A time to stay selective

MALAYSIA’S stock market is expected to remain resilient in the second half of 2026 (2H26), although the operating environment will become more challenging.

Research houses are urging investors to stay selective, defensive and ready to take advantage of bouts of volatility as corporate earnings moderate and political uncertainty increases.

While slower domestic demand, lingering geopolitical risks and the prospect of a general election are expected to weigh on sentiment, analysts broadly believe Malaysia’s longer-term structural growth themes remain intact – supporting quality companies with solid earnings, strong balance sheets and exposure to sectors such as power, renewable energy (RE), digital infrastructure and banking.

UOB Kay Hian (UOBKH) Research, CGS International (CGSI) Research, TA Research and Public Investment Bank (PublicInvest) Research all maintain a cautious but constructive outlook, although they differ slightly in their year-end targets and preferred investment themes.

Softer environment

UOBKH Research expects the FBM KLCI to weather a softer earnings environment better than it did in 2025.

“We anticipate slowing domestic consumption and corporate earnings momentum in 2H26 as the secondary inflationary impact of the Iran conflict fully seeps in,” it says.

Nevertheless, the brokerage believes earnings should still improve from last year because of easier year-on-year comparisons after disruptions caused by the US reciprocal tariffs.

Political developments are also expected to become a key market driver.

UOBKH Research says the surprise dissolution of the Johor and Negri Sembilan state assemblies have increased expectations that Malaysia could head into the 16th General Election (GE16) as early as the fourth quarter (4Q26).

“Hence, we expect the equity market to be largely risk-off in 2H26, anticipating a potential snap election and a hung Parliament,” it explains.

Despite the risks, UOBKH Research keeps its end-2026 FBM KLCI target at 1,760, arguing that investors are likely to look beyond near-term uncertainties.

“Our target valuation implicitly embeds an expectation of a gradual de-escalation of geopolitical tensions, easing of cost pressures, and an improvement in investor sentiment after GE16 as greater policy clarity emerges,” it explains.

“We advocate adopting a primarily defensive strategy (seek shelter in particularly liquid and high-yielding large caps) but an ‘overweight’ rating for beneficiaries of compelling investment themes,” it explains.

Those themes include RE, power infrastructure, data centres, artificial intelligence (AI), blockchain, trade diversion and stronger crude palm oil prices.

Its preferred stocks are 99 Speed Mart Retail Holdings Bhd (target price or TP: RM3.80), CIMB Group Holdings Bhd (TP: RM9.30), Eco World Development Group Bhd (EcoWorld Malaysia) (TP: RM2.70), Kuala Lumpur Kepong Bhd (KLK) (TP: RM24.65), MISC Bhd (TP: RM9.50), Greatech Technology Bhd (TP: RM3.10), Solarvest Holdings Bhd (TP: RM3.50) and Tenaga Nasional Bhd (TNB) (TP: RM16.30).

Accumulate on weakness

CGSI Research also expects political developments to influence market sentiment, trimming its end-2026 FBM KLCI target to 1,780 from 1,810.

“We reduce our end-2026 FBM KLCI target to account for a higher risk premium likely to be accorded to the market as the GE16 drum beats louder,” it says.

However, it believes policy continuity is likely regardless of the election outcome.

“We think this could mean that sharp deviations from existing policies would be limited, especially where they have helped strengthen Malaysia’s fiscal and policy situation,” it highlights.

Rather than retreating from the market, the brokerage encourages investors to use market weakness to build positions.

“Against this backdrop, we recommend that investors use periods of volatility to accumulate quality names,” it asserts.

CGSI Research also believes investors should begin positioning for longer-term opportunities. Amid the on-off ceasefire between Iran and the United States, investors should focus on fundamentals to to identify undervalued opportunities and manage risk effectively.

Its preferred themes are energy security, alternative transport, rebuilding industrial capacity, food security and RE.

