This article first appeared in Capital, The Edge Malaysia Weekly on December 29, 2025 - January 4, 2026

Head of Research, Maybank Investment Bank

Christmas brings hope. A new year rings in new beginnings. Look ahead for better times as Malaysia enters 2026 with a clearer sense of direction, firmer domestic fundamentals and improving execution visibility, setting the stage for a more constructive equity market backdrop.

While global growth remains moderate and external uncertainties persist, the country’s growth narrative continues to be internally generated, anchored by resilient domestic demand and a sustained investment upward cycle.

Global economic growth is expected to remain moderate in 2026, with world gross doemstic product (GDP) expanding 2.8%, reflecting stable US growth, a slowing but still expanding China, and a gradual tapering in Asean-6 growth. Importantly, the impact of Trump-era tariffs has thus far been benign, with global trade volumes, industrial output and supply chain stress indicators showing no material deterioration relative to earlier tariff episodes. Trade uncertainties have eased somewhat following reciprocal tariff finalisation, trade deals with key partners and the current US-China truce, although product-specific tariffs — particularly on semiconductors and related equipment — remain a key overhang.

The artificial intelligence (AI)-driven technology upward cycle continues to provide an important buffer to global growth, supported by robust semiconductor sales, strong data centre demand and elevated capital expenditure (capex) by major US technology companies. In parallel, the global monetary policy easing cycle, led by the US Federal Reserve, is mitigating downside risks to growth amid moderating inflation and a softer US dollar.

Domestically, GDP growth remains driven by resilient domestic demand amid volatile net external demand. Real GDP growth is projected at 4.5% in 2026, supported by steady private consumption and sustained gross fixed capital formation. Consumer spending remains underpinned by income-related measures in Budget 2026, steady private sector wage growth, low unemployment and tourism recovery ahead of Visit Malaysia 2026, while the investment upward cycle continues to be supported by robust approvals and high implementation rates.

External risks persist

Trade tensions, AI valuation concerns and domestic political developments remain wildcards. However, one implication of the evolving political cycle is likely faster and more timely budget execution, particularly for infrastructure and essential public services, which support domestic activity.

We expect 2026 to be pulsed with a clearer sense of direction and a stronger push to deliver on long-promised reforms. Project rollouts are gathering momentum, businesses are revving up capex, and households are benefiting from steadier wages and improved sentiment. Taken together, these shifts create a backdrop that is materially more constructive for equities.

After several years defined by policy announcements and planning frameworks, 2026 is the year where results take centre stage. The transition from policy articulation to execution is critical to restoring investor confidence, as it demonstrates tangible milestones, clearer project visibility and a more predictable base for corporate investment decisions.

Investment activity picking up where it matters

Investment momentum is increasingly visible in equity-relevant segments. Approved investments continue to signal optimism among corporates, particularly in data centres, industrial buildings, power and utilities, transport infrastructure and technology-related manufacturing upgrades. Gross fixed capital formation trends point to a sustained investment upcycle extending into 2026.

Data centres remain a central pillar of this investment narrative, with a deep and expanding pipeline across Johor and the Klang Valley. Importantly, opportunities are broadening beyond core civil works into power connections, substations, cooling systems, mechanical and electrical (M&E) services and fit-outs, supporting a wider ecosystem of contractors; engineering, procurement, construction and commissioning (EPCC) players; and specialist engineering players. We believe there are still jobs to be announced in 2026, which should continue to excite the construction and M&E space.

Beyond data centres, multi-year infrastructure pipelines — rail, highways, ports, water and utilities — provide further visibility. State-driven development corridors, particularly the Johor-Singapore Special Economic Zone (JS-SEZ), add another layer of investment and execution momentum.

Household conditions stabilising, supporting domestic demand plays

Household conditions have stabilised meaningfully. Concerns over RON95 subsidy rationalisation have largely passed, wage adjustments are manifesting through civil service and minimum wage revisions, and employment trends remain resilient. These dynamics should ensure consumer staples, retail and mass-market discretionary spending remain resilient into 2026.

Banking data reinforces this view. Growth in non-residential property loans — especially industrial buildings, factories and land — remains robust, while household loan applications for mortgages and auto loans are on an upward trend. This supports a constructive outlook for banks and domestic consumption-linked sectors.

Five themes for 2026, with banks as the backbone

We frame five key themes for 2026 that reflect policy delivery, capital allocation and execution momentum:

1.    Infrastructure-driven growth — Benefiting contractors, M&E and EPCC players as projects transition decisively into execution.

2.    Energy transition and utilities — Riding grid upgrades, renewable energy investments and rising power demand from data centres and industrial activities.

3.    Resilient consumer spending and healthcare demand — Supported by steady wages, cash assistance, medical tourism and demographic trends.

4.    State-driven development corridors — Led by JS-SEZ, with spillover effects across property, logistics, construction and services.

5.    Selective tech recovery and digital initiatives — Focused on automation, software, semiconductor supply chains and data centre ecosystems.

Banks remain the overarching thematic, acting as the financing backbone across infrastructure, energy projects, corporate capex and household consumption.

With a better year ahead expected, we set our year-end 2026 FBM KLCI target at 1,730 (15x 2027E price-earnings ratio). From a bottom-up perspective, the FBM KLCI could reach 1,780, driven primarily by large-cap banks, Tenaga Nasional Bhd (KL:TENAGA) and Gamuda Bhd (KL:GAMUDA).

By sector weight, banks are upgraded to “positive”, reflecting improved operating outlooks, asset quality resilience and their central role in funding domestic growth. Gloves are upgraded to “neutral”, while we remain “positive” on construction, consumer, healthcare and renewable energy, anchored on domestic-centric drivers. We are also “positive” on aviation and real estate investment trusts underpinned by the tourism thematic, though we are a little cautious on the REITs, with the withholding tax slated to lapse by end-2025. We are “neutral” on key sectors — plantations, telcos and utilities — while we stay “negative” on petrochemicals.

Our top picks are Tenaga, CIMB Group Holdings Bhd (KL:CIMB), Press Metal Aluminium Holdings Bhd (KL:PMETAL), IHH Healthcare Bhd (KL:IHH), SD Guthrie Bhd (KL:SDG), Nestlé (M) Bhd (KL:NESTLE), Gamuda, Westports Holdings Bhd (KL:WPRTS), Eco-Shop Marketing Bhd (KL:ECOSHOP), Frontken Corp Bhd (KL:FRONTKN), Pavilion REIT (KL:PAVREIT), Solarvest Holdings Bhd (KL:SLVEST), MN Holdings Bhd (KL:MNHLDG), ITMAX System Bhd (KL:ITMAX) and Northeast Group Bhd (KL:NE).

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