PETALING JAYA: Malaysian equities are likely to remain under pressure amid persistent geopolitical risks, with investors increasingly rotating into safe havens as global tensions keep risk sentiment fragile.
Economist Yeah Kim Leng highlights a global risk-off environment, where investors are shifting into safer assets amid heightened uncertainty.
This typically weighs on equities, as funds move out of riskier instruments.
However, he also points to an important countertrend – capital diversification into resilient emerging markets, with Malaysia seen as a relative safe haven.
“What we observe here is that there is some diversification towards emerging markets, especially to countries that are seen to be more resilient against the current shocks,” he said.
“We are among the so-called favourite countries because we seem to be more resilient.”
This, he added, helps explain the recent pickup in foreign inflows and could continue to underpin the market if sustained.
Last week, foreign investors, however, snapped a three-week net buying streak, turning into net sellers of RM76.9mil.
This brought the year-to-date 2026 net buying position down to RM3.3bil, according to CIMB Research.
For March 2026, foreign investors were marginal net sellers at RM55.3mil.
In contrast, Malaysia’s bond market has seen a stronger resurgence in foreign interest.
Foreign investors poured in a net RM6.1bil into Malaysian bonds in March, reversing a RM2.5bil outflow in February, after earlier recording inflows of RM951.9mil in January.
This shift comes amid growing unease over the traditional role of US Treasuries.
With rising fiscal concerns, elevated debt levels and policy uncertainty in the United States, some investors are beginning to reassess the safety of US government bonds.
As a result, there is a gradual reallocation of capital away from US Treasuries towards alternative safe-haven markets, including select emerging market bonds such as Malaysia’s, which offer relatively stable macro fundamentals and attractive yields, Yeah explained.
Still, MBSB Research cautioned that Malaysian equities are likely to remain capped, with the FBM KLCI already trading below its long-term average valuation.
“Despite our baseline expectations of still resilient macro performance along with positive earnings growth this year, we expect local equity valuations to remain at sub-average levels,” it said.
“That is so as we believe the equity market would be beset by uncertainties engendered by the ongoing geopolitical conflict in the Middle East and attendant inflationary pressure.”
Against this backdrop, the research house maintained its end-2026 FBM KLCI target of 1,800 points, citing a clouded outlook and elevated uncertainty.
The FBM KLCI is currently trading at a price-to-earnings multiple (PER) of 2026 of 15 times, which is below its 10-year average PER of 16 times.
MBSB Research added that investors should tactically position in defensive sectors such as real estate investment trusts, utilities, healthcare and consumer staples, which offer earnings stability and attractive dividend yields in a volatile environment.
“This stability and attractive dividend yields should moderate the downside risks while not discounting the potential for price appreciation due to undervaluation, as we have observed defensive sectors being a bit of a laggard,” it said.
Meanwhile, MBSB Research said oil price shocks from the Middle East conflict have reinforced concerns that inflation could remain structurally elevated, delaying expectations of US rate cuts and keeping global financial conditions tight.
It noted that Brent crude is now assumed to hover between US$100 and US$120 per barrel during peak disruption periods, with a 2026 average of around US$90 per barrel, while markets have almost fully priced out US Federal Reserve rate cuts this year.
In this scenario, MBSB Research projects inflation in Malaysia to edge up to around 2.5% in 2026, compared to 1.4% in 2025.
“This upside is driven by rising energy prices, which we expect to trickle down into other consumer price index components,” it said.
“Global inflation re-accelerated in March 2026, driven by surging energy and logistics costs that manufacturers are increasingly passing on to consumers, as evidenced by Malaysian output prices hitting a 45-month high in the March Purchasing Managers’ Index reading.”
Reflecting this trend, consumer prices rose 1.7% in annual terms in March, following a 1.4% increase in the prior month, marking the strongest reading since November 2024.
The increase was mainly driven by the transport group, which rose to 1.6%, likely due to higher fuel prices amid the conflict.
However, Yeah noted that the inflation impact is likely to remain contained rather than broad-based, supported by targeted fuel subsidies and a relatively stable ringgit, which help cushion imported inflation pressures.
Yeah said the current price pressures are primarily supply-driven and temporary in nature and are unlikely to trigger a sustained inflation spiral in the absence of strong wage pressures or demand overheating.
