PETALING JAYA: Rakuten Trade expects heightened market volatility in the coming months and has cut its FBM KLCI target for year-end 2026 to 1,770 points from 1,800 points, citing external uncertainties driven by sovereign debt pressures, shifting interest-rate expectations and currency volatility.
Head of research Kenny Yee said the downward revision was largely driven by adjustments to earnings expectations rather than domestic political developments.
“Our estimate on the KLCI did not include any impact from the political side. It is based mostly on the financials,“ he said at Rakuten Trade’s Q3 market outlook briefing today.
Yee noted that while domestic political developments may create short-term volatility, historical trends show limited correlation between election cycles and overall market performance, except in extreme scenarios.
He said Rakuten Trade conducted a sensitivity analysis of the past five general elections and found no direct relationship between election outcomes and market direction, unless the results were significantly beyond expectations. “Only in extreme cases, such as when Barisan Nasional lost power, did we see a negative market reaction. Otherwise, there is no consistent correlation.”
As such, he stressed that the firm’s FBM KLCI projections do not factor in political developments and are instead based primarily on financial fundamentals, particularly earnings.
Earnings growth for corporate Malaysia has been revised down to 5.4% for 2026 from 7.9% previously, following a round of “fine-tuning” by analysts amid heightened geopolitical uncertainties, particularly ongoing tensions in the Middle East, which have kept energy prices elevated and clouded the macro outlook.
Yee said the adjustment also reflects the exclusion of selected companies with significant one-off impairments, notably large-cap names, from the earnings base, resulting in a more conservative but cleaner projection for the year ahead.
Despite the downgrade, he noted that overall earnings momentum remains “decent”, with growth expected to recover to 6.2% in 2027, indicating that the revision is largely a near-term recalibration rather than a structural deterioration.
Sector-wise, the plantation segment is expected to be a key outperformer, supported by firmer crude palm oil prices and recent upgrades to earnings expectations, which could help offset weaker contributions from other sectors.
Yee said global investment conditions have deteriorated since the previous quarter, with geopolitical tensions, particularly in the Middle East, keeping crude oil prices elevated and raising the risk of renewed inflationary pressures.
The research house described the current macro environment as a “deadly love triangle” involving national debt, interest rates and currency movements, which could collectively create a “perfect storm” for global financial markets.
The United States remains at the centre of this dynamic, with national debt exceeding US$39 trillion and annual interest payments estimated at US$1.2 trillion, placing increasing strain on fiscal sustainability.
“In such circumstances, there are limited options for policymakers other than adjusting interest rates, which could weaken the US dollar and create further imbalances,“ Yee said.
He added that any move to lower rates to ease debt servicing could undermine confidence in US assets, while higher rates would exacerbate debt servicing burdens.
Compounding the risks, Japan’s monetary tightening could trigger an unwinding of the yen carry trade, which may drain liquidity from global markets and intensify volatility.
Despite the challenging external environment, Rakuten Trade maintains that Malaysia remains relatively resilient, describing the domestic market as a “captive market” supported by strong local institutional participation.
The firm noted that total assets under management among Malaysian funds have reached approximately RM1.14 trillion, with more than half allocated to equities, providing a stabilising force for the market.
The domestic base has helped cushion volatility, positioning the local bourse as a relatively stable environment compared with regional peers.
However, external pressures continue to weigh on sentiment. Foreign fund flows have turned volatile, with a sharp net outflow recorded in May amid domestic political developments, effectively reversing earlier inflows.
Retail participation, while showing some improvement, remains inconsistent due to the absence of strong market catalysts, suggesting limited momentum for a sustained rally.
Given the current environment, Rakuten Trade expects the market to remain range-bound, with limited near-term upside.
The revised FBM KLCI target of 1,770 is based on a price-earnings multiple of 17 times, reflecting a balanced view that incorporates both earnings prospects and prevailing risks.
Looking ahead, Yee said market direction will continue to be shaped largely by global developments, particularly shifts in US monetary policy and geopolitical dynamics.
“While Malaysia offers relative stability, it is not immune to external shocks. Investors will need to navigate an increasingly complex and uncertain global landscape,“ he said.
