A decent quarter, but what’s next?
IT has been a good quarter for global markets over the past three months with tariff-related issues having more or less settled down, while lower benchmark interest rates globally and expectations of a rate cut in the United States sent markets to record highs.
The Dow, S&P 500, Nasdaq Composite, Singapore Straits Times Index, Jakarta’s Composite Index, Australian Stock Market Index, Nikkei 225 and FTSE 100 all hit record highs in the past month.
Sadly, the same cannot be said for the local bourse. The FBM KLCI, which briefly surpassed 1,600 points on Aug 25, the highest level in more than seven months, quickly gave up the gains on profit-taking as well as a massive MSCI index-rebalancing exercise the very next day.
Even foreign selling accelerated towards the end of August, as RM1.4bil left the market in the final week of the month.
A flat quarter
After recording a year-on-year (y-o-y) earnings contraction of 1.6% in the preceding quarter, the second-quarter (2Q) earnings season went deeper into negative territory with core earnings falling by 3.6% y-o-y.
On a quarter-on-quarter (q-o-q) basis, after expanding by 3% in the preceding quarter, earnings growth slowed to just 1.1% q-o-q this time around.
However, thanks to the reduction in earnings estimates across the board in 1Q by broking firms, companies reporting earnings misses were lower at 26.2% (1Q: 30.6%), while companies that surprised the market improved to 14.5% from 10.7% in the 1Q reporting season.
The increase in the number of companies beating estimates and the reduced number of companies that missed suggest an improvement in the disappointing ratio, which fell to 1.80 times in 2Q from 2.86 times in the preceding quarter.
Fair value of 1,644 points
The better performance in terms of number of hits and misses in 2Q25 saw most brokers raising their FBM KLCI target, with consensus now looking at 1,644 points as the new fair value.
This was due to a higher average price-to-earnings multiple of 15.2 times against the average of 14.9 times in the preceding quarter.
Notably, earnings growth has again been lowered for this year to just 1.8% y-o-y from 2.9% previously, while earnings growth momentum for 2026 was raised to 7.1% y-o-y from the 6.7% that was forecast at the end of the 1Q reporting season.
Few surprises
Among the index-linked constituents, the consumer sector came in strongly, fortifying Malaysia’s strong domestic demand, led by earnings surprises from Nestle (M) Bhd, and recently listed 99 Speed Mart Retail Holdings Bhd, with the latter showing a 22% jump in net earnings to RM153.2mil.
Oriental Kopi Holdings Bhd also delivered a stellar set of numbers as its bottom line jumped 30% q-o-q.
However, there were some disappointments in the sector too, as AEON Co (M) Bhd, Padini Holdings Bhd and Heineken Malaysia Bhd missed market estimates.
The banking sector was decent with a surprise uptick in Hong Leong Bank Bhd’s dividend payout to 96 sen per share for the full year, up 41.1% from 68 sen in the previous year. Likewise, Hong Leong Financial Group Bhd also raised its dividend payout to 72 sen from 54 sen previously, an increase of 33.3% y-o-y.
Among construction names, Sunway Construction was an outlier, as its topline and bottomline more than doubled y-o-y, and raised its dividend payout to almost 100% for the first-half performance.
The healthcare sector remains challenging, with both KPH Healthcare Bhd and IHH Healthcare Bhd reporting disappointing numbers, and so was the property sector.
Among utility names, Tenaga Nasional Bhd saw another miss in its 2Q earnings, while YTL Power International Bhd also saw a dip in earnings.
In the automotive sector, Sime Darby Bhd’s quarterly performance improved with a stronger-than-expected bottomline, thanks to its industrial segment performance, but Tan Chong Motor Holdings Bhd remained in the red.
Among commodity names, PETRONAS Chemicals Group Bhd again disappointed, and so did Lotte Chemical Titan Holding Bhd. The former was also hit with a huge forex loss of RM446mil and impairment loss on property, plant and equipment of RM431mil.
Kuala Lumpur Kepong Bhd and SD Guthrie Bhd saw improved performance, on better crude palm oil prices, while among glove companies, Supermax Corp Bhd remained in the red as the other top three manufacturers sustained profitability despite the challenging business environment.
Budget 2026
With President Donald Trump’s tariffs out of the way, at least the uncertainty on the quantum and the timing of it, and post the tabling of the 13th Malaysia Plan at the end of July, attention will now shift to the tabling of Budget 2026 on Oct 10.
On the political front, the upcoming Sabah elections remain a concern for markets as the state assembly will automatically be dissolved on Nov 11, 2025, if not earlier.
These are the only two key events to watch out for, other than the 3Q reporting season in November and a likely 25-basis-point cut in the overnight policy rate by Bank Negara Malaysia, also in the same month.
Outside Malaysia, the market will be watching the US Federal Reserve’s potential rate cuts, which may drive the dollar lower and the ringgit stronger, while geopolitical risk remains high on the agenda, especially with respect to the final tariff rate that the United States will impose on imports from China.
Persistent outflows
Net foreign selling on Bursa surged to RM3.43bil last month, bringing the year-to-date outflow to an astonishing RM16.5bil, which, if annualised, suggests that market outflows may even surpass the record net foreign outflow of RM24.6bil in 2020.
After all, on a rolling 12-month basis, foreign net outflow between September last year and August this year now stands at RM23.75bil, suggesting that despite the low equity ownership, foreign selling has remained persistently high and increasing.
Even more telling is the emergence of foreign market participation trading value, which in August 2025 hit 42.2%, just behind local institutions and nominees combined participating trading value share of 42.6%.
The foreign market participation in terms of value has been steadily rising, from 29.2% in 2023 to 35.9% in 2024.
One wonders if the persistent selling will continue unabated despite foreign ownership falling even below the 19% mark, which includes strategic foreign ownership.
In conclusion, the 2Q earnings season was almost a non-event, except for selective surprises in the form of underlying strength or weakness and an uptick in dividend payout by some companies.
For now, the market lacks an immediate near-term catalyst to take it higher other than improved global risk-off appetite towards equities on lower interest rates and post-tariff tantrums.
The real concern is the increasing trend of foreign trading participation rate but remaining as net sellers in the market, which has limited the FBM KLCI’s upside, despite the strong domestic inflows.
Even retail market participation has been muted, with just a 15.3% share of total market trading value in the past month.