The planned expansion of the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) from 30 to 50 constituents is expected to reduce the impact of portfolio rebalancing while benefiting selected banks, utilities and large-cap stocks, according to Kenanga Research.
In a report, Kenanga Research said the implementation details for the enhanced FBM KLCI include a two-phase approach to introducing the next 20 constituents, which should help reduce concentrated trading flows during the transition.
The research house said the phased implementation would particularly benefit sectors that would otherwise face larger one-off reductions in index weightings, notably financials and utilities.
Under the first phase, effective Dec 21, 2026, the 20 new constituents will be included at 50% of their eventual index weight. In the second phase, the new constituents will reach 100% of their final weights, completing the transition to the expanded 50-stock benchmark.
Kenanga said the phased approach would halve the immediate portfolio rebalancing impact that passive funds and other institutional investors would otherwise face.
“For financials, we believe the market impact is manageable,” it said, noting that the seven financial stocks currently in the FBM KLCI collectively trade about RM600 million a day based on average daily trading value during the first seven months of 2026.
With the financial sector’s weight expected to decline by 3.3 percentage points to 39.4%, Kenanga estimated that the adjustment would be equivalent to around five days of trading value for the sector.
No 10% Single-Stock Cap
Another key change is the decision not to impose a 10% cap on the weighting of an individual stock in the index.
Kenanga said the absence of a cap would benefit large-cap stocks that currently have index weightings above 10%, particularly Malayan Banking Bhd (Maybank), Public Bank Bhd, Tenaga Nasional Bhd and CIMB Group Holdings Bhd.
The research house said these stocks would likely retain higher weightings under the expanded index compared with the earlier proposal that envisaged a 10% single-stock limit.
The top five stocks are expected to account for about 42.1% of the FBM KLCI after the second phase, down from around 50% currently.
Kenanga noted that while the lower concentration would improve the benchmark’s representation, the index would remain relatively dominated by its largest constituents.
20 New Constituents To Be Determined In November
The cut-off date for determining the 20 stocks to be added to the FBM KLCI is Nov 23, 2026.
Kenanga said the usual free-float and liquidity considerations are expected to remain relevant, with companies selected for inclusion based on their free-float-adjusted weights.
The research house cautioned that the final list remains uncertain, as the buffers used historically for index inclusions and deletions have yet to be announced for the expanded benchmark.
Based on free-float weights using the FBM100 index, Kenanga identified several potential candidates.
Among industrial stocks, the potential additions include IJM Corp Bhd, Sunway Construction Group Bhd and Westports Holdings Bhd. Potential real estate additions include IGB REIT, Sime Darby Property Bhd and Sunway REIT.
Consumer names identified include Genting Bhd, United Plantations Bhd, QL Resources Bhd and Sime Darby Bhd, while technology candidates include ViTrox Corp Bhd, Inari Amertron Bhd, Frontken Corp Bhd and KGB.
Other potential candidates include Time dotCom Bhd, KPJ Healthcare Bhd, Alliance Bank Malaysia Bhd, Bursa Malaysia Bhd, Dialog Group Bhd and Yinson Holdings Bhd.
Kenanga stressed that the list is indicative and does not represent the final constituents, which will only be determined closer to the Nov 23 cut-off date.
Broader Sector Representation
Kenanga maintained that expanding the FBM KLCI to 50 stocks would provide slightly better representation of Malaysia’s economy.
The broader index is expected to increase the representation of industrials, property and technology stocks, while reducing the relative dominance of financials and utilities.
The research house said the potential additions also have relatively low correlations with the financial sector, which currently dominates the benchmark. This could improve diversification and reduce the risk of large index swings driven by a single sector.
However, Kenanga noted that stocks ranked 31st to 50th generally have weaker trading liquidity than the existing FBM KLCI constituents. It expects the inclusion of these stocks to potentially improve their liquidity and attractiveness to institutional investors.
The expansion could also make sector allocation more important for portfolio managers as investors seek to balance exposures across a more diversified benchmark.
Kenanga said the greater representation of mid-cap stocks could create opportunities for companies that enter the expanded index, although the eventual impact will depend on their final free-float weightings and the behaviour of passive funds tracking the benchmark.
Despite the changes, Kenanga maintained its year-end FBM KLCI target of 1,770 points, saying its index target is based on a top-down approach rather than a bottom-up assessment.
The research house also said its fundamental sector calls remain unchanged despite the changes in index weightings and potential one-off portfolio rebalancing flows.
