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Big is beautiful in Malaysian stocks as foreign funds return

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[SINGAPORE] Bigger is better in battered Malaysian equities as investors expect larger stocks to outperform smaller ones in the second half of this year.

That would be a sea change from the performance so far. An index of the nation's small stocks has gained 20 per cent this year compared with a 3.6 per cent decline in the FTSE Bursa Malaysia KLCI Index tracking the biggest 30 companies. The broad benchmark remains the worst among the world's major markets in 2019.

The benchmark gauge declined 0.8 per cent on Wednesday, the most since May 23, as of 9.50am in Singapore compared to 0.6 per cent loss in the MSCI Asia Pacific Index.

Investors from Manulife to Areca Capital Sdn expect Malaysia's large firms to benefit from clearer policy direction after a year of public reforms and project reviews. While more than US$3 billion has left the nation since the election in May last year, overseas funds have been returning to buy a net of US$61.4 million Malaysian stocks in July, a second straight month of inflow.

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"We are pretty positive for the second half," said Danny Wong, who oversees RM1.6 billion (S$531.2 million) in assets under management. The benchmark KLCI could gain about 10 per cent from Friday close, he said, adding that "large caps would do good in second half, even if small ones don't".

Credit Suisse Group AG likes shares whose proportion of foreign holdings has dropped below the average levels after the global financial crisis, which indicates more room for international investors to buy these securities. That includes IJM Corp Bhd, Genting Bhd, Axiata Group Bhd, Gamuda Bhd and CIMB Group Holdings Bhd, Danny Goh, Asia equities strategist at the bank, wrote in a July 18 note.

The economy as a whole is also set to stabilise as the new government "finds its footing", said Kenglin Tan, a fund manager at Manulife Asset Management (HK) Ltd. The near-unanimous vote to pass a bill on the minimum voting age shows that "the investment case is becoming more attractive", Mr Tan said, adding that he's been adding to his holdings of the country's stocks.

To be sure, trade tensions between the US-China continues to weigh on the export-reliant Malaysia, leading Rob Mumford, a fund manager at GAM Investments, to see the market as unattractive.

Still, Finance Minister Lim Guan Eng remains optimistic on reaching economic growth close to 5 per cent this year, while drafting a 2020 budget that accounts for risks from the trade war. That expansion is set to boost larger stocks more due to already-lowered expectations, Areca's Mr Wong said.

"We are looking to slowly increase our exposure in undervalued stocks in telecom, casino and utilities," he said.

BLOOMBERG