HLIB Research expects FBM KLCI to regain momentum in 2026 to 7.1%.
PETALING JAYA: The equity market is set for an upward momentum with the country’s gross domestic product (GDP) growth expected to surpass 4% for this year, coupled with the receding of US tariff tensions, and the narrowing between the US federal funds rate (FFR) and overnight policy rate (OPR) spread.
Hong Leong Investment Bank (HLIB) Research said it is projecting GDP growth at 4.5% year-on-year (y-o-y) in 2026, at the upper end of the 2026 official 4% to 4.5% range.
“With US-led tariff tensions ebbing, alongside Malaysia’s high proportion of exempted exports, we think that 2026 will be a stronger year for the market,” it noted.
Malaysia’s official GDP growth for 2025 is projected to be in the range of 4% to 4.8%, and between 4% and 4.5% in 2026.
HLIB Research said although 2025 was off to a tumultuous start with the FBM KLCI plunging 10% by April as a result of US President Donald Trump’s global tariff onslaught, the local bellwether index managed to recoup its earlier losses.
This was on trade tensions subsequently easing.
All in, the FBM KLCI ended 2025 higher by 2.3%, and alongside the ringgit’s strong 10.1% appreciation versus the US dollar, this lifted its currency adjusted returns to 12.7%.
This was broadly in line with MSCI Asean’s 12% gain, it said.
“While still present, we opine that tariff tensions have eased from its Liberation Day peak.
“For most countries, the finalised US-imposed reciprocal tariff was lower than initially proposed.
“Despite lingering risks from the potential implementation of semiconductor tariffs under Section 232, this has reportedly been delayed, suggesting, in our view, that the Trump administration is taking a more guarded approach on the matter,” it said.
HLIB Research also expects the FFR to be lowered by 50 basis points (bps) in 2026, more dovish than the US Fed’s projection of 25 bps.
“Alongside our expectations for Bank Negara Malaysia to stand pat in 2026, this implies a further narrowing of the FFR-OPR spread throughout the year.
“Past periods of narrowing interest rate differentials between the United States and Malaysia have broadly been positive for the latter’s currency,” HLIB Research said.
“We believe that the economic reforms of the unity government are bearing fruit, with the fiscal deficit healthily declining from 5.5% of GDP in 2022 to a projected 3.5% in 2026.
“Based on this trajectory, we think that the fiscal deficit could hit 3% by 2028, ahead of the 13th Malaysia Plan target timeline,” it noted.
Fiscal discipline aside, HLIB Research said the administration has also crafted various strategic plans under the Madani Economy umbrella, which in its opinion, has helped propel approved investments to new highs and led to robust growth in gross fixed capital formation.
“Coming off our projection for subpar FBM KLCI earnings growth in 2025, we expect it to regain momentum in 2026 to 7.1%.
“We introduce our 2026 FBM KLCI target at 1,790 points premised on 15.4 times price-earnings multiple tagged to the 2026 earnings per share or EPS,” HLIB Research added.
