Malaysia Outlook 2026: Shifting Into a Brighter Lane

Key Points:

• We remain constructive on Malaysia’s equity outlook, as solid domestic fundamentals, improving corporate earnings, and easing external risks position the market for a potential valuation re-rating.
• Heading into 2026, we expect domestic fundamentals to remain the primary driver of growth, even as persistent global trade tensions could soften external demand.
• MADANI government unveiled its fourth national budget, maintaining a consistent focus on economic transformation and fiscal consolidation. The government’s commitment to fiscal discipline continues, with several fiscal measures introduced this year aimed at broadening the revenue base.
• Looking forward, we expect earnings momentum to strengthen further, led by domestic-focused sectors such as banking, construction, and property.
• With improved clarity on tariffs, a stabilizing macroeconomy, and improving corporate earnings, alongside record-low foreign ownership and its YTD lagging performance, we believe much of the risk has already been priced in, and Malaysia stands to benefit from potential foreign fund flow.
• Using our fair price-to-earnings (PE) ratio assumption of 15x, we forecast a 14.1% upside to 2027F from the current level (as of end-November), alongside a dividend yield of 4.35%. As a result, our 2027 target for the FBM KLCI remains at 1,850, after accounting for risk factors and the upward adjustment in the fair PE.

In contrast to most global markets, 2025 has not been a favourable year for Malaysia’s equity market, with the FBM KLCI Index recording a price return of -2.3% (total return of 3.8% including dividends), as of end-November 2025.

Despite continued momentum in infrastructure and data-centre development, along with resilient domestic fundamentals, the local equity market has faced heavy selling pressure. Investor sentiment has been dampened by external headwinds, including the early Biden administration chip curbs and global trade tariffs, which have weighed on Malaysia’s export-oriented sectors.

That said, we remain constructive on Malaysia’s equity outlook, as solid domestic fundamentals, improving corporate earnings, and easing external risks position the market for a potential valuation re-rating.

Figure 1: ASEAN equity market performance.

Steady GDP growth in 2025; Anticipated slowdown in global trade demand may pressure the downside

Malaysia’s economic performance in 2025 remained resilient despite persistent external headwinds. Although it was slower in the first half, the economy regained momentum in the third quarter, with Q3 GDP expanding by 5.2% y/y, exceeding earlier expectations and improving from the 4.4% recorded in Q2. The rebound was extending across sectors, with manufacturing strengthening (4.1% vs 3.7%) and mining and quarrying posting a sharp recovery (9.7% vs –5.2%), while construction (11.8% vs 12.1%) and services (5% vs 5.1%) continued to contribute to overall output despite a slight moderation.

On the demand side, domestic activity remained the key anchor. Private consumption remained steady (5% vs 5.3%) supported by a healthy labour market and firmer household income, while government expenditure strengthened (7.1% vs 6.4%). Fixed investments recorded a softer increase (7.4% vs 12.1%) after a strong first half. External trade remained broadly supportive, with import growth slowing significantly (0.4% vs 6.6%) relative to exports (1.4% vs 2.6%).

The stronger than expected economic growth was supported by an uplift in household spending following the full implementation of the minimum wage hike and the RM100 cash assistance, while investment activity remained robust across both public and private sectors, particularly in strategic growth regions such as Penang and East Malaysia. Johor, under the Johor–Singapore SEZ, continued to draw increasing investments, securing over RM91.1 billion in approved investments in 9M25.

Figure 2: Steady economic growth.

Figure 3: Healthy labour market.

Figure 4: Both DDI and FDI have seen improvement in 9M25.

Heading into 2026, we expect domestic fundamentals to remain the primary driver of growth, even as persistent global trade tensions could soften external demand. With that, our base case for Malaysia’s GDP growth is projected to range between 4.0% and 4.5%, with several growth drivers underpinning our view.

We expect domestic consumption, which accounts for more than 60% of GDP, to remain well supported. Measures announced under Budget 2026, including targeted cash assistance through SARA (Sumbangan Asas Rahmah) and STR (Sumbangan Tunai Rahmah), should bolster disposable incomes for low- to mid-income households and sustain consumption momentum. Moreover, the scheduled second RM100 cash handout to all Malaysian citizens in February 2026, alongside the next phase of wage increases for civil servants, provides further support for household spending.

