PETALING JAYA: Malaysia’s equity market is likely to retain its positive medium-term trajectory, supported by resilient economic growth, improving corporate earnings and valuations that remain below their long-term average.
However, the FBM KLCI could continue to face bouts of volatility as investors weigh US monetary policy, foreign fund flows and geopolitical risks in the months ahead.
MBSB Research said it is maintaining a marginally positive view on the market, with an end-2026 FBM KLCI price target of 1,770 points, equivalent to a 2026 price-to-earnings ratio (PER) of 15.6 times.
“Underpinned by expectations of continued robust gross domestic product growth (GDP) and a recovery in earnings growth in 2026, as well as an inexpensive valuation below the 10-year average PER of 16 times, the FBM KLCI should be able to retain its mid-term positive trend trajectory,” it said.
The research house noted that the market had come under pressure since mid-May as expectations of US rate hikes weighed on the ringgit, fund flows and equity valuations.
More recently, however, fading expectations of multiple US rate increases and Malaysia’s robust economic performance have helped restore momentum.
MBSB Research also pointed to the behaviour of domestic investors as a source of support, with local funds continuing to buy aggressively during market pullbacks while selling relatively sparingly when prices rally.
“It is anticipated that these dynamics will persist under current circumstances,” it said.
The market’s near-term direction could nevertheless be tested by developments in the Middle East.
MBSB Research warned that a prolonged closure or blockade of the Strait of Hormuz and Bab El-Mandeb, lasting months rather than weeks, could drain global crude oil inventories and trigger substantially higher energy prices, potentially resulting in tighter monetary conditions.
The FBM KLCI has already experienced a volatile year. It gained 0.6% in the first quarter of 2026 (1Q26), fell 1.6% in 2Q26 and has rebounded 4.2% so far in 3Q26.
The latest recovery has been supported by tame US inflation, lower crude oil prices, a less hawkish Federal Reserve outlook, stronger-than-expected Malaysian economic growth and continued support from local investors.
Malaysia’s GDP growth accelerated to 6% year-on-year in 2Q26, prompting MBSB Research to raise its 2026 growth forecast to 5.1% from 4.5%.
The stronger economic backdrop is also expected to provide support for corporate earnings, with the research house anticipating the 2Q26 earnings season to remain resilient, especially given the strong quarterly GDP performance.
It noted that foreign flows remain a key swing factor, with net foreign selling totalling RM6.3bil between May 13 and July 1, before the index recovered 91 points with RM0.4bil of net foreign buying from July 2 to Aug 5.
From Aug 6 to 17, the index eased 22 points to 1,726 despite RM1.2bil of foreign net selling, reinforcing the view that domestic investors remain a key stabilising force.
Meanwhile, one analyst told StarBiz that Malaysia’s equity market is likely to remain supported by resilient domestic fundamentals, although investors should expect periodic volatility as global rate expectations and geopolitical risks continue to shape sentiment.
“The market’s ability to weather foreign selling highlights the strength of domestic liquidity, but a sustained re-rating will depend on stronger earnings delivery and a more stable global macroeconomic backdrop,” he pointed out.
