Uncertain but not uninvestable

AFTER months of caution and volatility, investors might be wondering whether Malaysian equities are finally turning a corner, or simply gearing up for another bout of turbulence.

While market optimism has been rekindled by early signs of progress on tariff negotiations, seasoned strategists caution against overexuberance.

With both headwinds and opportunities in play, the strategy now is not about chasing rallies, but rather, staying grounded, staying diversified, and staying selective.

Maybank Investment Bank Research (Maybank IB Research) believes the market will largely be rangebound in the near term.

“While we keep our year-end FBM KLCI target at 1,700 or 15 times 2026 price-earnings ration (PER) per share, the market could trade sideways in the near term close to our bear-case scenario at 1,560 or 14 times PER,” the research house says, adding that the key risk lies with the banking sector, especially if stress-test assumptions materialise.

In such a scenario, the sector’s earnings growth could drop from 5.5% to 4.3%, pulling overall FBM KLCI earnings growth down to 6% for 2026, it highlights.

Still, Maybank IB is not sounding alarm bells just yet.

“In a worst-case scenario, should the FBM KLCI trade at five-year trough of 12 times PER, downside risk to the index could be at 1,350, but we believe this scenario is remote unless tariff negotiations turn out highly unfavourable,” it says.

The research house’s strategy? Stay with the long-term winners – particularly domestic-driven names in banks, consumer staples, hospitals, and renewable energy.

“We believe downtrading and spending on consumer staples should stay robust,” it explains.

Among Maybank IB’s top picks are Public Bank Bhd, AMMB Holdings Bhd, AEON Co (M) Bhd, Farm Fresh Bhd (with Padini Holdings Bhd as an alternative), KPJ Healthcare Bhd, YTL Power International Bhd, Eco World Development Group Bhd, Frontken Corp Bhd, ITMAX System Bhd and Solarvest Holdings Bhd.

For investors seeking defensive exposure, Maybank IB notes that Tenaga Nasional Bhd, Gas Malaysia Bhd and MISC Bhd fit the bill, while Sunway Real Estate Investment Trust (REIT) stands out in the property trust space.

High tensions

On the geopolitical front, tariff-related concerns remain front and centre.

Malaysia is in the early stages of discussions with the United States, and clarity will take time.

That said, the FBM KLCI has finally inched above pre-tariff levels but what will drive it further would be clear messaging on how Malaysia would be able to navigate macro headwinds amid US President Donald Trump’s tariff trade war, Maybank IB Research points out.

There is also a foreign-exchange dimension to consider.

“As the ringgit strengthening against the US dollar has a strong positive correlation with the FBM KLCI in US dollar terms, a stronger ringgit tends to add strength to the equities market,” the research house explains.

It noted that foreign net selling moderated in last month, and domestic institutions absorbed the flow, a sign that confidence is not absent – just cautious.

Over at Hong Leong Investment Bank Research (HLIB Research), the tone is more sceptical.

“Markets appear too optimistic, in our view, having erased post-tariff losses ‘too fast, too furious’, and seemingly priced in minimal collateral damage, which we struggle to comprehend,” it says.

While recognising the recovery in the FBM KLCI and renewed foreign buying, HLIB Research sees fragility under the surface.

“All show but no flow. Although the FBM KLCI recovered swiftly, underlying market dynamics remain fragile; the average daily trading value (ADV) fell to less than RM2bil for bulk of the past three weeks, signalling a lack of conviction,” HLIB Research says.

With unresolved tariff issues and the International Monetary Fund’s downgrade of global gross domestic product growth to 2.8% this year and 3% in 2026, HLIB Research’s preferred stance is clear: “We advocate selling on strength, with a readiness to pivot to buying on weakness when the opportunity arises.”

Stay cautious

HLIB Research expects a tactical window for recalibration.

“We are not convinced that the current market uptrend is sustainable,” it highlights, hence, its recommendation of a tactical “sell on strength” strategy over chasing fear-of-missing-out-led gains.

The research house’s advice: reassess portfolios, reduce beta, and embrace a barbell approach, pairing dividend-heavy defensives with selective exposure to beaten-down but potentially undervalued names.

In line with this thinking, HLIB Research refreshes its top picks by adding AMMB and Deleum Bhd, while Public Bank and Capital A Bhd are dropped.

Sectorally, financials, REITs and plantations proved resilient during downturns, while technology, construction and industrials saw the sharpest rebounds, it notes.

That said, there are seasonal and behavioural factors at play.

“Aside from fundamental factors, seasonality could also weigh on sentiment as the market enters the traditional ‘sell in May and go away’ window.

“Our findings showed that during the May to October period, the FBM KLCI historically posted positive returns only 52% of the time, with a subdued average gain of just 0.8%,” HLIB Research states.

AmBank Research shares many of these concerns.

While noting that share prices for most sectors have recovered to pre-tariff levels, the research house remains guarded.

“We remain cautious over challenges ahead, with the threat of sectoral tariffs still looming and the artificial intelligence (AI) difussion rule expected to take effect on May 15,” it says.

The technology sector, in particular, is under pressure.

“We had recently downgraded our sector calls for technology and plantations to “neutral” over the yet to be reflected impact of higher tariff prices to end demand,” AmBank Research says.

Investor positioning is also shifting, it notes, saying: “AI and data centre names continue to be a crowded trade, with industrials and utilities representing 17% (versus 12% in mid-2022) and 6.5% (versus 2% in mid-2022), respectively, of assets under management.”

AmBank Research believes the more prudent approach is to hold cash and pivot towards domestic-focused names.

“Until clearer value emerges, we advocate for higher cash levels and stock with domestic-focused demand,” it says.

Reflecting this, the research house’s refreshed top picks include Hong Leong Bank Bhd (replacing CIMB Group Holdings Bhd), Maxis Bhd, 99 Speed Mart Retail Holdings Bhd (a new addition), and Johor Plantations Group Bhd (replacing Kuala Lumpur Kepong Bhd due to downstream risk).

Vitrox Corp Bhd, formerly a top pick, is removed following a downgrade to “underweight”.

AmBank Research also cites forex trends.

A bane for exporters, the ringgit has strengthened against the US dollar.

While this may dampen export earnings, it benefits domestically oriented sectors like consumer staples and telecommunications, it explains.

Meanwhile, HLIB Research says it is hopeful that progress on tariff negotiations will materialise by the fourth quarter of this year and help boost clarity and confidence.

This, coupled with pro-market efforts ahead of the 2026 US mid-term elections, could spur stronger investor participation and pave the way for a more sustained FBM KLCI re-rating later on, it says.

Will clearer skies emerge by the fourth quarter of this year as HLIB Research hopes?

Possibly, but for now, the better part of strategy is caution.

After all, “volatility stays as a key market feature” and no one wants to get caught investing for sunshine in the middle of a storm.