Furthermore, we expect tourism to strengthen under the Visit Malaysia 2026. The sector has been gradually recovering in 2025, supported mainly by ASEAN and Chinese tourists. We reckon Malaysia’s ASEAN chairmanship in 2025 has boosted the country’s regional visibility, while policy incentives tabled under Budget 2026, including higher allowances and tax reductions for tourism operators, should further reinforce the recovery. In addition, earlier pro-growth measures, such as visa exemptions for China and India, are expected to drive stronger inbound tourism, creating positive spillover effects across retail, hospitality, and related service sectors.

Figure 5: Tourist Arrival

Consistent government policies - Raising the ceiling, lifting the floor.

In October, the MADANI government unveiled its fourth national budget, maintaining a consistent focus on economic transformation and fiscal consolidation. While the budget did not deliver major surprises or large-scale infrastructure announcements, it was viewed as friendlier than expected and continued to set a clear direction for Malaysia’s economic transformation. Notably, although development expenditure was reduced to RM81 billion from RM86 billion in the previous year, the government introduced a new RM50.8 billion allocation for public–private investment initiatives via GLCs, GLICs, and federal statutory bodies to strategically channel funds into high-growth, high-value (HGHV) sectors.

Meanwhile, the government’s commitment to fiscal discipline continues, with several fiscal measures introduced this year aimed at broadening the revenue base, including SST expansion, electricity tariff adjustments, dividend taxation, e-invoicing requirements, and the rationalisation of RON95 fuel subsidies. While these measures may impose some pressure on businesses, we believe stable labour-market conditions should continue to support real household purchasing power and sustain private-consumption momentum. That being said, the fewer new taxes announced in Budget 2026 reflect the government’s gradual and targeted approach to fiscal reforms, due to existing measures, such as the ongoing RON95 subsidy rationalization, still offer room for further calibration. With this more measured and targeted approach to fiscal implementation, we do not expect a significant rise in inflation that would materially erode household purchasing power.

Figure 6: Budget 2026 at a glance 

Figure 7: Inflation is expected to remain below 2%.

A clearer path ahead

To sum up, the YTD underperformance in Malaysia’s equity market was due to a significant sell-off in the year, largely driven by external policy uncertainties, such as Biden’s chip curbs dampened sentiment in the technology and data centre counters, as well as the President Trump’s global trade tariffs, which weighed on investor confidence across export-oriented industries.

However, we believe external headwinds have eased to a lesser degree, as reflected in the August trade deal between Malaysia and the US at 19%, lower than initially expected, which provides better certainties and enhances the country’s regional competitiveness. While we opine global trade tensions are unlikely to be fully resolved in the near term and export growth may soften, the government’s ongoing efforts to diversify trade partners are expected to mitigate part of the impact.

Moreover, in the event that external pressures intensify, such as GDP growth falling below 4% (the lower bound of government GDP expectation) or exports weakening significantly, we think that Bank Negara Malaysia (BNM) retains sufficient policy space to implement rate cuts to cushion the economy, supported by low and manageable inflation, a stronger ringgit, and a narrowing interest rate differential with the US.

In short, while downside risks to export growth remain, the clarity on US tariffs, supportive government policies, and Malaysia’s diversified export destinations, particularly within ASEAN, are expected to limit the impact on the economy and help sustain broader market performance.

An OPR cut is still on the table

While most major economies have already begun or completed their rate easing cycles in 2025, Malaysia’s central bank (BNM) has so far delivered only a single 25 bps cut to the Overnight Policy Rate (OPR) in July 2025, positioned as a pre-emptive step to cushion the economy amid escalating global trade tensions. Moving into 2026, we do not see a compelling case for an aggressive easing cycle, as a stabilising macro outlook and resilient domestic growth should continue to support the economy, anchored by firm domestic demand driven by sustained consumer spending and an ongoing investment upcycle.

In terms of the central bank’s dual mandate of maintaining labour market stability while managing domestic inflation, conditions remain manageable. We expect the labour market to stay healthy, driven by multi job creation under the national initiatives such as National Semiconductor Strategy (NSS), and the National Industry Master Plan (NIMP). Although recently introduced fiscal measures may generate some cost push inflation, we expect these pressures should remain contained due to the targeted and gradual nature of their implementation.

