PETALING JAYA: The equity market is expected to remain supported through the second half of financial year 2026 (2H26) and into 2027, underpinned by strong domestic liquidity, resilient economic growth and expectations of accommodative US monetary policy, says RHB Research.
However, it noted that investors would likely face a more volatile trading environment amid geopolitical and political uncertainties.
Its constructive stance on domestic equities remains intact, with an end-2026 target of 1,750 points for the FBM KLCI, based on 15.5 times forward earnings per share.
“Our argument for investors to remain long domestic equities is predicated on robust liquidity conditions, sanguine RHB Economics macroeconomic forecasts and dovish views on US monetary policy, coupled with populist policy undertones given the imminent polls,” it said.
The research house added that investors should, nevertheless, remain nimble given lingering external risks.
“Strong liquidity demands a buy on weakness approach with overarching risks requiring a trading mentality to profit,” it explained.
RHB Research said its positive outlook assumes that geopolitical tensions in the Middle East continue to ease, allowing financial markets to refocus on corporate earnings and economic fundamentals.
“RHB Economics retains a base case scenario probability at 60% that assumes that the US-Iran ceasefire will hold, Strait of Hormuz to remain open and crude prices to stay well below conflict peaks.”
It expects Malaysia’s economy to expand by 4.7% in 2026, supported by stronger exports, resilient domestic demand and easing external risks, although prolonged supply disruptions and higher commodity prices could reduce growth to 4% if geopolitical tensions re-escalate in 2H26.
Against this backdrop, the brokerage said market expectations for US interest rates remain overly pessimistic.
“We highlight the market’s divergence from RHB assumptions calling for no rate hikes in 2026 and two rate cuts in 2027.
“The market’s apparent mispricing of US monetary policy direction represents trading opportunities,” it said.
While it continues to assign a 30% probability to a worst-case scenario, RHB Research believes peace remains the more likely outcome.
“The macroeconomic consequence of an extended conflict for the United States is well documented, while the concessions given to Iran in the peace memorandum of understanding offers it a path back to economic normalcy,” it added.
The research house expects the market’s gains to be moderated by rotational trading rather than broad-based re-rating.
“Prevailing headwinds mean that absolute upside will be capped as markets move within a range in line with prevailing rotational plays,” it noted.
It said investors should anchor portfolios around defensive sectors including energy, plantations, healthcare, consumer, real estate investment trusts and telecommunications, while maintaining an “overweight” stance on banking, oil and gas, property, construction, basic materials, technology and transport.
One analyst from a different brokerage told StarBiz that while geopolitical developments and political uncertainty may trigger periods of volatility, these episodes could also create attractive entry points for long-term investors.
“Companies with strong earnings visibility, healthy balance sheets and defensive business models are likely to remain best positioned as the market navigates the second half of the year,” he highlighted.
RHB Research noted that several supportive factors remain in place, including robust domestic liquidity, improving global macroeconomic conditions, record-low foreign ownership of Malaysian equities, the long-term de-dollarisation trend and expectations that Budget 2027 will retain investor-friendly and populist measures ahead of the next general election.
However, it cautioned that risks from US inflation, US president Donald Trump-inspired policies, stretched valuations in US financial markets and artificial intelligence-related stocks, domestic corporate earnings pressures and political developments could continue to drive bouts of volatility, reinforcing its preference for a disciplined buy-on-weakness strategy rather than chasing market rallies.
