The opposition's surprise victory in Malaysia's general election May 2018, ending the perennial ruling party's 61-year run, promised a new dawn for the country. A year later, institutional investors aren't celebrating.
Foreign ownership of Malaysian stocks and bonds has dropped considerably since Mahathir Mohamad, at the age of 92, reclaimed the prime minister's office he held from 1981 to 2003, following a campaign focused on the incumbent United Malays National Organization-led government's scandal-plagued governance. Mr. Mahathir had quit UMNO, the ruling party he once dominated, in early 2016 to rally opposition against his one-time protege, Prime Minister Najib Razak.
Foreign investors owned 23.7% of listed Malaysian equities at the end of March, down from 28.5% just before the election, according to Malaysian stock exchange data.
That selling has helped make the Kuala Lumpur Composite index the lone wallflower at what has been a wild stock market party in Asia this year.
As of April 26, the index was down 3.09% for the year, even as China, Japan, Hong Kong, Australia, New Zealand and Taiwan were all sporting double-digit gains.
Meanwhile, quarterly data from Malaysia's central bank showed foreign ownership of Malaysian government securities dropping to 22.7% of the market at the end of December from 27.4% as of March 31, 2018 — with worse to come if index provider FTSE Russell follows through on an April 15 warning that Malaysia could be dropped from its widely tracked World Global Bond index if investor concerns about foreign-exchange hedging aren't addressed.
Market veterans see a number of factors contributing to the exodus — among them the prospect of wrenching changes needed to shift the country's center of economic gravity to private hands from the government; Malaysia's shrinking weighting in benchmark indexes as heavyweights like China come in; and push-back against Malaysian regulators' latest efforts to bend the foreign-exchange market to their will.