While market pricing reflected in the interest rate swap curve currently assumes no OPR cuts in 2026, we believe moderating external trade amid persistent global uncertainties keeps the possibility open. Accordingly, we expect a 25 bps cut next year. Adding to that, the narrowing yield differential between the US and Malaysia provides BNM with greater room to ease, particularly as the US is expected to deliver a larger scale of rate cuts driven by continued softening in its labour market.

Figure 8: Market is currently pricing in nearly no rate cut.

A slightly positive view on the MYR

As of end-November 2025, the Malaysian ringgit has strengthened by about 8% against the US dollar, supported by a softer USD and solid foreign inflows into the local bond market as investors positioned for a rate cut early in the year. Although fund flows have since retreated following the materialisation of the OPR cut and earlier overpricing in MGS yields, the ringgit has continued to strengthen beyond our 2025 forecast range of 4.2–4.3, trading at around 4.1.

Looking ahead, we hold a slightly positive view on the ringgit, expecting it to trade within the 4.0–4.1 range as the recent strength in the currency was mainly driven by increasing optimism surrounding renewed expectations for Fed cuts and the positive momentum in recent economic data. Meanwhile, in contrast to the interest rate path in the US, BNM decided to keep the OPR unchanged in the last MPC meeting of the year in November and provided relatively positive forward guidance for Malaysia, anchoring the view that the need for further rate cuts is lower in the near term.

While ongoing fiscal consolidation supports a healthier sovereign credit profile and the repatriation of export earnings should be constructive for the ringgit, we believe these factors provide a stronger foundation and could serve as potential catalysts for the currency, especially given that a significant portion of foreign-currency earnings has yet to be fully repatriated.

Although growing rate-cut expectations in the US and policy unpredictability remain a source of uncertainty for the USD, the entrenched dominance of the USD as a global reserve currency keeps us only slightly negative on the greenback. Meanwhile, despite our base case for the OPR in 2026 is one cut, the money market is currently pricing in no rate cut for 2026, with the scale of rate cuts expectation in the US being larger than in Malaysia, we believe the narrowing yield differential will continue to support Ringgit strength. Hence, we hold a slightly positive view on the Malaysian Ringgit, expecting it to trade within 4.0–4.1 by end-2026.

Figure 9: Significant portion of foreign-currency earnings has yet to be fully repatriated.

Figure 10: Ringgit projection.

Improving 3Q25 Earnings Outlook

The 3Q25 earnings season marked a notable improvement in momentum, with most companies delivering results largely in line with expectations. Notably, the beat-to-miss ratio has strengthened to 2.2x from 1.4x in the prior quarter, signalling a recovery in the earnings cycle. The outperformance was primarily driven by domestically oriented sectors, in which consumer staples remained solid on the back of supportive government measures, construction continued to post robust numbers on accelerated progress billings and stronger order book execution, and the banking sector held firm as a key anchor of stability, supported by firmer non-interest income and moderating credit costs. Meanwhile, property developers maintained strong sales momentum, and plantation players benefited from higher CPO prices and stronger FFB production.

In contrast, external and cyclical sectors continued to face headwinds. Oil & Gas earnings contracted meaningfully amid weak spreads and softer demand, with the petrochemical segment still posting structurally subdued results. The utilities sector delivered mixed outcomes, with Tenaga Nasional impacted by higher-than-anticipated tax expenses. Technology companies also recorded uneven performance due to an incomplete recovery in end-demand and limited exposure to AI-driven growth themes.

Looking forward, we expect earnings momentum to strengthen further into 2026, led by domestic-focused sectors such as banking, construction, and property. Notably, 19 KLCI constituents have seen upgrades to their 2026 earnings outlook, while consensus forecasts FBM KLCI earnings growth upwardly to 6.6% in 2026.

Adding to that, the fiscal and macro policy measures introduced in 2025 — including the pre-emptive  OPR cut, lower SRR, targeted growth initiatives, ringgit stabilisation, and more predictable external policy visibility, should help reduce macro uncertainty and support a more favourable corporate earnings environment.

Figure 11: Corporate earnings in 3Q25.

Source: Company, Bloomberg Finance L.P., iFAST Compilation. Data as of 11 December 2025.

