PETALING JAYA: After a bruising 2025 marked by heavy foreign outflows and policy uncertainty, Malaysia’s equity market is shaping up for a more constructive 2026, anchored by improving earnings visibility, resilient domestic demand and undemanding valuations.
The FBM KLCI has been weighed down by persistent foreign selling and external shocks ranging from US-China trade tensions to tariff volatility this year, especially in the first half, as foreign ownership of Malaysian equities fell to a historical low of 18.7% in September, underscoring how under-owned the market has become.
CIMB Research projected the benchmark index to reach 1,772 points by end-2026, underpinned by 6% to 6.4% earnings growth, resilient domestic consumption and the prospect of a policy rate cut.
The index closed 0.36% higher yesterday at 1,643.72 points.
It said foreign shareholding is near a historical low, which limits downside, while the pre-election cycle and stable macroeconomic conditions could support a market rebound.
The research house pointed out that gross domestic product growth is expected to moderate but remain healthy, forecasting a 4.1% expansion for 2026, while inflation is projected to hover near 2%.
It said Bank Negara Malaysia is also widely expected to keep policy accommodative, with an anticipated 25-basis-point overnight policy rate cut in the second quarter of 2026 (2Q26).
“Our ringgit outlook is also favourable, with potential to retest RM4.05 to RM4.10 in 1Q26 before normalising to around RM4.10 to RM4.20 for the rest of the year – a trend that has historically supported market valuations and foreign inflows,” said CIMB Research.
It said a key domestic structural catalyst is the Government-linked Enterprises Activation and Reform Programme (GEAR-uP), which aligns the investment mandates of Malaysia’s six major government-linked investment companies (GLICs).
Under GEAR-uP’s next phase, more than 30 government-linked companies will be guided to lift their collective market capitalisation by RM100bil and deliver shareholder returns of at least 7.5% annually over five years.
The research house believes this initiative should disproportionately benefit large-cap FBM KLCI constituents with significant GLIC ownership.
On a separate note, the research house observed that election-related seasonality could be another factor in the market’s favour, stressing that while the next general election is not due until 2028, historical data show that the FBM KLCI has delivered positive 12-month returns ahead of three of the past four elections when growth and inflation were stable.
It reported that financials, consumer stocks and industrials tend to outperform during pre-election periods, providing a potential roadmap for sectoral positioning in 2026.
Meanwhile, RHB Research said investors are increasingly turning their attention to mid-and small-cap stocks after a difficult 2025.
Despite describing 2025 as a “laggard” year for the FBM Mid 70 and FBM Small Cap (FBM SC) indices – which fell 9.9% and 11.3%, respectively, year-to-date and significantly underperformed the benchmark index – it said history suggests a rebound may be due.
“From a slow 2025, the FBM 70 and FBM SC are poised for a potential rebound in 2026, based on the historical trend of alternating years of outperformance,” said the research house, adding that valuations have become increasingly compelling.
The small-cap index is now trading at a four to five times price-to-earnings discount to the FBM KLCI, while earnings growth expectations of more than 19% far exceed those of the broader market, it added.
RHB Research advocates a balanced approach, combining value and growth names while prioritising earnings quality, margin resilience and cash-flow visibility amid lingering geopolitical and cost pressures.
It said sectoral interest within mid- and small-caps is expected to centre on infrastructure-related plays, renewable energy, data centres and beneficiaries of the semiconductor recovery.
Meanwhile, MBSB Research takes a similarly constructive but guarded stance on the broader market, expecting the FBM KLCI to surpass its post-lockdown high in 2026, supported by a rebound in earnings and continued domestic-led expansion.
“In 2026, expect the positive market momentum to be sustained by a sanguine economic outlook and positive earnings performance,” the research house said, setting a baseline FBM KLCI target of 1,750 points, equivalent to a forward price-to-earnings ratio of 15.2 times.
MBSB Research picked the financial services, utilities and consumer sectors as key contributors to earnings growth in absolute terms, while stating that industrial products, technology and consumer stocks are expected to deliver the strongest percentage gains.
