PETALING JAYA: Malaysia’s resilient domestic economy, alongside Budget 2027, should support the local stock market in the fourth quarter of 2026 (4Q26), although geopolitical uncertainty and elevated global yields could keep a lid on valuations, says MBSB Research.
In a strategy report, the research house said it remained “optimistic but cautious” on Malaysian equities, favouring defensive sectors while selectively taking on growth exposure.
The research house said market direction in 4Q26 would depend on whether the Strait of Hormuz begins to reopen, oil and freight costs moderate, and the Federal Reserve’s (Fed) September rate hike proves to be an adjustment rather than the start of a prolonged tightening cycle.
It said Malaysia’s resilient economic growth, corporate earnings and domestic liquidity should provide downside support, while Budget 2027 could bring renewed attention to domestic catalysts.
However, sustained oil prices above US$100 a barrel, further Fed rate hikes and persistently elevated bond yields could continue to weigh on valuations and foreign fund flows.
Despite heightened external uncertainties, MBSB Research said growth should remain well anchored, with the strong first-half (1H26) performance providing a solid base for the rest of the year, “which we expect to remain reassuring in 3Q26”.
Even under more adverse scenarios, the research house said full-year growth should remain above 4%, given the strong 1H26 performance.
“Into 2027, we favour sectors combining near-term catalysts with recurring demand, pricing power and resilience against prolonged external disruption,” it said.
“Preference should remain with companies offering visible earnings, recurring demand, balance-sheet strength, dividend support and direct exposure to Malaysia’s domestic investment cycle.”
Against this backdrop, the research house favours utilities, telecommunications, consumer staples and healthcare for their resilient earnings, while construction and technology offer exposure to growth.
MBSB Research also recommended retaining exposure to plantations and energy-related stocks as protection against external uncertainty in 4Q26.
Plantations could benefit from firm crude palm oil prices, biodiesel demand and ringgit weakness, while energy infrastructure and shipping should remain relevant amid normalising trade and potential supply disruptions, it said.
MBSB Research expects Malaysia’s economic growth to moderate to 4.6% in 2027 from a forecast 5.1% this year, having expanded 5.7% year-on-year in 1H26.
It said the moderation largely reflected normalisation from a relatively high base rather than a material weakening in underlying economic conditions.
The research firm said domestic demand should remain supportive, underpinned by healthy labour market conditions, positive wage growth and continued investment activity, while external trade should continue to benefit from resilient electrical and electronics (E&E) demand.
Still, MBSB Research said the outlook for 2027 remained clouded by geopolitical and macroeconomic uncertainties, including the US midterm elections, conflicts involving the United States, Iran and Israel, risks around the Strait of Hormuz and Bab el-Mandeb, inflation and the path of monetary policy.
“A change in any one of these variables could materially alter the direction of energy prices, interest rates, global growth and financial markets, making a single-point forecast inadequate,” it noted.
The research house said the next major political event to watch was the US midterm elections on Nov 3, which will determine control of the US House of Representatives and Senate.
The research house said the election would not directly determine the actions of Iran, Israel or the Houthis, but could affect areas including war funding, sanctions, congressional oversight, the legal basis for military operations and the political cost of sustaining the blockade.
Under its baseline scenario, where Malaysia’s economy grows 4.6% in 2027, MBSB Research expects corporate earnings to expand 6.6% and has set a preliminary FBM KLCI target of 1,850 points.
The target is based on a forecast 2027 price-to-earnings ratio (PER) of 15.4 times, compared with the FBM KLCI’s current 2026 PER of 14.8 times.
“Underpinned by our baseline expectations of resilient macro performance along with healthy earnings growth next year, we expect equity valuations to improve going forward,” it said.
It expects the local equity market to benefit from an anticipated easing of geopolitical tensions in the Middle East, with Brent crude oil prices expected to decline towards US$75 to US$85 per barrel.
Under a more adverse scenario, MBSB Research sees GDP growth slowing to 3.2%, with earnings growth moderating to 4.5%.
In this scenario, it has set a lower FBM KLCI target of 1,730 points based on a PER of 14.7 times.
Separately, CIMB Research said changes to the rules governing the expanded FBM KLCI should give the 50-stock index a wider buffer against frequent changes in its constituents.
The FBM KLCI is set to expand to 50 constituents from 30, with the new structure taking effect from the December 2026 semi-annual index review.
FTSE Russell, which manages the index, has revised the entry and exit thresholds to reduce the frequency of stocks moving in and out of the index.
Under the new rules, a stock must rank among the top 40 by full market capitalisation to qualify for inclusion, compared with the top 25 previously, while existing constituents will only be removed if they fall to 61st or below, compared with 36th previously.
CIMB Research said the wider gap between the inclusion and deletion thresholds should reduce index churn.
FTSE Russell has also lowered the fast- entry threshold to 1% of FBM Emas market capitalisation from 2%.
Based on Aug 28 data, CIMB Research said this translates into an estimated market capitalisation threshold of RM18.1bil, compared with RM36.3bil previously.
The research house said the lower threshold should allow large newly listed companies to enter the KLCI more quickly if they meet the other eligibility requirements.
