At some point, the Malaysian market was called the sick man of Southeast Asia. The Ringgit was one of the worst-performing currencies in the region. The KLCI was underperforming compared to other stock markets in the region.
At the beginning of the year, the KLCI was languishing at the 1,450 level, one of the lowest levels even before the pandemic. Even though the Malaysian economy delivered quite steady growth in 2023, investors were very negative on Malaysia’s prospects.
Most of this stems from a lack of exciting developments in the country. And the decline of crude oil and natural gas prices delivered the final blows to a lacklustre 2023. Oh, and higher interest rates from the U.S. and Europe was wreaking havoc on the Ringgit.
Now that I have set the context for 2023, what happened in 2024? The Malaysian market is actually up by 11% from the beginning of the year, trading at around 1,620 in June 2024.
I think it’s important we understand what factors have driven the Malaysian stock market up this year. Many times, we look at the market and just conclude “Oh, it’s because of the Ringgit. The economy not good. Politics not good also”. Those answers are VERY superficial, and should not be the baseline for many of us.
Instead, let’s go deep into this and come out more enlightened about the long-term prospects of the Malaysian stock market and economy. There are good and bad. But at least we understand both sides of the coin rather than jump to those superficial reasons.
#1: The Stock Market is a Function of the Economy’s Performance and Prospects
This is true in any stock market. How well an economy does in the past, present and future, ultimately determines how the stock market will go moving forward.
So how has the Malaysian economy performed in 2024?
We only have results from the first quarter of 2024. And GDP growth exceeded expectations. Most players in the market expected the economy to grow by 3.9%, but it came out at 4.2%.
You see when the economy seems to be doing better than expected. Investors in the market will normally buy up Malaysian stocks as they now need to readjust their expectations.
The KLCI rose from 1,603 on 15 June 2024 to as high as 1,628 on 20 June 2024 (the GDP was announced on 17 June 2024.
#2: Consumption, Investments and Exports Were Stronger in 1Q 2024
Going deeper into the economic numbers, three things stood out.
Firstly, consumer spending growth rose to 4.7% in 1Q 2024 from 4.2% in 4Q 2023. Consumption make up about 55% of the whole Malaysian economy.
Secondly, investment by companies rose to a whopping 9.2% growth in 1Q 2024 from 4.0% in 4Q 2023. Property, construction, and machinery investments were leading the way.
Thirdly, Malaysia’s exports rebounded to a growth of 2.2% in 1Q 2024 from a contraction of 6.9% in 4Q 2023. Malaysia exported more oil & gas products and generated more tourism money.
So, how do you connect these points to the stock market?
For consumer spending, Bursa Malaysia does have an index named “Bursa Malaysia Consumer Products”. This index consists of all the listed companies that sell consumer products to you. It rose by 10.9% since the beginning of the year, in line with the stronger consumer spending growth.
What about investments by companies and exports? This is normally related to construction, property and manufacturing companies. The KL Property Index rose by 30% since the beginning of the year, while the KL Industrial Products Index rose by 11.7% equivalently.
Whenever these economic indicators seem to be doing well, these sectors will probably also rise in line with them.
#3: The Pressure of High Global Interest Rates is Coming Down
Let’s start from the basics. High interest rates mean that borrowing costs are higher, and thus, will dampen the economic growth of economies. Interest rates in the U.S. and Europe have been high, and because Malaysia is an exporting country, its stock market declined due to less demand from them.
However, that changed this year. The Federal Reserve in the U.S. and the European Central Bank in Europe have said that they will reduce interest rates this year. This is good news for Malaysia.
On this front, China also has shown that its economy is also recovering in 2024. If you didn’t know, China is Malaysia’s largest trading partner.
#4: Not All is Rosy
Malaysia faces some short — and long-term challenges.
Firstly, in my opinion, the move by the government to allow Malaysians to withdraw their retirement funds through Account 3 will increase consumption in the short term but jeopardise retirement in the long term. As it stands, most Malaysians already do not have enough for retirement in the future.
Secondly, the removal of the fuel subsidy for Malaysians will increase the cost of living in the long term. Malaysians rely heavily on RON95 and diesel to get around and find jobs. The Malaysian government is planning to remove these fuel subsidies in 2024.
Thirdly, Malaysia seems to lack local technological capabilities. It is still heavily reliant on foreign direct investment in the country to spur technological progress moving forward. What if these foreign direct investment runs out?
Conclusion
There are three main points why Malaysia’s market is up halfway in 2024. The economy did better than expected, while consumption and investments did well. Also, U.S. and European interest rates are expected to come down, which is projected to increase Malaysia’s exports.
However, if you are an investor, you have to take into account the risks of Malaysians not having enough for retirement, higher cost of living due to removal of fuel subsidies and a lack of local technological capabilities.
