Corporate earnings growth in Malaysia is unlikely to drive a significant market rally in the near term, as rising global bond yields, continued foreign fund outflows, and heightened geopolitical risks weigh on investor sentiment. Market analysts point to persistent external headwinds, despite improving fundamentals among local companies.
Global markets experienced widespread sell-offs on Tuesday amid a sharp increase in government bond yields. Notably, Japan’s 10-year government bond yield reached 3%, a level not seen since 1996. This development is prompting Japanese investors to shift their portfolios toward domestic assets, potentially reducing outbound capital flows and increasing pressure on emerging markets such as Malaysia.
Tradeview Capital chief executive Ng Zhu Hann highlighted that foreign fund outflows remain a key constraint on the FBM KLCI’s growth potential. He attributed this to the attractive risk-free returns offered by higher Japanese bond yields compared to Malaysian bonds. “Foreign funds will continue to be net sellers so long as this situation persists,” Ng said, noting that Japanese bonds currently offer around 3% returns, significantly narrowing the yield gap with Malaysian debt.
Ng advised investors to focus on defensive sectors and companies with steady dividends, recurring income, and strong cash flows, rather than high-beta or speculative stocks. Specifically, he identified utilities, select banking groups like Hong Leong Financial Group, and insurers as relatively safer investments. While semiconductor and data centre themes remain appealing, he cautioned against buying at elevated valuations or prematurely increasing market exposure amid external uncertainties.
Looking ahead, the upcoming U.S. midterm elections in November add another layer of risk. Ng warned that a shift in political incentives could reduce U.S. policy support for markets post-election, possibly triggering corrections. He maintained a year-end FBM KLCI target of 1,750 points. On the currency front, Ng projected the ringgit to end 2026 at around RM3.95 against the U.S. dollar, assuming two interest-rate cuts by Bank Negara Malaysia—a scenario that has yet to materialize amid persistent rate stability.
The U.S. Federal Reserve is set to meet from September 15-16, with markets increasingly pricing in a potential rate hike following hawkish signals from Fed Chair Kevin Warsh and renewed inflation concerns tied to elevated oil prices. Meanwhile, Malaysia’s Monetary Policy Committee convened on September 3, with consensus expecting the overnight policy rate to remain steady at 2.75% for the rest of the year.
Ng also noted potential positive triggers for the local market, including the MY Value Up initiative and the planned expansion of the FBM KLCI from 30 to 50 stocks. The index enlargement could draw additional demand from benchmarked and exchange-traded funds required to adjust portfolios accordingly.
Supporting this cautious outlook, Kenneth Leong, head of research at Berjaya Research, agreed that external factors currently overshadow corporate earnings strength. He recommended a domestic-oriented investment strategy, emphasizing sectors benefitting from ongoing infrastructure projects, digitalisation, and rising electricity demand. Leong identified construction, utilities, data centres, and power infrastructure as key areas with growth potential, alongside selected consumer-related stocks supported by resilient local consumption. He emphasized prioritising companies with solid financial health, predictable earnings, and sustainable cash flows.