FBM KLCI ends 2025 on firmer footing

PETALING JAYA: The Malaysian stock market ended 2025 on firmer footing, even as foreign fund outflows and external macroeconomic uncertainties lingered through much of the year.

This was supported by a strengthening ringgit, economic growth and easing global monetary conditions.

The FBM KLCI closed near its 52-week high of 1,684.53 at 1,680.11 yesterday, delivering a 2.3% year-to-date (y-t-d) gain on a turnover of 1.72 billion securities.

iFAST Capital research analyst Kevin Khaw Khai Sheng said the market was supported by strong participation from institutional funds in 2025, with fund managers focusing on large-cap stocks, while consumer-related stocks also benefitted from government cash handouts.

Looking ahead, Khaw said the market is expected to be more domestically driven, with sectors such as banks, construction, consumer and renewable energy serving as key investment themes, supported by the implementation of the government’s economic and policy frameworks.

“Policy continuity under initiatives outlined in the Madani economic blueprint, like the National Energy Transition Roadmap and the New Industrial Master Plan, as well as the continuation of cash assistance programmes, should support the aforementioned economic sectors this year.

“Moreover, the construction sector is poised to benefit from ongoing flood mitigation projects. Another positive driver includes the expected growth opportunities from the Johor-Singapore Special Economic Zone (JS-SEZ),” he told StarBiz.

The local market saw net foreign equity outflows amounting to RM21.65bil y-t-d. However, local institutional funds stepped up with net inflows of RM21.47bil over the same period.

Despite this, Khaw anticipates foreign net inflows into the domestic market this year, as investors diversify away from US assets amid easing US dollar strength, political and institutional uncertainty surrounding the Federal Reserve’s (Fed) independence following new board and chair nominations, as well as rising concerns over US debt levels.

“Investors are increasingly seeking to diversify their exposure. Previously, capital had largely flowed into the United States, but heightened tariff uncertainties, rising US debt levels and US dollar volatility are now prompting investors to reassess their positioning.

“In this context, Malaysia is viewed as a relatively attractive destination due to its relatively more favourable tariff positioning and neutral stance amid trade and geopolitical risks,” he said.

Further, projected fund outflows from the US market are expected to result in incremental flows into safer or higher-yielding Asian currencies, including the ringgit.

Rakuten Trade head of equity sales Vincent Lau said that while this may be the case, he does not expect the easing of the US dollar carry advantage to push the ringgit significantly stronger from current levels.

“The US dollar has already weakened a fair bit. Levels around 4.00 are quite good, and anything lower may not be ideal for Malaysia, as we remain an export-driven economy. Around four is quite acceptable,” he said.

“My expectation for the US dollar–ringgit pair this year is around 4.05 to 4.10. I don’t think it will move significantly below that level, and any dip below four would likely be temporary,” he said.

Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid said the Fed’s decision on interest-rate cuts carries a lot of weight on the ringgit’s outlook.

Markets have currently priced in two rate cuts for 2026 via the CME FedWatch Tool, with probabilities showing a likely hold at the Jan 28 to 29, 2026 meeting.

Futures pricing reflects caution following the December cut, with expectations shifting toward a slower pace amid resilient jobs data and sticky inflation, compared with earlier, more aggressive cut forecasts.

Amid growing uncertainties and volatility in the US market, Malaysia’s bond market emerged as a key beneficiary in 2025, attracting steady inflows.

The ringgit has remained resilient despite substantial foreign equity outflows, as capital continues to circulate within Malaysia, with funds shifting from equities into the bond market amid expectations of further rate cuts by the Fed this year.

Foreign holdings of Malaysian Government Securities increased month-on-month to RM298bil in November 2025 from RM292bil in October 2025, and were also higher year-on-year (y-o-y) compared with RM277bil in November 2024.

iFAST Capital’s Khaw said bond inflows helped cushion broader market volatility, as investors sought safer assets amid uncertainties surrounding global growth, tariffs and equity valuations.

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“A lot of the inflows into Malaysia last year went into bonds, as yields remained relatively stable and attractive compared with other markets,” Khaw said, adding that the bond market benefitted from expectations of further monetary easing.

Looking ahead, he expects the bond market’s performance in 2026 to be more measured, as the scope for further gains narrows.

While additional rate cuts by the Fed and a potential insurance rate cut by Bank Negara Malaysia could provide some support, Khaw noted that the impact may be partly offset as global yields stabilise.

“At this stage, bond yields are already relatively stable, so further upside could be limited. In relative terms, equities may look more attractive than bonds,” he said.

Meanwhile, the precious metal complex had a strong year with gold rising 65.7% y-o-y, from around US$2,630 per troy ounce at the end of 2024 to US$4,349 per troy ounce by Dec 30, 2025.

The rally was driven by central bank buying, trade tensions, and de-dollarisation trends.

Many anticipate the rally to continue into 2026 on the back of persistent geopolitical risks and expected Fed easing.

​On the alternative asset side, Bitcoin, the most popular cryptocurrency, went on a rollercoaster ride in 2025, surging from early April lows before suffering a sharp decline from early October that wiped out earlier gains. Bitcoin is down by 14% y-t-d.

Against this backdrop, UOB senior economist Julia Goh said the country’s gross domestic product growth in 2026 is expected to remain steady at 4.5%, reflecting a slight moderation from the projected pace in 2025.

“Growth this year is expected to be supported by newly implemented fiscal measures designed to boost private consumption and investment, as well as the Visit Malaysia 2026 campaign,” she said.

Goh added that on the external front, the outlook should be buoyed by artificial intelligence (AI) and technology-driven investments, continued fiscal stimulus and policy support, the ongoing restructuring of global trade benefitting emerging markets and Asean, resilient regional economies, and a more accommodative US interest-rate environment.

Nevertheless, she cautioned that downside risks warrant attention.

These include potential financial shocks from elevated valuations in AI-related equities, renewed inflationary pressures stemming from tariff impacts amid resilient demand, deepening labour market weakness in advanced economies, and heightened political and geopolitical uncertainties.

“A key risk event to monitor will be the US mid-term elections in November 2026,” Goh said.

Khaw said political developments remain a key wildcard for the domestic market, cautioning that a more volatile political environment – including uncertainty over the possibility of an early general election – could weigh on investor sentiment.

He added that risks linked to AI could ultimately outweigh tariff-related concerns, as tariffs have largely been anticipated and priced in by markets.

“In contrast, concerns over a potential AI bubble remain elevated, particularly over whether major technology and semiconductor players can continue delivering outsized earnings growth and successfully monetise heavy investment spending.

“If monetisation takes longer than expected (with 2026 widely seen as a key test year), it could emerge as a major source of volatility and a broader drag on markets,”Khaw said.