PETALING JAYA: Better corporate earnings are unlikely to translate into a stronger rally in the local market as rising global bond yields, elevated geopolitical risks and persistent foreign fund outflows continue to overshadow better company fundamentals.
The sell-off across global markets on Tuesday came amid a deepening global bond rout, with Japan’s 10-year government bond yield hitting 3% for the first time since 1996.
Higher returns at home could encourage Japanese investors to favour domestic assets over overseas investments, raising concerns over global fund flows.
Meanwhile, renewed US-Iran tensions, elevated oil prices and expectations of higher-for-longer US interest rates continue to put pressure on risk assets, including emerging markets.
Tradeview Capital chief executive officer Ng Zhu Hann said the FBM KLCI’s upside is likely to remain capped by persistent foreign fund outflows, which could intensify amid the recent rise in Japanese bond yields.
He added the market would struggle to gain further ground unless foreign fund flows reverse.
“High Japanese bond yields have sucked out a lot of fund flows from capital markets, including Malaysia.
“Foreign funds will continue to be net sellers so long as this situation persists. These Japanese bonds, which are risk free, are offering a 3% return risk free, narrowing the yield differential with Malaysian bonds only about 1%
“There is the argument that there will be foreign exchange risk for those moving into the yen. However, ultimately, it is all about which assets are offering the best returns for investors at this juncture,” Ng told StarBiz.
Foreign investors remained net sellers of local equities for most of the year, recording a cumulative net outflow of RM4.5bil through August.
Although selling eased temporarily in July, when there was a net inflow of RM0.3bil after outflows of RM3.6bil in May and RM2.4bil in June, foreign investors resumed selling in August with a net outflow of RM2bil.
Ng said earnings results in sectors like healthcare, data centre-related construction, mechanical and engineering, as well as semiconductor and technology were in line with expectations. Consumer companies and some banks, however, disappointed.
“Some banks did not perform as well, which is indicative of economic activity, that it is not as rosy as the headline numbers suggest. Weaker earnings in banks – possibly due to the macroeconomic environment and geopolitical tensions – means loan growth is not as high.
“Banks are also seeing margin compression due to higher non-performing loans, which points to some weakening in the overall economy,” he said.
Ng said investors should favour dividend stocks and companies with solid recurring income and strong cash flows, rather than high-risk, high-beta counters, as “it will be difficult to justify the investment thesis” otherwise, with utilities, selected banking groups such as Hong Leong Financial Group and insurers among the more defensive sectors.
He said semiconductor and data centre themes remained in favour, but cautioned investors against chasing them at elevated valuations or rushing into the market until there was greater clarity on external risks.
According to Ng, the upcoming US mid-term elections in November is another key factor to watch and could trigger a market correction as US President Donald Trump may have less incentive to support markets after the polls.
“Construction companies, suppliers and engineering firms supporting the country’s data centre rollout remain relevant as foreign direct investment continues to materialise in that space, but valuations are not palatable at the moment,” he noted.
Ng maintained his year-end FBM KLCI target at 1,750 points. His year-end ringgit target of RM3.95 against the US dollar, meanwhile, was based on the assumption of two interest-rate cuts.
With no cuts delivered so far, Ng said it would be difficult for the ringgit to strengthen below RM4 against the greenback.
The US Federal Reserve (Fed) is due to meet on Sept 15 to 16, with markets now pricing in a greater chance of a rate hike after hawkish signals from Fed chair Kevin Warsh at the Jackson Hole economic symposium and renewed inflation concerns stemming from higher oil prices.
Meanwhile, Bank Negara Malaysia’s Monetary Policy Committee is scheduled to announce its overnight policy rate (OPR) decision following its meeting today. Market consensus broadly expects the central bank to maintain the OPR at 2.75% for the remainder of 2026.
Still, Ng is of the view that the MY Value Up programme and the planned expansion of the FBM KLCI from 30 to 50 index-linked stocks could serve as potential catalysts for a reversal in foreign fund flows.
