Kenanga Research has lowered its end-2026 FBM KLCI target to 1,700 points from 1,775, as higher bond yields and expectations of an interest-rate increase raise the required return for equities, although it still sees upside from the market’s current level of around 1,611.
In its 4QCY26 strategy, Kenanga said the near-term market outlook has become more challenging following the US Federal Reserve’s rate hike, elevated Middle East geopolitical risks and potential wage and cost pressures at home.
However, it believes Malaysia’s longer-term investment story remains supported by structural themes including artificial intelligence, data centres, power generation, energy transition and technology investment. It recommends a “barbell” strategy combining defensive sectors such as banking and healthcare with companies positioned to benefit from these structural growth trends.
Kenanga has reduced the valuation multiple applied to the KLCI to 15.3 times earnings from 16 times, after the 10-year Malaysian Government Securities yield climbed to around 4% from 3.6% at end-June. It forecasts KLCI earnings growth of 12.2% in 2026 and 3.5% in 2027, or 7.9% and 5.4%, respectively, excluding the more volatile Petronas Chemicals.
Banks Seen As Market Anchor
Banks are one of Kenanga’s preferred defensive exposures after the KL Financial Index fell about 6% following the US rate increase.
The research house said Malaysian banks now offer an average dividend yield of around 6%, the highest in three years, while their capital positions remain adequate. It also expects a 25-basis-point increase in the Overnight Policy Rate in the first quarter of 2027 to provide a further earnings boost, historically worth around 2% to 3% on an annualised basis.
Its preferred banking stocks include Maybank, with a target price of RM12.30, Hong Leong Bank at RM25.80 and Alliance Bank Malaysia at RM5.50.
Kenanga also upgraded healthcare to OVERWEIGHT, citing improving risk-reward following recent share-price weakness. IHH Healthcare has been added to its market picks, with a target price of RM9.10, replacing IOI Corp.
AI And Data Centre Investment Still A Key Theme
Technology remains one of the structural areas favoured by Kenanga. Its bottom-up analysis projects wafer fabrication equipment capital expenditure outside China to rise 46% in 2026, followed by 41% in 2027 and 17% in 2028, supporting a multi-year semiconductor equipment investment cycle.
It favours front-end technology companies with clearer earnings visibility, including Kelington Group, with a target price of RM10.10, and Ame Elite Consortium’s technology-related AMBEST exposure at RM1.80.
Power infrastructure is another key theme. Kenanga expects Malaysia’s new generation capacity programme to support continued data centre expansion, benefiting utilities as well as engineering, mechanical and electrical and grid infrastructure companies.
It sees Tenaga Nasional and Malakoff as potential frontrunners for new generation capacity, while YTL Power has secured gas turbines capable of supporting substantial additional power generation. Kenanga also sees opportunities for downstream players involved in data centre electrical infrastructure and renewable energy projects.
The research house also expects upstream oil and gas capital spending to strengthen in 2027 and 2028, although it does not expect a prolonged structural oil-price supercycle.
More Cautious On Cyclicals
Kenanga is less positive on some cyclical sectors as higher wages, input costs and interest rates threaten margins.
It downgraded plantations to NEUTRAL from OVERWEIGHT after the sector’s strong performance and as investors increasingly price in the impact of El Niño. Rising fertiliser, diesel and potentially labour costs could also pressure planters despite firm crude palm oil prices.
Consumer stocks could meanwhile receive some near-term support from Budget 2027, which Kenanga expects to remain “rakyat-friendly”, potentially including higher SARA and STR assistance. However, a higher OPR and rising labour and electricity costs could limit the benefit.
Kenanga expects Malaysian GDP growth to moderate to 5.0% in 2027 from 5.3% in 2026, while it has raised its Brent crude forecasts to US$91 per barrel for 2026 and US$85 for 2027 amid continued geopolitical uncertainty.
Among its main conventional market picks are Maybank, Hong Leong Bank, Gamuda, QL Resources, IHH Healthcare, Kelington, Time dotCom, Tenaga Nasional, YTL Power and Sime Darby Property.
