Malaysia must strengthen Bursa to attract foreign capital amid Indonesia's MSCI downgrade threat

KUALA LUMPUR 20 Oct - Malaysia has an opportunity to attract greater international investment as Indonesia faces a potential downgrade by global index provider MSCI, but stronger corporate governance, deeper market liquidity and higher-quality listed companies will be crucial to securing foreign capital.

Penaga Research & Consultancy said Malaysia should not assume that billions of dollars potentially leaving Indonesian equities would automatically flow into Bursa Malaysia, as global investors prioritise regulatory credibility, sustainable earnings and investment returns.

On 15 October 2026, MSCI proposed reclassifying Indonesia from an emerging market to a standalone market, citing concerns over opaque shareholding structures, suspected coordinated trading and insufficient evidence of improvements in market integrity. The consultation runs until 30 April 2027, with a final decision due by 30 June.

Goldman Sachs estimates cited by Penaga suggest Indonesia could face passive investment outflows of US$5.6 billion if its equities are fully removed from MSCI indices, with another US$2.7 billion potentially at risk should FTSE Russell follow suit, bringing the combined estimate to US$8.3 billion.

However, Penaga cautioned that these remain estimates rather than confirmed withdrawals, with index-tracking funds generally redistributing investments among eligible markets instead of directing them exclusively towards Malaysia.

Foreign investors were net sellers of RM5.6 billion in Malaysian equities in the year to 25 September 2026, according to MBSB Research data, highlighting the challenge of converting economic stability into sustained foreign equity demand.

Bursa Malaysia must strengthen its competitiveness

Penaga said Malaysia possesses established financial institutions, a substantial domestic investment base and competitive industries spanning banking, healthcare, utilities, Islamic finance and electrical and electronics manufacturing.

However, these strengths have yet to translate consistently into stronger foreign participation in its equity market.

The research firm urged Bursa Malaysia and the Securities Commission to prioritise larger, more liquid and higher-quality listings, particularly in semiconductors, industrial technology, healthcare, digital infrastructure and logistics, while expanding research coverage and institutional participation in mid-capitalisation companies.

It stressed that attracting more initial public offerings should not become an end in itself, as international fund managers require credible earnings growth, transparent ownership, adequate free float and sufficient liquidity to enter or exit investments efficiently.

Corporate governance could become another competitive advantage if Malaysia demonstrates consistent regulatory enforcement, greater transparency in beneficial ownership and stronger protection for minority shareholders.

Predictable economic policies and credible fiscal management would further strengthen investor confidence, said Penaga.

Vietnam intensifies regional competition

Malaysia also faces growing competition from Vietnam, which FTSE Russell upgraded to Secondary Emerging Market status effective 21 September 2026, with phased index inclusion extending into 2027.

Penaga said Vietnam's manufacturing strength and growth prospects could attract additional international investment, although market access and ownership restrictions remain challenges.

Beyond equities, Malaysia could attract longer-term capital into semiconductor manufacturing, data centres, power infrastructure, logistics and advanced industrial supply chains, supporting skilled employment, domestic suppliers and export earnings.

Penaga said success should be measured not merely by gains in the FBM KLCI, but through sustained foreign net buying, improved market liquidity, stronger corporate listings and investments that expand the country's productive capacity.

With MSCI's decision on Indonesia expected by June 2027, Penaga urged the government, Securities Commission and Bursa Malaysia to strengthen market transparency, regulatory consistency and investor access rather than build their strategy around potential Indonesian outflows.

The firm emphasised that Malaysia's real opportunity lies not in capturing money leaving Indonesia, but in creating a transparent, liquid and competitive investment market capable of attracting and retaining international capital over the long term. — DagangNews.com