PETALING JAYA: After a volatile first half of financial year 2026 (1H26) marked by geopolitical tensions, shifting expectations over US interest rates and foreign fund outflows, analysts expect Malaysian equities to remain choppy in 2H26.
Nevertheless, they remain broadly constructive on the market’s prospects, underpinned by resilient corporate earnings, continued investment inflows and structural themes such as artificial intelligence (AI), semiconductor expansion and data-centre investments.
The FBM KLCI started the year at 1,680.11 and climbed to a high of 1,771.25 on Jan 27.
However, the war in the Middle East later triggered a sharp sell-off, dragging the benchmark index down to as low as 1,664.07 on March 9.
The index subsequently recovered in early May, rising to 1,758.85, supported by Malaysia’s resilient domestic economy and renewed interest in emerging markets.
But those gains proved short-lived, with the index retreating to a year-to-date low of 1,655.28 on June 29. The FBM KLCI ended 1H26 largely flat, slipping 0.96%, or 16.05 points, to close at 1,664.06 yesterday.
Despite the decline, the benchmark index remained about 8%, above its level of 1,532.96 a year earlier.
Market watchers said external developments, particularly US monetary policy, trade measures and geopolitical events, are likely to continue dictating market sentiment in the months ahead.
IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said that while the firm had lowered its year-end FBM KLCI target to 1,780 from 1,800 previously to reflect higher external risks, it remained “constructive” on Malaysian equities.
“The revision should not be interpreted as a weakening of Malaysia’s corporate or economic fundamentals,” he said.
“Instead, it reflects a more conservative valuation assumption amid heightened external uncertainty.”
Mohd Sedek said recent weakness in the local market was largely driven by external factors, particularly developments in the United States, rather than any deterioration in domestic fundamentals.
He said investors are likely to remain focused on US policies, geopolitical developments and the upcoming US mid-term elections, which could result in broader tariffs, tighter export controls and renewed volatility across global markets.
Nevertheless, Mohd Sedek said Malaysia’s earnings outlook remained intact and should continue to support equities over the medium term.
He noted that sustained global investments in AI and semiconductor-related infrastructure, coupled with stronger electronics demand and continued foreign direct investment inflows, would continue to support sectors such as technology, industrials, utilities and construction.
“While headline risks may continue to weigh on sentiment, we believe corporate earnings and structural growth drivers will ultimately determine long-term investment returns,” he said.
Meanwhile, MBSB Research head Imran Yusof said the key factor for 2H26 is the direction of US monetary policy.
The US Federal Reserve (Fed) kept interest rates unchanged at its June meeting, maintaining the target range at 3.50% to 3.75%, with the next Federal Open Market Committee meeting scheduled for end-July.
Meanwhile, Bank Negara Malaysia maintained the overnight policy rate at 2.75% at its May meeting, with the next Monetary Policy Committee meeting scheduled for July 9.
Imran said markets have largely priced in a single Fed rate hike for the remainder of the year, which MBSB views as an “adjustment hike” aimed at anchoring inflation expectations rather than the start of a prolonged tightening cycle.
“If that is the case, we do expect the market to recover after that rate hike, although there will likely be heightened volatility in the interim,” he said.
However, Imran cautioned that if inflation remains elevated, the Fed may be forced into a series of rate hikes, which could have a more severe impact on global equities, including emerging markets such as Malaysia.
He said a US rate hike could strengthen the US dollar, lift bond yields and trigger renewed foreign fund outflows, leading to a volatile third quarter.
Still, Imran does not expect the current environment to warrant a prolonged tightening cycle, as inflationary pressures are largely supply-driven rather than demand-driven.
He added that once markets digest the Fed’s policy decision, investors are likely to shift their focus back to domestic catalysts such as Visit Malaysia 2026, renewable energy projects, construction activity and data-centre investments.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said fears of a Fed rate hike cycle have dampened market sentiment, although he believes expectations for such a move may be excessive.
He noted that moderating wage growth and a still-healthy labour market in the United States could allow the Fed to keep rates unchanged.
Despite the uncertainty, Mohd Afzanizam remained optimistic on equities, citing easing oil prices and moderating inflationary pressures in 2H26.
He added that earnings quality and visibility would remain key considerations for investors.
“Positive macroeconomic foundations such as a current account surplus, adequate foreign exchange reserves and fiscal discipline mean there is always a case for the FBM KLCI to pierce above the 1,700-point level,” he said.
Mohd Afzanizam added that foreign investors would also be monitoring the upcoming state elections and the possibility of a general election being called this year.
Looking ahead, MBSB Research expects 2H26 to begin on a cautious note, with market sentiment improving later in the year as external uncertainties ease.
“We expect the second half to begin on a cautious note, but if the Fed signals that it is not embarking on a sustained tightening cycle, markets could recover in the later part of the year,” the research house noted.
It added that any recovery in the local market would likely be supported by healthy domestic growth, resilient corporate earnings, attractive valuations and a renewed focus on domestic catalysts once external policy uncertainty subsides.
MBSB Research has set a year-end FBM KLCI target of 1,770 points while maintaining an “optimistic but cautious” investment stance that balances defensive resilience with selective recovery and growth opportunities.
