KUALA LUMPUR (Dec 10): MIDF Research expects the FBM KLCI to continue to climb and hit 1,800 points by the end of 2025, supported by foreign fund inflows cued by the global easing environment, positive fundamental growth in corporate earnings, as well as undemanding stock valuations.

But due to recurring economic fears in the US and escalation in geopolitical uncertainties, MIDF’s head of research Imran Yassin Md Yusof is advocating that investors take up positions in defensive sectors.

Based on MIDF’s baseline scenario, Malaysia’s gross domestic product (GDP) is expected to grow 4.6% in 2025, supported by sustained growth in domestic demand and external trade recovery. Under this backdrop, the FBM KLCI is forecast to register a 9% year-on-year earnings growth in 2025.

“Applying the price-earnings ratio of 15.4 times to the FBM KLCI, which is almost the same as last year, we arrived at the 1,800 KLCI target,” said MIDF head of strategy Syed Muhammed Kifni Syed Kamaruddin, while emphasising earnings growth as the key driver for the higher target.

In terms of macro, private consumption is seen to be supported by a healthy labour market, higher salaries for civil servants, and increased tourist spending, according to MIDF economist Abdul Muizz Morhalim.

He also sees higher inflation next year, mainly because of policy changes, which may put a slight pressure on purchasing power.

Nevertheless, overall demand could still be supported, as he thinks Bank Negara Malaysia (BNM) will keep the overnight policy rate (OPR) unchanged at 3% in 2025, as price pressures from demand should be well contained.

MIDF expects the ringgit to strengthen to 4.23 against the US dollar in 2025, amid the possibility of interest rates declining globally, especially in the US and the EU, that could give rise to positive interest rate differentials between Malaysia and the US, that would lend support to the ringgit.

“Empirically, a stronger ringgit would attract net inflow of foreign funds into the local equity market, and vice versa,” explained Syed Muhammed Kifni.

The local and broader Asean equity markets will stand to gain from increasing global financial liquidity arising from global rate cuts and additional stimulus by China to pump-prime its economy, he added.

Syed Muhammed Kifni also warned that several time-tested leading economic signals have continued to point to a potential slowdown in the US economy.

But barring any major economic malaise or recession, should the US stock indices, which are trading at their record highs, come off those highs, MIDF thinks this could present an opportunity for investors in the local market, as funds may relocate into laggard markets like the KLCI.

“The early August equity market selloff in reaction to below-expected US payroll figure was a stark reminder of how fickle investors can behave,” Syed Muhammed Kifni said.

As such, Imran Yassin advises investors to position themselves in defensive sectors such as banking, real estate investment trusts (REITs) and consumers, to ride out market turbulence.

The banking sector was picked because of stable loan growth and stable asset quality, while REITs are favoured because of positive earnings outlook, underpinned by positive rental reversions. The consumer sector, particularly the staples, was picked because it has been a market laggard.

Imran Yassin prefers to stay away from export-driven sectors such as technology, gloves and transportation, which are highly susceptible to US’ trade war policy.

Other sectors that have received a positive outlook rating by MIDF are: construction, oil and gas, plantation, property, and healthcare.

Its overall top 10 stock picks for 2025 are: Leong Hup International Bhd (KL:LHI), Malayan Cement Bhd (KL:MCEMENT), Fraser & Neave Holdings Bhd (KL:F&N), Axis REIT (KL:AXREIT), Malayan Banking Bhd (KL:MAYBANK), Petronas Dagangan Bhd (KL:PETDAG), Pavilion REIT (KL:PAVREIT), Public Bank Bhd (KL:PBBANK), Hong Leong Bank Bhd (KL:HLBANK) and CIMB Group Holdings Bhd (KL:CIMB).