KUALA LUMPUR (Jan 6): Malaysia will have to rely more heavily on domestic demand this year as its external engine of growth may sputter from US tariffs.

Overall corporate earnings growth will accelerate this year and provide support for share prices to rally, according to a consensus of sell-side analyst estimates. The ringgit is also widely expected to appreciate further against the US dollar this year after a stellar 2025.

The real test will be the effects of the US tariffs and their spillover on domestic demand, Lee Heng Guie, executive director at think tank Socio-Economic Research Centre, told The Edge. Whether private consumption can continue to carry the economy is also an open question, he said.

The official forecast calls for the economy to expand 4.0%-4.5% this year, moderating slightly from the pace in 2025, powered largely by domestic consumption and investments. An influx of foreign tourists will also keep the domestic growth engine humming.

Malaysian consumers are entering 2026 on a firm footing. A tight labour market, government cash assistance and a scheduled civil service salary hike are expected to sustain household spending. Inflation, meanwhile, remains benign thanks to subdued prices of commodities.

The strong growth in business investments could moderate next year as the wave of data centre investments reaches its tail-end, said Lee.

Despite the supportive domestic backdrop, risks to growth remain tilted to the downside, said Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

“Downsides centre on a heavier-than-expected drag from the existing US tariff regime, uncertainty around sector-specific trade measures, geopolitical disruptions to trade and energy flows, and sustained volatility in global financial markets,” he said.

Bank Negara Malaysia is widely expected to keep the benchmark overnight policy rate unchanged this year, drawing comfort from steady growth and tame inflation that will also provide a backstop for the ringgit.

The ringgit has strengthened more than 10% against the US dollar in 2025, making it Asia’s top-performing currency. The local currency ended last year at around 4.06 versus the greenback, and may appreciate to as high as 3.95 by the end of this year, according to a Bloomberg survey.

Apart from looser US monetary policy, the ringgit will also benefit from sustained foreign direct investment and robust tourist arrivals with the Visit Malaysia Year campaign, said TA Securities.

Foreign investors, which have sold their holdings of Malaysian stocks to near historical lows, are also expected to return in droves with lower US interest rates and clarity on US trade policy. All in all, Bursa Malaysia is set for a bull run after underperforming its regional peers, analysts said.

The FBM KLCI could climb to 1,821 points, according to the aggregated target prices of the 30 companies in the FBM KLCI for the next 12 months compiled by Bloomberg. Total earnings could expand 7% this year, more than double 2025’s pace.

KLCI earnings growth will be driven by Tenaga Nasional Bhd (KL:TENAGA), CIMB Group Holdings Bhd (KL:CIMB), Gamuda Bhd (KL:GAMUDA) and Public Bank Bhd (KL:PBBANK) — the four companies together provide more than half of the estimated growth, according to CIMB Securities.

“If achieved, this would mark the fifth consecutive year of corporate earnings growth for Malaysia’s KLCI,” the research house added.

UOB Kay Hian also points to a potential boost for the KLCI from the next national elections that must be held by 2028 but may be called earlier in 2027, noting positive returns in the 12-month periods in the run-up to past elections.

“The index should play catch-up and reverse 2025’s regional underperformance,” UOB Kay Hian said and cautioned that investors may turn risk-off towards the end of 2026.