PETALING JAYA: The equity market is expected to navigate a more challenging second half of financial year 2026 (2H26), with resilient corporate earnings and structural growth themes likely to underpin sentiment even as investors contend with geopolitical uncertainties, currency pressures and domestic political risks.
While analysts anticipate a gradual recovery towards year-end, they expect trading to remain largely range-bound amid the absence of strong near-term catalysts and lingering external headwinds.
Both Hong Leong Investment Bank (HLIB) Research and Phillip Capital Research have trimmed their benchmark index targets, although they continue to project positive earnings growth and a supportive macroeconomic backdrop.
According to HLIB Research, the Malaysian market would face four key headwinds 2H26, stemming from both external and domestic factors.
The research house highlighted lingering global supply chain disruptions following the Iran conflict, a stronger US dollar amid hawkish US Federal Reserve expectations, the increasing probability of an early 16th General Election (GE16) and the potential expansion of the FBM KLCI to 50 constituents as near-term risks for equities.
“While positive in the longer term, (the potential expansion of the FBM KLCI constituents) may create a transitory overhang for the existing 30 stocks as their cumulative weights are diluted,” HLIB Research said.
“From our analysis, winners of the FBM KLCI’s expansion are the automotive, gaming, real estate investment trust, ports and technology sectors as they will be represented in the bellwether index, while the losers are banking and utilities, which suffer the largest weight reductions,” it added.
Despite the challenges, HLIB Research maintained its optimism, stating: “We believe that the quartet of hurdles are temporary in nature, which should subside by year-end, clearing the pathway for the market to recover.”
It forecasts the FBM KLCI to end the year at 1,770, as compared with its previous target of 1,790.
The brokerage also upgraded its 2026 gross domestic product (GDP) growth forecast to 4.7% from 4.5%, citing robust electrical and electronics exports, while expecting inflation to remain contained at 2% and Bank Negara Malaysia (BNM) to keep the overnight policy rate (OPR) unchanged through the year-end.
Phillip Capital Research, likewise, expects a firmer macroeconomic environment to support Malaysian equities, identifying artificial intelligence (AI) expansion, the green energy transition, the infrastructure rollout and tourism recovery as the key investment themes for 2H26.
“We expect Malaysian equities to see improved performance into 2H26, supported by resilient corporate earnings growth, a more constructive macro backdrop, and sustained thematic tailwinds,” it said.
However, the research house maintained a neutral stance on the FBM KLCI because of limited near-term catalysts and expected foreign inflows to remain subdued amid uncertainty over the timing of GE16.
Reflecting that cautious stance, Phillip Capital Research lowered its end-2026 FBM KLCI target to 1,700 from 1,710 previously while retaining its “overweight” recommendations on seven sectors.
It also upgraded its 2026 GDP growth forecast to 4.7% from 4.5%, saying, “Malaysia’s growth outlook remains underpinned by resilient domestic demand, supported by healthy labour market conditions and steady investment activity, while external demand continues to benefit from ongoing AI-driven semiconductor upcycle.”
At the same time, it warned that inflation had re-emerged as a key near-term US dollar, while expecting BNM to keep the OPR at 2.75% through the end of 2026.
Meanwhile, another analyst told StarBiz that 2H26 will likely be characterised by periods of heightened volatility rather than a sustained directional rally, as investors weigh resilient domestic fundamentals against evolving external risks.
“Stock selection and sector allocation are expected to play a bigger role in generating returns than broad market exposure,” he said.