Eyes on elections

The five-year term of the Madani government — formed by Pakatan Harapan (PH) with Anwar Ibrahim as Prime Minister in 2022, is soon coming to its end, with automatic dissolution set for December 2027, and GE16 (general election) is therefore expected to take place in 2027. Although there has been periodic speculation of an early election in 2026, the broader view remains that the current administration will likely serve its full term. Meanwhile, we expect state polls such as Melaka in 2026 and the recently concluded Sabah election will play a key role in shaping political momentum heading into the national vote.

The overall Sabah results highlighted a noticeable shift on the ground, where Sabah-based parties won majority of the seats amid dissatisfaction with perceived Federal shortcomings in supporting local development. While this may appear to introduce more political uncertainty, we see a more practical implication, which we foresee the Federal Government is likely to accelerate budget execution ahead of GE16, especially in infrastructure development allocations.

To the equity market, the KLCI has historically shown no consistent pre-election pattern across the past 10 general elections, although more than half recorded positive returns in the 180 days before the election date, averaging around 5.97%. Against this backdrop, we hold a positive view on pre-election sentiment in 2026, supported by expectations of faster spending rollout and a more active policy environment.

Table 1: Equity Market Return before and After Election.

A positive pivot in foreign fund flows is likely

The main reason Malaysia’s local equity market registered a huge underperformance in 2025 is the significant foreign fund outflow. Such outflows were first triggered in August 2024 when the BoJ hiked interest rates as well as the hawkish tone on Fed rate cuts in end-2024. The unfavourable external policies in 2025 further impacted foreign investors’ confidence in the local bourse, exacerbating the outflows.

While foreign fund outflows can be seen across ASEAN peers, Malaysia has suffered a greater outflow, with foreign shareholdings on the local bourse dropping to a record low of 18.7% as of end-September. We believe this was mainly due to lacklustre corporate earnings and the reduced weightage in the MSCI Emerging Markets Index. That being said, one notable point is that the pace of outflows has slowed entering mid-3Q25, largely because many markets secured trade deals with the US during that period.

Moving into 2026, with improved clarity on tariffs, a stabilizing macroeconomy, and improving corporate earnings, alongside record-low foreign ownership and its YTD lagging performance, we believe much of the risk has already been priced in, and Malaysia stands to benefit from potential foreign fund flow.

Table 2: Foreign Fund Flow in ASEAN countries.

Figure 12: Malaysia bourse trade participation.

Banks, Construction, Consumer, and Renewable Energy are our top picks  

Despite our expectation of an interest rate cut in 2026, likely in 2H26, which might put greater pressure on banks’ Net Interest Margins (NIM), we believe robust domestic economic growth, continued progress in the JSSEZ and East Malaysia development, as well as the prior BNM reduction in SRR, could support loan growth and improve liquidity conditions. Meanwhile, with greater debt refinancing expected in 2026, coupled with a strengthening ringgit against the US dollar, non-interest income, including debt capital market activities and other fee-based services such as wealth management could see sustained performance. Nonetheless, in 2025, we have seen larger management overlays, which we expect to serve as a buffer for banks to withstand potential shocks in asset quality deterioration, although conditions remain healthy.

Figure 13: Healthier bank loan growth and NPL levels.

We maintain a positive stance on the Construction sector, supported by strong momentum in both private and public projects. The sector continues to benefit from sizeable job wins, particularly in civil works and the growing data centre sub-segment, while key infrastructure developments such as the Penang Mutiara LRT, water infrastructure development, and highway expansion remain key drivers for contractors. With Budget 2026 allocating significant development expenditure and maintaining a strong focus on East Malaysia, alongside robust corporate earnings and order book replenishment among leading players, we believe the sector is well-positioned for domestic infrastructure play and data centre development.

Figure 14: Value of construction works done.

We maintain a constructive view on the Consumer sector heading into 2026, supported by resilient domestic demand and clearer policy visibility. We expect the recovery in consumer staples to continue, underpinned by healthy labour-market conditions, improving household income, and the upcoming SARA cash disbursement. As we mentioned above, we believe tourism-driven consumption would be strengthened under Visit Malaysia 2026, with higher footfall benefiting domestic F&B, shopping mall, and convenience-focused retailers. On costs, the MYR appreciation against the USD and CNY, alongside easing commodity prices, should support margins. However, we foresee the expanded SST on leases remains a headwind, though we expect large-scale operators with strong sales density to withstand the impact.

Figure 15: Malaysia retail sales and private consumption y/y growth (%).