue. It will take a long time for such companies to emerge,” he said.

To strengthen the local equity market, Ng said the government needs to enhance shareholder activism as many government-linked companies or government-linked investment companies have seen the destruction of shareholder value over the years.

“Proper shareholder activism is needed to hold these companies or professional managers accountable in order to ensure that shareholders or minority shareholders’ rights are taken care of.

“Moreover, the government can also introduce a fund-of-fund programme specifically for small and mid-cap companies in Malaysia,” he said.

iFAST Capital research analyst Kevin Khaw Khai Sheng said, from a portfolio and asset allocation perspective, the country still presents opportunities, particularly for investors seeking exposure to so-called “boring sectors” and shelter from volatility.

“The government is also firm on its commitments, and with the upcoming budget, it is likely to reaffirm support for sectors such as semiconductors, pharmaceuticals and infrastructure,” he said.

Khaw said the risk appetite of investors will ultimately determine allocation decisions in the equity and bond markets.

“Malaysian bonds are definitely one of the best assets for Malaysian investors. This is because when investing in fixed income, investors need to consider currency exposure.

“There are two benefits when investing in Malaysian bonds, First, they are very steady – the yields on Malaysian Government Securities (MGS) show strong stability.

“While foreign bonds like Australian or US bonds may offer higher yields now, investors are exposed to currency risk, which can affect total bond returns. For equity, diversification is still the better approach,” he said.

Khaw remains positive the domestic equity market can outperform competitors in 4Q25 and 2026 despite having seen a net foreign fund outflow year-to-date.

Foreign fund outflows in the first half of the year were mainly due to foreign investors adopting a more risk-off approach, given global uncertainties such as tariffs and geopolitical tensions.

Malaysia, having been one of the top performing markets earlier, also saw some profit-taking.

The tide may be turning.

“In the past couple of weeks, we have seen huge renewed interest in Malaysia due to its strong fundamentals,” Khaw said.

According to Bloomberg, Malaysian bonds posted their largest foreign outflows in 11 months in September with global funds pulling about US$1.7bil from sovereign and corporate bonds. This followed inflows of US$726mil in August.

The outflows were attributed to fading expectations of interest-rate cuts, with Bank Negara projecting resilient domestic demand through 2026 and swaps pricing in a steady policy rate over the next six months.

A large RM27bil bond maturity in September also weighed on flows.

MBSB Research estimates the ratio for foreign holdings out of the total outstanding government bonds, including the MGS and sukuk, moved lower to 21.7% in September compared with 22.3% in August, below the pre-pandemic level (2018 average: 23.1%) and 22.1% a year ago.

Foreign holdings of Malaysian listed companies meanwhile have eased to about 19% now from a peak of 27.5% in 2007.

Ng said the recent foreign outflows from bonds are temporary and the trend is expected to reverse in 4Q25 on the back of expected rate cuts by the Fed.

“Recently, we have also seen Japanese bond yields rising significantly. Previously they were below 1%, but today they are above 3%.

“Hence, the yield gap between Malaysian and Japanese bonds has narrowed, posing a challenge for the local bond market. If the Fed delivers two more rate cuts, we should see more fund flows returning to this part of the world,” he said.

Ng said the expected Fed easing will likely set the tone for Europe and other developed markets, narrowing yield differentials, and driving fund flows back into Asean.

As for the equity market, Ng said the return of foreign funds remains uncertain, especially as some Asean peers have seen foreign funds returning despite having to deal with more challenges than Malaysia.

“We have to ask ourselves, is it due to the policies, or the weakening economy or because investors may be adopting a wait-and-see approach ahead of Budget 2026. The budget is largely expected to be more focused on fiscal discipline which may indicate less stimulus and catalysts.

“When there is a lack of catalysts, it is difficult for foreign fund flows to return. The equity market is therefore also banking on the expected US rate cuts to improve its relative attractiveness,” he said.

Recently, JPMorgan Chase said it would gradually lower the issuer cap on its GBI-EM Global Diversified index in the first half of next year. The limit will fall to 9% from 10% currently.

Given that JPMorgan’s index is the main benchmark for developing-nation debt funds, changes to its composition will impact global investment flows.

The largest bond sellers in emerging markets like Indonesia, Mexico, and Malaysia are expected to be affected by the weighting reduction.

Khaw thinks JPMorgan’s move could be moderately negative for local bonds as funds tracking the index may be forced to trim their Malaysian holdings in line with the lower allocation cap. Nonetheless, he said the impact is likely to be one-off.

Ng said Malaysia’s bond market remains healthy and should continue to attract investors despite JPMorgan’s adjustment.

“At the end of the day, we expect fund flows to return in 4Q25, as Malaysia’s government bonds have always carried good ratings and the country has never defaulted. This underscores the government’s reputation and ability to repay, which is still above many other emerging markets.”

Article By ELIM POON

Source: Bonds outshine stocks (Thursday, 09 Oct 2025). The Star. Retrieved from https://www.thestar.com.my/business/business-news/2025/10/09/bonds-outshine-stocks

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The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile. The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

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Bonds outshine stocks

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