Executive Summary
Global markets have entered a more complex phase in 2026, transitioning from a policy-driven cycle to one increasingly shaped by geopolitical developments, particularly the escalation of the Iran conflict and its impact on global energy markets. The resulting surge in oil prices has reintroduced inflationary pressures, complicating the monetary policy outlook and reinforcing a “higher-for-longer” rate environment, thereby limiting near-term market direction.
In this environment, we predict 9M2026F could exhibit “Kangaroo Market” characteristics, with heightened volatility and lack of sustained trend, as investor sentiment becomes increasingly driven by geopolitical headlines, policy uncertainty, and energy price dynamics rather than fundamentals alone.
US policy under Donald Trump remains a major driver of global market risk into 9M2026, but the approach of the US midterm elections may temper aggressive geopolitical actions as domestic economic concerns and voter sentiment take priority. Markets are shifting focus from individual policy moves to whether the broader agenda gains traction before and after the elections, which will be a key turning point for policy direction.
Meanwhile, US equities have repriced meaningfully, with the S&P 500 forward P/E declining to around 19.7x, approaching levels seen during prior geopolitical shocks. Notably, the derating has been driven primarily by higher risk premiums rather than earnings downgrades, indicating that recent weakness reflects uncertainty rather than structural deterioration. Historical experience suggests geopolitical events tend to create short-lived volatility, while early stabilisation signals in gold point to moderating downside pressure. In this context, valuations are becoming more balanced, supporting a phased and selective accumulation approach rather than signalling capitulation.
On the domestic front, Malaysia remains relatively resilient, supported by stable macro fundamentals, sustained foreign investment inflows, and structural growth drivers such as the AI-driven semiconductor upcycle, data centre expansion, and energy transition initiatives. From a valuation perspective, the FBMKLCI is now trading broadly in line with fair value following the earlier re-rating cycle, with its P/E premium versus the MSCI ASEAN Index at~+0.3% (vs. historical mean of -1.1%) as at 2 April 2026. Valuations remain within the ±1standard deviation range, indicating a balanced risk-reward profile, with limited scope for further multiple expansion absent new catalysts.
In terms of strategy, we advocate a barbell approach, balancing defensive, cashflow generating names for downside protection with structural growth exposures anchored on AI and data centre themes, complemented by a tactical allocation to small caps for alpha generation. This framework allows investors to navigate volatility while maintaining exposure to long-term growth opportunities.
We offer six investment trading themes for 9M2026F: 1) Defensives as a Safety Anchor; (2)Structural Growth Anchored by AI and Data Centre Expansion; (3) Alpha picks; (4) Energy Driven CPO Upside; (5) Heatwave Alpha; and (6) World Cup Consumption Trade.
Our top picks for 9M2026 are Tenaga, ViTrox, Frontken, Mi Technovation, Aurelius Technologies, EG Industries, Seni Jaya Corporation, Southern Score Builders, Ramssol and MSC.
BNM projects Malaysia’s GDP to expand between 4.0-5.0% in 2026 (2025: +5.2%), broadly in line with our forecast of +4.7%. Downside risks stem from weaker global trade amid the Middle East conflict and tariff uncertainties, as well as softer commodity production.
BNM expects inflation to average 1.5-2.5% in 2026 (2025: +1.4%), with risks tilted to the upside, contingent on external developments and domestic fuel policy.
In assessing the policy path, BNM will monitor spillovers from elevated oil prices to business costs, the extent of pass-through to consumer prices, and domestic demand conditions.
Barring a sharp rise in inflation or a material deterioration in the growth outlook, we expect BNM to keep the OPR unchanged at 2.75% throughout 2026.
Malaysia’s headline inflation moderated to +1.4% YoY in February (Jan: +1.6%), slightly below consensus of +1.6%, driven mainly by easing food prices.
Core inflation printed +2.0% YoY (Jan: +2.3%), slightly below its 2021–2025 average of +2.1%. Domestic demand should remain the key growth anchor in 2026, in our view.
Rising geopolitical tensions in the Middle East pose upside risks to the inflation outlook, with the main risk stemming from adjustments to domestic fuel prices.
Using the Russia-Ukraine conflict in 2022 as a reference, assuming Brent averages USD101/bbl through year-end and subsidised RON95 rises to RM2.40/litre or higher, headline inflation could exceed 3.0%, raising the prospect of a BNM rate hike.
Nonetheless, we believe BNM will remain cautious, as monetary tightening may not be ideal in a cost-push inflation environment.
An upward revision to our inflation forecast looks increasingly likely if fuel prices remain elevated. For now, we maintain our 2026 inflation forecast at +1.8%.
| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.025232 | 4.057517 |
| EUR | 4.652922 | 4.662453 |
| CNY | 0.585439 | 0.586057 |
| HKD | 0.513407 | 0.517569 |
| SGD | 3.127135 | 3.152540 |
