Malaysia Outlook 2H26: Constructive, but Selective

• Malaysia’s economic performance remained resilient in 1Q26, with GDP expanding by 5.4% y/y, topping market expectations, while the domestic growth engine remained supported by government measures, investment activity and medium-term structural drivers.
• While we remain constructive on Malaysia’s domestic growth outlook, we expect full-year GDP growth to come in at the lower end of BNM’s 4.0% to 5.0% forecast range, reflecting rising cost pressure from elevated oil prices and softer consumption momentum.
• In terms of monetary policy, we expect BNM to keep the OPR at the current accommodative level of 2.75% throughout 2026.
• While political headlines may create short-term volatility, we believe investors should focus instead on earnings delivery, valuation and structural growth drivers.
• Beyond near-term support, the policy direction remains consistent with our earlier outlook.
• As such, the earnings recovery is likely to be more back-end loaded and selective, with clearer opportunities in banks, construction, consumer staples, renewable energy, healthcare and selective technology names.
• Putting everything together, macro uncertainties have placed greater pressure on our constructive view on Malaysia equities. As such, we revise our star rating for the Malaysia equity market from 3.5 stars “Very Attractive” to 3.0 stars “Attractive”.

The Malaysia equity market entered 2026 on a more constructive footing after a difficult 2025, with the FBM KLCI trading above the 1,700 level for the first time since 2019, supported by a lower base, resilient economic growth and easing geopolitical uncertainty.

However, the picture turned challenging in May, as domestic political developments and MSCI rebalancing triggered a sharper retreat in the equity market. That said, moving into 2H26, we acknowledge that the macro backdrop has become more challenging, with slower consumption, softer corporate earnings growth and higher cost pressure from elevated oil prices amid the Middle East conflict. As such, we revised our Malaysia outlook from “Very Attractive” to “Attractive”. That said, we continue to stay constructive on Malaysia equities, as the domestic growth engine remains supported by government measures, investment activity and medium-term structural drivers. Therefore, we advocate investors should stay invested, but adopt a more defensive strategy while being more selective on sector positioning.

Figure 1: FBM KLCI Index.

Domestic growth holds the line, though the mix is more nuanced than the headline

Malaysia’s economic performance remained resilient in 1Q26, with GDP expanding by 5.4% y/y, topping market expectations despite moderating from the strong 6.2% growth recorded in 4Q25. Growth remained broad-based, as manufacturing held firmly at 5.9%, services expanded by 5.6% and construction continued to grow at a healthy 7.7%, while mining and quarrying was the only major sector that contracted, declining by 2.1%.

On the demand side, domestic activity remained the key anchor, with private consumption growing by 4.7% y/y, supported by healthy labour-market conditions, continued cash assistance and firmer household income. That said, the moderation on a q/q basis to slower household spending momentum, while softer leading indicators, including manufacturing PMI data, suggest a slower growth path into 2H26. That said, investment activity should remain supported by ongoing infrastructure projects, data centre development and private-sector capex.

As such, while we remain constructive on Malaysia’s domestic growth outlook, we expect full-year GDP growth to come in at the lower end of BNM’s 4.0% to 5.0% forecast range, reflecting rising cost pressure from elevated oil prices and softer consumption momentum.

Figure 2: Malaysia GDP growth

OPR to remain steady at 2.75% throughout 2026

Although volatile oil prices and the recalibration of BUDI fuel subsidy may raise inflation risk, we believe the impact should be partly cushioned by the policy support already in place. Continued fuel subsidies for eligible groups, targeted cash assistance and SME financing support should help contain the pass-through to households and businesses.

We expect headline inflation to remain above 2% in 2026, within Bank Negara Malaysia (BNM)’s forecast range of 1.5% to 2.5%, while core inflation should remain relatively contained, implying that the inflation pressure is largely driven by higher energy and input costs rather than stronger demand conditions. As such, we do not expect inflationary pressure to spill over materially into the broader economy at this stage.

In terms of monetary policy, we expect BNM to keep the OPR at the current accommodative level of 2.75% throughout 2026. While inflation is expected to trend higher, we believe the pressure remains manageable and is unlikely to warrant a policy response under our base case. With domestic demand still resilient, labour market conditions healthy and inflation largely supply-driven, there is no compelling case for either a rate cut or a rate hike. That said, we do not rule out tighter monetary policy if cost pressures become more persistent and eventually translate into broader demand-driven inflation, although this is not our base case.

Figure 3: Progressive Fuel Entitlements Under the BUDI Madani Diesel Programme.

Figure 4: Elevated oil prices exert higher inflation pressures.

Figure 5: 1-year IRS points to a slightly hawkish tilt in OPR expectations.

Neutral on the Ringgit; external developments remain the key driver

The Ringgit has retreated from its January high of 3.90 to trade at 4.10 to 4.14 against the US Dollar (as of writing) , on the back of geopolitical uncertainties alongside repricing interest rate expectations in the US. 

Looking ahead, we believe Ringgit’s direction in 2H26 will be driven by the global macro backdrop, particularly US monetary policy expectations and developments in the Middle East. While geopolitical negotiations have seen meaningful progress and oil prices have eased from their conflict-driven peak, the situation remains fragile. Adding to that, persistent US inflation concerns and a more hawkish tone from new Fed Chair Kevin Warsh would likely keep risk sentiment cautious, Treasury yield elevated and thus supporting US Dollar.

On top of that, domestically, with rising subsidy pressures from the government’s continued fuel subsidies, Second Finance Minister Datuk Seri Amir Hamzah Azizan recently acknowledged that Malaysia may fall slightly short of its fiscal deficit target. While we believe the government has broadened revenue base via several new tax policies, higher Petronas dividends and special dividends remain uncertain. As such, we believe a weaker fiscal position may potentially weaken Ringgit strength by lowering the confidence of foreign holders of domestic bond.

