PETALING JAYA: Kenanga Research believes the benchmark FBM KLCI is trading fairly at around the 1,690-point level now, given tactical positioning will sustain into the second quarter of financial year 2026 (2Q26) due to the conflict in the Middle East.
The conflict has increased the appeal of dividend stocks such as banks and real estate investment trusts (REITs), leading the research house to maintain its year-end expectation of 1,760 points for the FBM KLCI (16 times multiple on blended 2026/2027 earnings per share).
The banking sector generates a dividend yield of 5.3%, which is marginally below the 5.5% from the REIT sector.
However, if the conflict prolongs beyond six months, Kenanga Research warned that the economic impact could see the index test 1,610 points in a bear case scenario.
“While we acknowledge Malaysia’s relative appeal versus peers as a net energy exporter, we are being more vigilant, especially as year-to-date (y-t-d) earnings expectations haven’t been adjusted much despite potential cost/inflation pressures,” it stated in its latest 2Q26 strategy report titled “Choosing Our Battles”.
However, Kenanga Research is cautious about timing positions in banks in 2Q26 as it foresees the case for building up some provision buffers, before unwinding them later in the year as war tensions subside.
It noted that the equity market is an attractive dividend destination given many companies have started to adopt a more aggressive payout and capital management posture supported by free cash flows, more so as capital management intensify.
The research house expects the 2Q26 to offer a longer window for trading and tactical positioning in oil and gas and plantation stocks, helped by selling product prices remaining stubbornly high.
Another investment option it identified was in companies that have a cost-pass through business model such as those operating in steel, plastic packaging and gloves sectors.
On the other hand, construction players will have to absorb some cost in the near term, notwithstanding data centre engineering procurement, construction and commissioning contracts which help support the sector’s pipeline.
Utilities fit somewhere in between, with the impact to rising cost not impactful thanks to cost-pass through mechanisms.
In the consumer space, where valuation reversals y-t-d are relatively aggressive, Kenanga Research expects some downtrading and prefers more defensive names at present.
“The war is said to offer opportunities in structural growth, which may be oversold.
“These include renewable energy and selective technology names.”
On the macro front, Kenanga Research advised keeping an eye out for the US inflation and treasury yields as key barometers.
It believes higher borrowing cost in the United States is curtailing the escalation of the war as well as the mid-term elections in the 4Q26.
Kenanga Research has forecast an average crude oil price of US$80 a barrel, and at around US$100 in 2Q26 before normalising in the second half of financial year 2026.
Its top stock picks include names like CIMB Group Holdings Bhd
, Tenaga Nasional Bhd, Sime Darby Bhd and Gamuda Bhd.
