[KUALA LUMPUR] Malaysian stocks recorded their biggest advance in two years, led by a rally in state-controlled companies, after Prime Minister Najib Razak said the government will tap a fund to support the nation's equities.

The FTSE Bursa Malaysia KLCI Index surged 2.3 per cent to 1,639.63 at the 5 pm close in Kuala Lumpur, the most since May 2013.

Tenaga Nasional Bhd, a government-controlled power utility, jumped 6.6 per cent, the most since December 2013. Sime Darby Bhd rose 7.4 per cent and palm-oil producer Felda Global Ventures Holdings Bhd soared a record 29 per cent. The government will "reactivate" ValueCap Sdn with funds of as much as RM20 billion (US$4.6 billion), Mr Najib said on Monday, without giving details.

Malaysia is seeking to bolster confidence in its financial markets after international investors pulled RM16.4 billion from the nation's equities this year, more than double the RM6.9 billion for the whole of 2014. Malaysia's ringgit has dropped 19 per cent versus the dollar this year, battered by a political scandal, slumping oil prices and the prospect of higher US interest rates that threaten economic growth.

"This is good news as the intention is to prop up the stock market," Ang Kok Heng, chief investment officer at Phillip Capital Management Bhd, which manages US$630 million, said by phone in Kuala Lumpur. "Stocks have fallen a lot."

The KLCI has tumbled 13 per cent from its July 2014 peak, with valuations sliding to the lowest since 2012 last month. Even with the gains on Monday, Tenaga and Sime Darby are down at least 13 per cent this year, while Felda Global has declined 25 per cent. ValueCap started operations in 2003 to bolster government-linked shares after the country's stock market failed to recover from the 1998 Asian financial crisis. ValueCap didn't respond to calls and an e-mail seeking comment.

"ValueCap was set up as an entity to support undervalued stocks and it was found to be effective in stabilizing the equity markets," Mr Najib said. "ValueCap also generated high returns to its shareholders."

The prime minister said Monday government-linked companies and government-linked investment companies will be encouraged to invest in higher value-add activities in Malaysia. The Employees Provident Fund said it's "constantly seeking out appropriate local investments and will actively invest in long-term strategic industries and companies," according to a statement Monday after Mr Najib's speech.

State investment fund Khazanah Nasional Bhd said Monday it will accelerate and increase domestic investments over the immediate and medium term in several sectors. It identified projects worth about RM6.8 billion, including spending RM4.5 billion in development costs on a tourism resort in Johor state near Singapore, and RM670 million to build new hospitals and expand existing ones.

Malaysia has been struggling to boost confidence in its economy and government finances since oil prices started slumping late last year. Growth in the economy slowed to 4.9 per cent in the second quarter from a year earlier, expanding the least in almost two years after a new consumption tax curbed private spending.

In August, Mr Najib named his brother and a senior finance official under former premier Mahathir Mohamad as members of a committee tasked with finding ways to spur the economy amid a rout in the country's financial markets.

BLOOMBERG