PETALING JAYA: Analysts are generally maintaining a positive outlook on domestic equities in 2026, underpinned by improving liquidity conditions, renewed foreign interest, and supportive domestic fundamentals.
However, RHB Research stressed that the year ahead will not be a one-directional market. Instead, it expects 2026 to be “a trading market,” requiring disciplined stock selection, active portfolio management and timely rotation.
“The 2026 outlook for equities remains positive,” it said in a note, citing clarity on trade tariffs, expectations of further US rate cuts, a softer US dollar and robust domestic growth initiatives.
Malaysia’s relative political stability and continued commitment to reform also placed it in a favourable position compared with regional emerging market peers.
At the same time, it cautioned that external risks – particularly those linked to US policy – necessitate a selective and risk-aware investment approach.
On that note, investment strategist and economist at IPP Global Wealth Mohd Sedek Jantan said foreign flows relative to the ringgit is a likely marker to gauge if external funds are retreating from local equities.
“If the ringgit stays firm but foreign equity inflows start to fade, that is an early signal liquidity support is weakening.
“Second, market breadth and technical structure matter – a sustained break below the 50-day moving average, especially with narrowing participation, would be a clear de-risk signal,” he told StarBiz.
Thirdly, he said if defensive counters begin to outperform banks and cyclicals without a macro shock, it can also suggest the market is quietly de-leveraging.
Early market performance has been constructive, with the FBM KLCI having reached an intra-year high of 1,771 points by late January, up 5.4% year-to-date.
RHB Research attributed the gains primarily to financial services stocks, as investor risk appetite improved and foreign portfolio flows began to reverse after Malaysia lagged regional peers in 2025.
A strengthening ringgit has also provided a tailwind for the benchmark.
“Easy liquidity conditions and the quick run-up in markets have surprised investors,” RHB Research noted, warning market pullbacks are likely to be “relatively shallow” as the “fear of missing out” effect encourages participation.
Against this backdrop, the securities firm expects rotational interest into laggards and second-line stocks rather than a narrow, momentum-driven rally.
It pointed out that financial services have been the strongest performers year-to-date, supported by expectations of net interest margin recovery, potential capital management initiatives and attractive dividend yields.
At the same time, it also highlighted gains in large-cap consumer stocks, driven by their defensive characteristics and earnings resilience. Meanwhile, Mohd Sedek said domestic-oriented defensives such as consumer staples, utilities and healthcare appear mispriced despite stable cash flows and resilient domestic demand.
“Part of this reflects the ringgit’s roughly 12% appreciation since early 2025, which has concentrated foreign flows into larger, more liquid index heavyweights rather than driving a broad-based re-rating,” he pointed out.
As a result, Mohd Sedek said valuation dispersion has widened across sectors, and a rotation would likely be unlocked by greater confidence in domestic liquidity and earnings visibility, rather than a new macro catalyst, while parts of industrials and construction remain more sensitive to execution risks given current pricing.
Looking ahead to corporate earnings, RHB Research is anticipating the final quarter of 2025 reporting season this month to deliver results broadly in line with expectations.
Robust domestic macroeconomic conditions and an appreciating ringgit in the fourth quarter supports this view, with 2025 weighted earnings growth forecast at 2.5%. The research house flagged potential earnings risks in the oil and gas sector due to softer crude prices, and in telecommunications due to merger-related adjustments and currency strength.
Reflecting its constructive stance, RHB Research raised its end-2026 FBM KLCI target to 1,780 points, based on a valuation of 15.5 times forward 2027 earnings, up from 15 times previously.
It remains “overweight” on banks, energy, consumer, property, healthcare, construction, real estate investment trusts and technology.
Nonetheless, it emphasised that success in 2026 will depend less on broad market exposure and more on execution, commenting that investors should “make hay while the sun shines” – but do so with discipline and selectivity.