That said, we believe further downside in the Ringgit should remain relatively contained, as Malaysia’s resilient economic growth and BNM’s accommodative monetary policy, with the OPR expected to remain unchanged at 2.75% throughout the year, should continue to provide support for the currency. As such, we maintain a neutral view on Ringgit and expect it to trade within the 4.10 to 4.15 range through end-2026.

Figure 6: Ringgit projection.

Near-term political risk premium

Political developments returned as one of the key reasons behind weaker investor sentiment in May. Prime Minister Anwar Ibrahim’s comment that a snap election could be considered if cracks continue to form within the unity government, followed by the resignations of Datuk Seri Rafizi Ramli and Datuk Seri Nik Nazmi Nik Ahmad from PKR, alongside the upcoming state election, added fresh uncertainty to the domestic political landscape.

Nevertheless, we believe the market reaction is somewhat overstated, as Malaysia has gone through multiple election cycles and changes in political leadership over the past decade. As highlighted in our 2026 outlook article, Malaysia Outlook 2026: Shifting Into a Brighter Lane, the KLCI has historically shown no consistent pre- and post-election pattern across the past 10 general elections, suggesting that there is no strong correlation between general elections and equity market performance. Adding to that, while we do not rule out the possibility of an early general election or a more fragmented coalition outcome, we do not see this leading to a structural change in the government’s policy direction under our base case.

Therefore, while political headlines may create short-term volatility, we believe investors should focus instead on earnings delivery, valuation and structural growth drivers.

Table 1: Equity Market Return before and After Election

Consistent government policies with key investment themes remain intact

Government policy remains supportive, with measures continuing to focus on cushioning household purchasing power, easing SME cash-flow pressure and supporting consumption and business operations. Targeted fuel subsidies, SARA and STR cash assistance, civil servant salary adjustments, SME financing support and supply management for critical goods should help contain the pass-through from elevated oil prices and the Middle East supply shock.

Beyond near-term support, the policy direction remains consistent with our earlier outlook. Tourism recovery under Visit Malaysia 2026, strategic investment into high-growth, high-value sectors, infrastructure rollout, energy transition and the Johor-Singapore SEZ should continue to support domestic demand and private investment flows into 2H26. Notably, we believe Malaysia remains a beneficiary of global supply-chain reconfiguration, as multinationals continue to diversify manufacturing, semiconductor and logistics exposure into the country.

Adding to that, data centre investment, industrial expansion and infrastructure rollout should translate more directly into construction orderbooks, EPCC revenue visibility, industrial land demand, power demand, grid capex, renewable energy requirements and telco connectivity. This provides a more visible earnings base for contractors, utilities, renewable energy players, selected property developers with strategic industrial landbanks, telcos and selective technology names.

Figure 7: Malaysia’s Approved Manufacturing Investments.

Figure 8: Malaysia FDI.

Eyes on Middle East development

External uncertainties have recently resurfaced, particularly as US tariff concerns come back into focus. That said, we believe much of the tariff risk was already priced in during the 2025 market sell-off, when Malaysia equities underperformed amid concerns over trade restrictions and export exposure.

The key tail risk remains a more aggressive Section 232 move on semiconductors. This would matter more for Malaysia given E&E’s importance to exports and technology value chain, though this is not in our base case given near-term substitution constraints and the current exemption structure. As such, while tariff headlines may continue to affect sentiment and fund flows, we do not think they have derailed our constructive view on Malaysia equity outlook.

Meanwhile, the Middle East conflict remains a key macro swing factor, mainly through oil prices, subsidy pressure and cost pass-through. However, the impact is likely to be uneven rather than broad-based, with petroleum-linked manufacturing, transport, logistics and selected consumer facing sectors more exposed, while infrastructure, construction and E&E should remain supported by committed capex and AI-related demand.

Figures 9: Elevated oil prices may add pressures on private consumption.

1Q26 corporate earnings: a soft set; the path is back-end loaded

The 1Q26 earnings season was largely within expectations, although we see some softness from the strong recovery seen in 2H25. The softness was mainly driven by higher cost pressure, fewer working days from festive holidays and weaker sector-specific earnings, particularly in banks, selected technology names and several cyclical sectors. As such, while earnings growth remains intact, the quarter suggests that the recovery is becoming less broad-based, with 2H26 performance likely to depend more on sector-specific earnings delivery.

The main earnings support came from industrial products, telecommunications, healthcare and selected domestic-oriented names. Industrial products were helped by stronger petrochemical earnings, while telecommunications benefited from better earnings delivery and upward forecast revisions. Healthcare remained supported by patient demand and improved glove assumptions, while selected consumer staples continued to show resilience from essential spending, cash assistance and subsidies.

In contrast, the key draggers came from banks, broader technology, selected utilities, plantations and consumer discretionary names. Banks were affected by softer non-interest income and higher precautionary provisions, although stable NIMs, steady loan growth and capital management should continue to provide support. Technology remained uneven due to weaker RF demand, higher operating costs and slower recovery in traditional end-markets, even though AI and data centre related demand continue to support selected names. Plantations were mixed, with near-term earnings affected by lower FFB output and softer palm product prices, although firmer CPO assumptions provide some offset.

Looking ahead, with geopolitical tensions expected to persist for longer, higher cost pass-through could continue to weigh on corporate earnings growth. As such, the earnings recovery is likely to be more back-end loaded and selective. We remain more constructive on sectors with clearer earnings visibility, including banks, consumer staples, construction, renewable energy, healthcare and selective technology.

Table 2: Top 10 Market Cap Malaysian Companies 1Q26 Earnings Growth.