The latter could generate additional demand from benchmarked funds and exchange traded funds, which would need to buy newly included stocks to track the expanded index.
Berjaya Research head of research Kenneth Leong echoed the view that the market’s upside is likely to remain measured despite stronger corporate earnings, as external factors continue to exert a greater impact on the market’s direction.
Leong favours a more domestic-oriented investment approach, seeing opportunities in sectors such as construction, utilities, data centres and power infrastructure, which are underpinned by ongoing infrastructure spending, digitalisation and rising electricity demand.
“We also favour selected consumer-related names that could benefit from resilient domestic consumption, while prioritising companies with strong balance sheets, earnings visibility earnings and sustainable cash flows,” he said.
With four more months left for the year, Leong said there are no major changes to his underlying assumptions for the market and economy, which he expects to remain resilient.
However, the prolonged Middle East conflict and growing prospects of higher-for-longer US interest rates have placed “renewed pressure on emerging market currencies”, including the ringgit.
“We now expect the greenback and ringgit to trade within a wider range of 4.00 to 4.10 in the coming months, compared with our earlier assumption of 4.00,” Leong said.
TA Research said the recently concluded second quarter of financial year 2026 (2Q26) results season came in largely within expectations. The research house said across its coverage universe, 69.7% of companies reported earnings were in line with its forecasts.
“Sectors that broadly met expectations included banking, building materials, construction, consumer, gaming, healthcare, insurance, plantations, power and utilities, property, technology and telecommunications,” TA Research said in a report yesterday.
The research house said results delivery “showed a rare positive skew, with outperformers exceeding underperformers for the first time since 3Q22”.
TA Research noted that outperformers accounted for 15.6% of its coverage, led by automotive names and selected large caps. Underperformers, though, accounted for 14.7% of its coverage, with misses mainly from oil and gas names.
“For 2027, growth should moderate but become more balanced, supported by technology, construction, gaming, healthcare, power and utilities, consumer and property.
“The main dampeners are expected to be oil and gas, media, automotive and plantations, as selected 2026 drivers normalise,” TA Research said.
The research house said while global investors remained cautious amid ongoing uncertainties surrounding US trade policy, global growth moderation and intermittent tensions in the Middle East, mainly attributed to the United States and Iran war, Malaysia continued to attract strong investment inflows.
Nonetheless, TA Research said foreign fund flows remain a near-term concern and that the sentiment on global oil shock and policy uncertainty “may not be reversed anytime soon” as expectations of a more restrictive global interest rate environment following the rising oil prices could affect liquidity conditions and constrain foreign investor appetite towards emerging market equities.
“Overall, the Malaysian equity market continues to trade at a discount to its historical valuation (FBM KLCI consensus 2027 price-to-earnings ratio of 14.3 times versus long-term average of 15.8 times) despite improving earnings visibility and strengthening investment fundamentals.
“We remain cautiously optimistic on the FBM KLCI’s medium-term trajectory and continue to favour sectors leveraged to data centres, utilities, construction, infrastructure, technology supply chains and domestic consumption recovery,” the research house said.
Meanwhile, RHB Research said its end-2026 target for the FBM KLCI remains unchanged at 1,750 points. It noted that prevailing geopolitical and global macroeconomic challenges will cap the market’s absolute upside and that the market will likely remain rangebound with downside support from robust liquidity conditions.
That said, RHB Research said the market will remain focused on fundamentals as corporate earnings performance will be a key determinant of its fundamental upside.
The research house is “overweight” on sectors including plantation, energy, oil and gas, property, construction, basic materials, technology, healthcare and transport.
“We expect to see continued rotational interest into laggard stocks and laggard sectors as investors maintain a trading mentality.
“Our emphasis on trading remains valid and we continue to believe portfolio management should be anchored on a defensive bedrock even as inflationary conditions shift global interest rate conditions towards a more hawkish slant,” RHB Research said.
