KUALA LUMPUR (July 9): Bursa Malaysia will be largely in risk-off mode in the coming months amid domestic political uncertainties and external geopolitical risks, said UOB Kay Hian.

Investors are on guard following the unexpected early dissolutions of the state assemblies in Johor and Negeri Sembilan, the research house flagged. That has raised the chances of national elections being called before the year ends and produce a hung Parliament, the house noted.

“We expect Malaysian equities to navigate a more challenging operating environment” in the second half of 2026, UOB Kay Hian said in a note, advising clients to stay defensive.

Malaysian stocks have underperformed most Asian and Southeast Asian markets, even as the ringgit outperformed. The FBM KLCI has lost most of its gains and the index is now near where it ended 2025.

Still, the economy has performed better than most of its neighbours with 5.4% year-on-year expansion in the first three months of 2026, while inflation remained largely benign at 1.6%.

However, there are risks that domestic spending, the main engine of economic growth, and corporate earnings momentum could also slow with secondary inflationary from the Iran conflict creeping in, UOB Kay Hian cautioned.

“Companies operating in highly competitive industries or those with limited pricing power are likely to absorb a greater share of the cost increases, leading to margin compression and slower earnings growth,” the house flagged.

Coupled with weaker consumer demand and elevated operating costs, profitability is expected to come under pressure across the consumer, industrial and selected manufacturing sectors, the house said.

UOB Kay Hian is optimistic on recovery of Malaysian equities by the year-end, as political uncertainties subside and foreign direct investments pour into onshoring, data centres, and semiconductors.

For strategy, the house is recommending that investors seek shelter in particularly liquid and high-yielding large-cap stocks but 'overweight' on investment themes such as renewable energy, utilities, plantation, and artificial intelligence hardware and software beneficiaries.