PETALING JAYA: Analysts generally expect the third quarter of financial year 2026 (3Q26) to be a period of consolidation for Malaysian equities, with investors likely to shift from broad market bets to selective sector rotation as economic growth moderates and external uncertainties linger.
Against this backdrop, Kenanga Research believes stock picking will be the key to generating returns, while maintaining its year-end target of 1,770 points for the FBM KLCI on expectations that market reforms and an expansionary Budget 2027 will provide stronger catalysts in 4Q26.
“Our year-end 1,770 FBM KLCI target price is thus unchanged, with the belief also that the market will start to firm on an expansionary Budget 2027 (by October),” it said, while cautioning that an earlier-than-expected general election remains a potential source of market volatility.
In its latest 3Q26 strategy report, the research house said the market is likely to trade sideways over the coming months as Malaysia enters a period of milder year-on-year gross domestic product growth following a stronger first half (1H26).
Borrowing from football, the report described its investment approach as “having an eye for goal”, saying investors should remain nimble and seize opportunities as they emerge.
“This reflects our 3Q26 approach to be agile, with stock picking to generate alpha a key strategy,” the report said.
Rather than expecting broad-based gains, Kenanga Research sees sector rotation becoming the dominant investment theme.
The research house has turned more positive on banks after previously advising caution in 2Q26, arguing that the sector now offers compelling risk-reward, given improving dividend visibility, resilient asset quality and the prospect of attracting foreign inflows under the government’s MY Value Up initiative.
The research house favours Public Bank Bhd
, CIMB Group Holdings Bhd and AMMB Holdings Bhd, saying banks could outperform more defensive sectors such as telecommunications and utilities.
Kenanga Research has upgraded the consumer sector to “overweight”, citing expectations that targeted fiscal assistance, a stronger ringgit and more supportive government spending will underpin household consumption.
“We like consumption in its broader definition.”
Its preferred consumer stocks are MR DIY Group (M) Bhd and QL Resources Bhd, while Petronas Dagangan Bhd replaces Dialog Group Bhd as its top oil and gas pick following a recent valuation pullback.
The plantation sector also remains among its highest-conviction calls.
Kenanga Research believes a 63% probability of a severe El Nino could support crude palm oil prices, leaving its 2027 earnings forecasts around 6% ahead of market consensus.
Its preferred large-cap plantation stock is IOI Corp Bhd, while TSH Resources Bhd and United Malacca Bhd are its favoured smaller-cap names.
With the broader market expected to remain range-bound, the research house believes investors should focus on companies with structural growth drivers.
An analyst told StarBiz that local equities could outperform regional peers if volatility persists, supported by ample domestic liquidity and relatively low foreign ownership.
He expects data centres, construction, utilities, retail and tourism-related sectors to remain structural beneficiaries.