Stocks on its high-conviction list include Malayan Banking Bhd (TP: RM15), TNB (TP: RM16.60), SD Guthrie Bhd (TP: RM7.40), RHB Bank Bhd (TP: RM10.30), MISC (TP: RM9.17), Telekom Malaysia Bhd (TM) (TP: RM9.50), Gamuda Bhd (TP: RM5.78), Westports Holdings Bhd (TP: RM6.98), Axiata Group Bhd (TP: RM2.87), MR DIY Group (M) Bhd (TP: RM2.11), Sime Darby Bhd (TP: RM2.50), Fraser & Neave Holdings Bhd (TP: RM37), EcoWorld Malaysia (TP: RM2.63), Hong Leong Industries Bhd (TP: RM26.30), Ta Ann Holdings Bhd (TP: RM6.85), Capitaland Malaysia Trust (78 sen) and Hap Seng Plantations Holdings Bhd (TP: RM3.35).

Structural risks unresolved

TA Research keeps its end-2026 FBM KLCI target at 1,760, amid longer-term uncertainties and geopolitical tensions.

While a recent ceasefire, though off the table now as at time of writing, would resemble its best-case scenario, structural risks remain unresolved.

The research house identifies domestic political uncertainty, fragile geopolitics and global macroeconomic headwinds as key reasons for keeping its base-case target unchanged.

“Domestic political uncertainty, fragile geopolitics, and external macro headwinds justify maintaining our base case target of 1,760,” TA Research says.

It warns that a more severe deterioration in domestic politics could drag the benchmark index down towards 1,580.

As such, its investment approach is similarly cautious, recommending investors to “stay defensive, favouring firms with strong balance sheets and steady cash flows”.

It also recommends investors “exploit volatility for tactical entry into undervalued names” while maintaining exposure to long-term themes such as demographics, digitalisation, sustainability and high-value industries.

Its preferred stocks include TNB (TP: RM18.00), Malakoff Bhd (TP: RM1.26), Nestle (M) Bhd (TP: RM124.70), Farm Fresh Bhd (TP: RM2.91), IHH Healthcare Bhd (TP: RM10.30), KLK (TP: RM24.64), Public Bank Bhd (TP: RM5.36), Hong Leong Bank Bhd (TP: RM24.41), Alliance Bank Malaysia Bhd (TP: RM5.30), Gamuda (TP: RM5.52), Binastra Corp Bhd (TP: RM3.04), Cahya Mata Sarawak Bhd (80 sen), Sime Darby Property Bhd (TP: RM2.10), TM (TP: RM8.80) and CelcomDigi Bhd (TP: RM3.59).

Slower momentum

PublicInvest Research takes the most conservative stance among the four brokerages after weaker-than-expected 1Q26 corporate results.

It says more companies under its coverage, particularly in the consumer and oil and gas sectors, have underperformed, prompting earnings downgrades.

“Corporate earnings growth momentum is expected to slow down in 2H26 due to rising cost and weaker sales,” it says.

The brokerage has lowered its year-end FBM KLCI target to 1,680 from 1,730 after reducing its earnings growth forecast to 2% from 6.8%.

Although it expects upstream oil and gas earnings to recover later in the year as production gradually resumes, it remains cautious on banks because of concerns over weakening consumer and business confidence.

PublicInvest Research says it is “overweight” on the banking, construction, healthcare, plantation, power and technology sectors.

The brokerage has a “neutral” stance on airlines, automotive, consumer, gaming, gloves, oil and gas, property, real estate investment trusts and telecommunications; and “underweight” on the electronics manufacturing services sector.

Its top stock picks are CIMB (TP: RM9.10), TNB (TP: RM16), Malaysia Smelting Corp Bhd (TP: RM3.10), Ta Ann (TP: RM7.10), IHH (TP: RM11.43), Gamuda (TP: RM5.60), Hibiscus Petroleum Bhd (TP: RM2.80) and LBS Bina Group Bhd (67 sen).