What a Recent Malaysian Study Reveals
Author: Ronnie Loo
The KLCI is not driven by company earnings and chart patterns alone. A recent Malaysian study suggests that inflation, interest rates, exchange rates and money supply have a measurable long-term relationship with Malaysia’s main stock market index.
- Why Investors Should Care About the Economy
Most Malaysian investors focus on company profits, dividends, technical charts or market rumours when deciding where to invest.
But the stock market does not move in isolation. It sits inside a wider economic system. Inflation, interest rates, currency movements and liquidity conditions can influence investor confidence, company earnings, foreign fund flows and market valuation.
A 2023 Malaysian study by Chan and Rayappan examined this bigger picture by studying how key macroeconomic factors affected the FTSE Bursa Malaysia KLCI. - What the Study Examined
Chan and Rayappan analysed monthly data from January 2015 to December 2021, covering 84 observations.
The study used the FTSE Bursa Malaysia KLCI as the measure of stock market performance.
The four macroeconomic factors tested were:
Factor Meaning
– Inflation rate measured by the Consumer Price Index
– Real Effective Exchange Rate Ringgit’s value against a basket of trading partners
– M2 Money Supply Broad money circulating in the economy
– Overnight Policy Rate Malaysia’s short-term policy rate set by Bank Negara Malaysia
The researchers applied several statistical methods, including correlation analysis, multiple regression, unit root tests and the Johansen cointegration test. In simple terms, they were testing whether these economic variables had both short-term and long-term relationships with the KLCI. - What the Study Found
The findings were useful for investors.
A stronger real effective exchange rate was linked to a moderate positive movement in the KLCI. This suggests that currency strength can matter to market performance.
Higher inflation and a higher Overnight Policy Rate were both positively associated with the KLCI during the study period.
Growth in M2 money supply, however, showed a moderate negative long-term relationship with the KLCI. This is interesting because many investors assume that greater liquidity should always support the stock market, but the study suggests the relationship is more complex.
Together, the four macroeconomic factors explained about 56% of the movement in the KLCI during the period studied. - What This Means for Bursa Malaysia Investors
The key lesson is simple: the KLCI is shaped by more than individual company news.
Macroeconomic conditions create the environment in which listed companies operate. Interest rates affect borrowing costs. Inflation affects consumer spending and business margins. Exchange rates affect exporters, importers and foreign investor sentiment. Money supply affects liquidity, but not always in a direct or positive way.
For retail investors, this means stock selection should not be separated from the wider economic picture. - Three Practical Takeaways for Investors
Takeaway 1: Watch Bank Negara and Inflation Data
The Overnight Policy Rate and inflation are not abstract economic terms. They can influence market direction, valuation and investor confidence.
When Bank Negara changes its policy tone, investors should pay attention.
Takeaway 2: Do Not Assume Liquidity Always Lifts the Market
The study found that M2 money supply had a moderate negative long-term relationship with the KLCI.
This reminds investors that more money in the system does not always mean stronger share prices. The quality of economic growth, investor confidence and business earnings still matter.
Takeaway 3: Pay Attention to the Ringgit
The real effective exchange rate was positively associated with KLCI performance.
For Malaysian investors, currency movements matter because they affect foreign fund flows, import costs, export competitiveness, and market sentiment. - The Investor’s Framework
A simple way to apply the study is to use this macro checklist:
Question: Why it matter
Is inflation rising or falling? Affects consumer demand, margins and policy decisions
Is Bank Negara tightening or easing? Affects borrowing costs and market valuation
Is the ringgit strengthening or weakening? Affects foreign flows, exporters and importers
Is the money supply growing too fast? May signal liquidity, inflation pressure or economic imbalance
Are company earnings still strong? Confirms whether macro trends are helping real businesses
This framework does not predict tomorrow’s market movement. It helps investors understand the climate in which the market is operating.
Reference
Chan, C. S., & Rayappan, P. (2023). A study on the effect of macroeconomic factors on stock market performance in Malaysia. E3S Web of Conferences, 389, Article 09037. https://doi.org/10.1051/e3sconf/202338909037