With the first half earning results out surprisingly Hong Leong Investment Bank (HLIB) Research lowered its year-end FBM KLCI target to 1,760 from 1,770, as it expects a combination of geopolitical, interest-rate and domestic uncertainties to weigh on the Malaysian equity market through much of the second half of 2026.
The research house nevertheless sees the latest corporate reporting season as an improvement, with positive earnings surprises increasing and aggregate core profits recording both quarter-on-quarter and year-on-year growth.
Among the 110 stocks under its coverage that reported 2Q26 results, excluding four restricted counters, 57% delivered core earnings in line with HLIB’s forecasts, 26% fell below expectations and 16% exceeded estimates.
Against consensus forecasts, 51% were in line, 30% missed and 19% beat expectations.
Importantly, the house noted that the proportion of positive surprises improved from 10% in 1Q26 to 16% in 2Q26, while negative surprises declined from 29% to 26%.
This lifted the positive-to-negative surprise ratio to 0.62 times from 0.35 times in the preceding quarter, although earnings misses continued to outnumber beats.
The automotive sector emerged as a positive surprise, with better-than-expected margins at Sime, Bermaz and MCE supporting stronger results.
Oil and gas results, meanwhile, were mixed, although several companies benefited significantly from higher crude prices and market conditions stemming from the Iran conflict.
The main disappointments came from construction, gaming and gloves.
HLIB said construction earnings were affected by a combination of slower-than-expected orderbook execution and margins, while weakness in gaming was mainly attributable to the Genting group.
Although glove manufacturers appeared to deliver strong headline results, HLIB expects a material sequential contraction in margins due to higher-cost inventories and declining average selling prices.
Of HLIB’s 13 top picks going into the reporting season, 10 delivered results within expectations. Alliance and Dialog surprised on the upside, while SkyWorld disappointed.
Despite the mixed sector performance, aggregate core earnings across HLIB’s coverage universe increased 9.4% quarter-on-quarter and 10.5% year-on-year in 2Q26.
This brought aggregate core earnings growth for 1H26 to 5.8% year-on-year.
Oil and gas was an important contributor, helped by Brent crude prices that were 23.3% higher quarter-on-quarter and 44.9% higher year-on-year.
Dialog and Hibiscus benefited from stronger upstream earnings, while MISC gained from elevated spot crude tanker rates amid the Iran war.
Petronas Chemicals benefited from higher petrochemical average selling prices, while Petronas Dagangan saw its commercial margins improve on favourable Mean of Platts Singapore price trends.
For the FBM KLCI, based on HLIB’s coverage of 27 of its 30 constituents, the research house estimated that core earnings increased 8.3% quarter-on-quarter and 13.5% year-on-year in 2Q26.
First-half KLCI core earnings were up an estimated 8% from a year earlier.
However, HLIB’s analysis also showed how much of the improvement was linked to companies benefiting from the Iran conflict and associated commodity-market conditions.
After excluding these beneficiaries, aggregate 1H26 core earnings growth moderated to 1.9% for HLIB’s broader coverage universe and 2.8% for the KLCI, indicating that underlying earnings expansion remained positive but relatively modest.
Following the reporting season, HLIB now forecasts FBM KLCI earnings growth of 8.2% in 2026, slightly below its previous projection of 8.9%.
Its 2027 earnings growth forecast, however, was raised marginally to 5.4% from 5.1%.
HLIB consequently lowered its year-end KLCI target by 10 points to 1,760, while retaining its valuation assumption of 15.4 times price-to-earnings, equivalent to 0.75 standard deviation above the post-pandemic mean, applied to 2026 earnings per share.
HLIB expects the Malaysian market to encounter a confluence of external and domestic hurdles during much of 2H26.
External risks include a potential re-escalation of the Iran war and increasingly hawkish US Federal Reserve expectations, which could affect global risk appetite and financial conditions.
Domestically, HLIB highlighted the overhang surrounding potential changes to the composition of the FBM KLCI as well as possible jitters over Malaysia’s 16th General Election (GE16).
The research house nevertheless considers these headwinds largely transitory and expects most to subside towards year-end, potentially clearing the way for a market recovery.
It also sees Malaysia’s already-low foreign investor positioning as providing some protection against further downside.
Foreign investors’ shareholding of Malaysian equities fell to another record low of 18.1% in August, while international investors remain underweight on Malaysia, limiting the scope for substantial further foreign positioning reductions, in HLIB’s view.
Against this backdrop, HLIB’s refreshed list of preferred stocks comprises Tenaga Nasional, Sunway, CelcomDigi, ViTrox, Dialog Group, IJM Corp, Alliance Bank, UWC, OSK Holdings, ITMAX System, Southern Cable, AEON Co (M), EITA Resources-linked EI Power, SkyWorld Development and Focus Point Holdings.
The improved 2Q26 reporting season provides a more constructive earnings backdrop entering the final months of the year, but with HLIB trimming its KLCI target to 1,760, the research house expects near-term volatility before a potentially firmer market recovery towards year-end.
