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Malaysia's biggest state fund sees strong revival for stocks

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The biggest exodus of overseas investors from Malaysian equities since 2015 is spurring bets for a strong rebound in the Asian laggard.

[KUALA LUMPUR] The biggest exodus of overseas investors from Malaysian equities since 2015 is spurring bets for a strong rebound in the Asian laggard.

There's potential for "significant upside" when foreigners return, lured by the nation's strong fundamentals, said Abdul Rahman Ahmad, chief executive officer of Permodalan Nasional Bhd, the nation's largest state-owned asset manager.

The Southeast Asian market has been in a limbo following an unprecedented election victory in May by a disparate group of parties led by Mahathir Mohamad that has clouded investors' outlook. Global funds pulled US$2.9 billion from local equities in 2018, and have remained net sellers this year, even as other markets in the region have lured inflows amid a revival in demand for riskier assets.

"The market always like clarity. We are going through a period of transition," said Mr Rahman. "Fundamentally, we remain strong and the government will pursue policies that are positive for the market. Once the market understands that, flows will come back."

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The FTSE Bursa Malaysia KLCI Index tumbled about 6 per cent in 2018, its worst annual drop since the global financial crisis. The measure is the only decliner among major Asian gauges this year, trading at the lowest level in nine months relative to the MSCI Emerging Markets Index.

Finance Minister Lim Guan Eng recently called on investors to buy Malaysian assets before they turn expensive once the fiscal situation gets back on track in three years. The nation's economy is projected to grow at 4.9 per cent this year from 4.7 per cent in 2018, while the ringgit has gained 1.4 per cent so far this year.

Mr Mahathir has been on a drive to improve the investing environment, pledging reforms to tackle inefficiencies and cracking down on graft. The Southeast Asian country is seeking to bring down its budget deficit to 3.4 per cent of gross domestic product in 2019, from a five-year high of 3.7 per cent in 2018.

"The Malaysian government is now putting in the necessary ingredients or platform for us to be a more sustainable economy," said Mr Rahman.

Permodalan, which held RM272.9 billion (S$91.5 billion) of assets in 2017, was formed by the Malaysian government in 1978 to help boost the wealth of the country's ethnic Malays and indigenous people, who can buy its trusts. It owns stakes in some of the nation's biggest companies including Malayan Banking Bhd, Sime Darby Bhd and UMW Holdings Bhd.

The asset manager has about 70 per cent of its funds in equities, Mr Rahman said. He declined to say if Permodalan was currently a net buyer of local shares.

"We believe in the long term and if all what the government has set out to do happens, and once the market has received better clarity, we think the flows will come back," he said.

BLOOMBERG