KUALA LUMPUR: The government's call for the local institutional funds to prioritise domestic investments may be depriving them of the opportunity to generate more profits from the international market.
But the move will enable Malaysia's major institutional investors to allocate additional capital to support domestic firms and contribute to the national agenda of economic prosperity and job creation, economists said.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said this shift will generate more liquidity and increase trading volume in the secondary markets.
The main benefits of redirecting investment from overseas to domestic markets are the currency risks, he noted.
"Overseas investment would require these investors to hedge their exposures in the derivatives market. This can be a costly affair if the markets work against them.
"However, going abroad would offer these investors an opportunity to diversify their portfolios which can effectively bring down the portfolio risks especially if their assets class are uncorrelated among each other. This could improve the risk-return profile of a portfolio," he told Business Times.
Nevertheless, Afzanizam stressed the necessity of making a clear distinction between portfolio investment and foreign direct investment (FDI).
He explained that portfolio investment tends to be volatile, and there are specific optimisation rules that can dictate how long an institutional investor remains in the market to maximise their investment returns.
"On the contrary, FDI is in for long term. They come here to set up a production hub, employ workers and pay the necessary tax to the government. I suppose we need to have a a clear view on this front," he noted.
Putra Business School economic analyst Associate Professor Dr Ahmed Razman Abdul Latiff believes that local funds should be encouraged to invest in local markets.
He said this should be done provided it aligns with their strategic investment objectives and meets the targeted return on investment.
"Local funds might be losing the opportunity to invest in the international market, which provides higher returns.
"However, the advantage is that the domestic market can grow faster, thereby contributing to the national agenda of economic prosperity and job creation," he added.
That said, Ahmed Razman emphasised the need to ensure that the policy is not restrictive since no one standard can fit all.
He noted that there must be some consideration on a case-by-case basis to ensure that local funds will not suffer in terms of the return on investments due to this policy.
Prime Minister Datuk Seri Anwar Ibrahim recently asked government-linked corporations (GLC) and government-linked investment companies (GLICs) to reduce their involvement in unprofitable foreign ventures.
Anwar, who is also the finance minister, plans to talk with the GLICs, which manage almost RM2 trillion, about investing more locally to boost Malaysia's economy.
Anwar stated that he had provided instructions, including a call for reducing investments in foreign countries.
He also questioned the purpose of attracting foreign investors to Malaysia if local investment was not appealing.
Anwar emphasised the importance of enabling local companies to pursue profitable investments and hinted at potential policy adjustments to encourage more investment within the country.
In December last year, Anwar reiterated the pivotal role of GLCs and GLICs in advancing the nation's aspiration to emerge as a leading Islamic economic hub and a global investment magnet.
He urged these entities to enhance investments in digital and renewable energy sectors while facilitating the expansion of micro, small, and medium enterprises into regional markets, aligning with national objectives.
Anwar further directed GLICs to heighten their domestic direct investments, highlighting their collaborative role with the government in driving economic advancement and augmenting citizens' incomes.