KUALA LUMPUR: The FBM KLCI is expected to see a slightly firmer tone in the third quarter of 2026 (3Q26), supported by seasonal strength and selective sector opportunities, although near-term volatility is likely to persist amid global and domestic uncertainties, according to Malacca Securities.
“Looking ahead, we anticipate a positive start to 3Q26. Historical seasonality data suggests that July is typically a strong month, yielding a decent average upside of 2.2% with a favourable up/down win ratio of 1.5,” the research house said in its 3Q26 Outlook and Strategy report.
The research house noted that the FBM KLCI is still trading at a discount with a price-to-earnings (P/E) ratio of 14.3 times, below its 10-year average of 16.8 times. It added that the rerating lower followed the dissolution of the Johor and Negeri Sembilan state governments, which “may pave way for GE16 to come about earlier than anticipated.”
It said the local market was slightly lower in 2Q26, while small caps outperformed the benchmark index. “We expect this to continue into July 2026,” it added.
This comes after the FBM KLCI fell marginally in 2Q26, ending lower despite broader market resilience, while the FBM Small Cap Index rose 5.12%, driven mainly by technology counters and improved trading flows.
Malacca Securities said foreign funds recorded a net outflow of RM5.12 billion in 2Q26, reversing from an inflow of RM1.07 billion in 1Q26, contributing to the index’s 1.6% decline and its position below the 1,700-point psychological level.
It cautioned that “emerging GE16 speculation could introduce near-term political noise and temporarily dampen foreign inflows,” although global equity strength continued to provide some offset.
The research house also highlighted continued weakness in the ringgit, noting that currency conditions remain supportive for exporters.
“The ringgit has softened to RM4.06–4.15/USD as of end-June 2026, down around 3% over the past month. Having peaked at RM3.88/USD in February, the currency has surrendered those gains as the Fed under new chair Kevin Warsh holds firm,” it said.
It added that US inflation remains elevated, with “May 2026 US CPI came in at 4.2% YoY, leaving no room for rate cuts, with the funds rate anchored at 3.5%–3.75%,” while Bank Negara Malaysia maintained the OPR at 2.75%, keeping the rate differential unfavourable for the ringgit.
“The differential stays structurally unfavourable for the ringgit,” Malacca Securities said.
Despite this, the research house said a weaker currency remains a tailwind for Malaysia’s export-driven economy and technology sector.
“As an export-oriented economy, a strong ringgit was never the right environment for Malaysia's technology sector to thrive, the weakening bias is a tailwind, not a threat.”
It added that Malaysia’s technology sector is moving up the value chain.
“More importantly, the conversation has shifted. Malaysia's tech sector is no longer just about assembly and low-cost EMS. The SkyeChip IPO is a signal of that evolution,” it said.
On sectors, Malacca Securities maintained a positive stance on construction, consumer, solar, industrial products, technology and telecommunications.
It said global markets ended 2Q26 on a strong note, supported by easing Middle East tensions and robust AI-related capital expenditure, which helped offset concerns over a “notably hawkish Federal Reserve stance.”
Malacca Securities said it is executing a partial rebalancing of its simulated portfolio for 3Q26 to capture emerging structural tailwinds while maintaining exposure to its highest-conviction names.
The research house said the strategy aims to benefit from “accelerating capital expenditure cycles across our preferred sectors, namely technology, building materials, renewable energy, power infrastructure, consumer, and telecommunications.”
“We are introducing BM Greentech, EG Industries
, Kobay Technology, Spritzer, and Time dotCom into the portfolio.
“Also, we maintain a strong core exposure to structural themes by retaining 99 Speed Mart, CBH Engineering, Kelington Group, MN Holdings, Northeast, OSK, Southern Cable Group, and Solarvest,” it said.
“This tactical shift preserves our active momentum exposure while broadening our diversification across structural proxies poised for sustained growth,” it added.
Overall, the research house maintained a constructive but cautious outlook, noting that near-term direction will continue to be driven by global rate expectations, foreign fund flows and domestic political developments.
