Playing catch-up, carefully

AMID lingering geopolitical tensions and ongoing reciprocal tariff talks, analysts are approaching Malaysian equities with cautious optimism as the second half of 2025 (2H25) unfolds.

The consensus is taking shape: liquidity remains healthy, valuations are turning attractive, and laggards may have room to catch up.

Still, investors aren’t diving in headfirst – strategies are becoming more selective, investment themes more tactical, and a focus on quality continues to take precedence.

According to Kenanga Research, while Malaysia ushers in the 2H25 at almost an equal level from before the reciprocal tariffs, the real play now lies in what’s yet to rebound.

“We see scope for some catch-up play,” the research house notes, emphasising that liquidity that has been shored up is now being deployed and investors are beginning to consider laggards within key sectors such as construction, property and utilities.

It highlights that companies such as YTL Power International Bhd, IJM Corp Bhd, Sime Darby Property Bhd (SimeProp) and CIMB Group Holdings Bhd are emerging as promising catch-up candidates.

Notably, Kenanga Research is of the view that the small cap segment is finally showing some appeal.

“Valuations of the small cap segment, where we previously only concentrated on visible sectors such as renewable energy/water, are becoming more palatable,” it writes in its recent strategy report, pointing out that this is particularly so if tariff differentiation turns out favourably.

Technology names like PIE Industrial Bhd and SKP Resources Bhd could stand to benefit from this shift, especially if foreign relocation plays materialise.

As for macro drivers, the ringgit is expected to be a tailwind.

“The third quarter of 2025 (3Q25) may usher in some domestic cost hurdles, but overall inflation is a manageable 2%,” Kenanga Research says.

This makes dividend-yielding stocks, including small caps and banks, increasingly attractive.

Still, risks linger.

With trade talks dragging and no firm conclusion by the original July 9 deadline, Kenanga Research stresses that investors are right to remain discerning.

“We will be selective in looking for laggards, pending verdict on tariff negotiations,” it states.

That said, the tone remains optimistic.

“Malaysia stays hopeful,” it argues, noting that government officials are in advanced discussions and describe talks as “progressing well”.

Kenanga Research holds its year-end FBM KLCI target at 1,655 points, based on a price-to-earnings ratio of 15.5 times.

It has added CIMB to its top picks, joining AMMB Holdings Bhd, Tenaga Nasional Bhd (TNB), Fraser & Neave Holdings Bhd (F&N), Gamuda Bhd and YTL Power, but dropped Malayan Banking Bhd.

Construction, renewable energy, banks, and gloves are the brokerage’s preferred sectors for the 2H25.

Fluid trend

Maybank Investment Bank Research (Maybank IB) is broadly in agreement but highlights that the 2H25 could be “even more fluid” than the 1H25, which it regards as a “tumultuous period”, citing ongoing Middle Eastern tensions, supply chain disruptions and domestic policy recalibrations.

The research house maintains its year-end FBM KLCI target at 1,660 points, assuming further de-escalation in trade tensions and favourable tariff negotiations.

In terms of sector strategy, Maybank IB’s five key investment themes remain intact.

Its top picks include a mixture of financials like Public Bank Bhd and AMMB, data centre plays such as Gamuda and YTL Power, and defensives like KPJ Healthcare Bhd, Telekom Malaysia Bhd (TM), Time dotCom Bhd, Solarvest Holdings Bhd and Pavilion Real Estate Investment Trust.

Among smaller caps or higher-beta names, Southern Cable Group Bhd, MN Holdings Bhd, Frontken Corp Bhd, Aurelius Technologies and ITMAX System Bhd are highlighted as selective bets.

For ports, Westports Holdings Bhd is seen as a standout as “storage rates surge” due to ongoing congestion and rising tariffs.

Maybank IB is also warming up to plantations – albeit cautiously.

“The Middle Eastern conflict has triggered oil prices surge and, indirectly, crude palm oil price bounce,” it notes, although only a sustained rally above RM4,500 per tonne would truly excite the sector.

SD Guthrie Bhd is flagged as the best proxy for the planters.

Elsewhere, the construction sector is regaining traction.

“We raise our conviction (for the sector) amid build-up in activities within the data centre space,” Maybank IB says, echoing Kenanga Research’s view on project pipeline visibility.

Similarly, the renewable energy sector is expected to benefit from continued momentum under the National Energy Transition Roadmap, with MN Holdings identified as a battery energy storage system beneficiary, alongside stalwart TNB.

Cautious tone

TA Research strikes a more conservative tone but is by no means bearish.

The research house continues to recommend a thematic approach built around “fundamentally solid blue chips,” “domestic plays” and “defensive plays.”

Its favourites include CIMB, Hong Leong Bank Bhd, Public Bank, TNB, TM, Gamuda, SimeProp, F&N, Duopharma Biotech Bhd and Padini Holdings Bhd. While TA Research pegs its year-end target for FBM KLCI at 1,660 as well, it warns that heightened geopolitical tensions and moderate economic growth prospects may drag on earnings.

Following a softer-than-expected 1Q25 results season, TA Research cut its earnings forecast for 2025 by 4.5%.

The research house now expects earnings under its coverage universe to grow by 3.1% in 2025, with a stronger 8.5% rebound in 2026.

The main headwinds cited include US President Donald Trump’s unpredictable trade policies, which have placed the “China Plus One” policy in paralysis.

However, a resolution to trade issues could unlock upside.

“This scenario could improve in the 2H25 with the United States and China meeting eye to eye to negotiate trade terms and both countries slashing their tariffs imposed on each other by 115%,” TA Research says.

Malaysia, notably, is said to be making significant headway, with the government stating that discussions are “progressing well”.

On the earnings front, TA Research sees construction (up 22.7%), healthcare (up 21.5%) and technology (up 17.3%) leading the charge in 2025, with banks contributing the lion’s share of earnings (46.2%).

But this mix is expected to normalise in 2026, as gaming and oil and gas rebound sharply, diluting the financial sector’s contribution.