Bursa’s 2026 test: Small-cap rebound

PETALING JAYA: The Malaysian stock market heads into 2026 with blue chips leading the rebound, but the real test lies in whether small-cap stocks are capable of playing catch-up.

With the benchmark index of Bursa Malaysia potentially at the start of a bull run, small-cap stocks will find it difficult to keep pace unless retail investors increase their participation.

In 2025, retail investors had a “marginal” role in Bursa Malaysia, a fund manager told StarBiz.

“Year-to-date, local retail investors were net buyers of Malaysian equities but only by RM180mil. In November, their participation remained low below 16%.

“This needs to change if you want the small-cap stocks to rebound.”

For now, hopes of stronger corporate earnings, reasonable valuations and a potential return of foreign investors are strengthening the investment case.

However, the positive backdrop is tempered by lingering macro risks from abroad, as volatility in global markets, policy uncertainty and geopolitical tensions threaten to disrupt investor appetite.

At this point, stock pundits are hopeful yet guarded about the overall outlook of Malaysian equities.

MBSB Research, in a note, stated it expects the FBM KLCI, the benchmark index of Bursa Malaysia, to reach a new post-Covid-19 high in 2026.

“The consensus expects FBM KLCI earnings growth to retreat by 3.2% in 2025 and resume its upward trajectory at 7.7% next year.

“We reckon the earnings recovery in 2026 should support firmer FBM KLCI exceeding the post-Covid high level of 1,696 points registered around mid-December 2020.”

Since this year’s low in April, the 30-stock FBM KLCI has rebounded by 20%, suggesting a tentative bull market.

Year-to-date, the index is up 2.4% and closed at 1,680.99 points yesterday.

Meanwhile, the FBM Small Cap Index has also rebounded from April’s low, yet remains in the red year-to-date by 12.3%.

An improvement in corporate earnings next year should help to reverse this.

“In the broader market, based on our coverage universe of stocks listed on Bursa Malaysia as at early-December 2025, the aggregate earnings growth is forecasted at 7.4% year-on-year over the next financial year.

“All sectors are expected to show positive earnings growth,” stated MBSB Research.

Within the MBSB Research universe, financial services; utilities; and consumer products and services sectors are expected to contribute the largest quantum of earnings increment over the next financial year.

Meanwhile, industrial products and services; consumer products and services; and technology sectors are anticipated to generate the highest percentage earnings growth in the same period.

Such optimism is already fuelling FBM KLCI’s rise, despite the absence of foreign fund inflows.

Foreign investors have been net sellers almost every month this year- except for May and September - leading to a cumulative net outflow of RM21.5bil year-to-date.

BIMB Securities director of research Mohd Redza Abdul Rahman said there are already signs of “tentative confidence” returning into the market, despite recent profit-taking activities.

However, he pointed out that conviction remains selective, rather than broad-based.

Mohd Redza made the comment after FBM KLCI rallied to its best year-to-date performance last week, up by 0.7% week-on-week.

This raises a key question for investors, how long can the uptrend sustain?

TA Research head of research Kaladher Govindan said January may bring “short-term caution” as profit-taking weighs on sentiment.

“Yet the broader structure remains constructive, with potential for new highs before political and macroeconomic factors trigger the next corrective phase.

“The ability of the index to recover despite persistent foreign outflows underscores the strength of domestic liquidity, which is likely to remain a key support in the months ahead.”

In a note to clients, Kaladher further added that seasonal trends provide some encouragement.

Historical data from 1977 to 2025 shows equities tend to perform better between November and April, with a gain probability of 72.9% and an average return of 8.4%.

This suggests the benchmark index could resume its upward trajectory after a brief profit-taking phase in January.

“Our long-held view remains intact that the major bull cycle that began from the March 2020 low of 1,207.8 is still alive, with room to test fresh highs ahead of the next general election, scheduled for December 2027 unless called earlier.

“This cycle mirrors the earlier uptrend that began from the October 2008 low of 801.27, peaked at 1,896.23 in July 2014, and eventually corrected into the Covid-19 low of 1,207.80.”

For 2026, TA Research retains a cautiously optimistic view of the stock market.

This will depend on five interconnected drivers, which are timely reforms, robust foreign direct investments, strong consumption, corporate earnings recovery, and capital inflows supported by a dovish tilt in US monetary policy.

These drivers form a reinforcing ecosystem where reforms create fiscal space that attracts foreign direct investments (FDI), FDI boosts productivity and wages, consumption strengthens earnings, and ringgit appreciation stabilises sentiment.

Together, they position Malaysia not merely as an emerging market story, but as a reform-driven, consumption-led, globally integrated economy, said Kaladher.

“The interplay of these forces makes Malaysia’s equity outlook in 2026 particularly compelling.

“Sector leadership ensures growth is distributed across industries, enhancing resilience and investor appeal.

“This virtuous cycle is likely to attract higher allocations to Malaysian equities, rewarding the combination of structural reforms, external competitiveness, and domestic strength,” he said.

Looking ahead into 2026, TA Research’s key investment themes are energy transition; digital economy and infrastructure; robust consumption and tourism; fundamentally solid blue chips; and small to mid-cap growth stocks.

“These themes are supported by fiscal reforms and steady foreign investment inflows, offering investors a diversified pathway to capture Malaysia’s evolving growth story,” according to Kaladher.

In a separate note, Apex Securities remains positive on selective power-ancillary and renewable energy names.

This is underpinned by long-term energy transition trends that support earnings resilience and ongoing investor rotation amid prolonged global trade uncertainty.

“We also expect the global technology sector to remain resilient going into next year, which should benefit selected local technology and artificial intelligence-related stocks.

“We favour domestic-oriented consumer staples, supported by a firmer ringgit and an improving domestic economic outlook,” added Apex Securities.