• External headwinds may drive further market volatility in 3Q25, but we expect a rebound in 4Q25 on improved trade clarity and easing geopolitical tensions. We expect increasing rotation into small-mid caps as funds shift out of defensive large-cap names
• Downgrade Gaming and Telecom sectors to Neutral; Initiate coverage on Plantation. SD Guthrie and TM are added to our large-cap Top Buy list, replacing Public Bank and NationGate. Our small-cap picks remain unchanged
• Lower our end-2025 KLCI target to 1,610. Maintain NEUTRAL on the market with OVERWEIGHT calls on 8 sectors

Malaysia equities struggled on risk-off sentiment

Lingering policy ambiguity has been a key overhang for Malaysian equities. The KLCI has shed 8.6% YTD, making it the second worst performing market in SEA. Small caps have not been spared, with the FBM Small Cap index declining 16.0% YTD amid subdued liquidity and a rotation into defensive large-cap names. The Malaysian equity market recorded US$2.5bn net foreign outflows in 1H25, marking the most significant exodus since 2018-19.

Tariff concerns will begin to abate

The US tariff may trigger another bout of volatility in 3Q25 as markets digest the decision and its post-90-day implications. Our base case assumes a more constructive resolution, with Malaysia likely to take a pragmatic stance in exchange for tariff relief, which could support a market recovery in 4Q25. A de-escalation in trade tensions could see rotation of foreign capital back into US assets, leading to a mild depreciation of the Ringgit toward RM4.30:US$1 by year-end. Malaysia's inflation is expected to stay low at 2% in 2025E, supporting BNM's decision to maintain OPR at 3%. Our 2025E GDP forecast is revised down to 4.3%.

Overweight on 8 key sectors

We maintain OVERWEIGHT on the Banking, Construction, EMS, Healthcare, Industrial (data centres), Oil and Gas, Renewable Energy, and Transport sectors, largely reflecting our conviction in industries that benefit from long-term policy and rising domestic investment. While we retain a neutral stance on the Technology sector, we see merit in selective exposure given its high beta and tendency to outperform during a market upcycle.

Backing the structural winners

Our strategy continues to favour a selective approach, focusing on durable growth themes that can withstand external headwinds, as we believe structural growth stories offer sustainable re-rating potential and tend to outperform over the long term. We prefer sectors supported by megatrends with strong earnings visibility and enduring tailwinds: 1) sustained FDI inflows, 2) acceleration in infrastructure investment, 3) supply chain reconfiguration, 4) energy transition, and 5) data centre expansion.

Maintain Neutral with revised year-end KLCI target of 1,610

We reiterate our Neutral call on the market with a revised year-end KLCI target of 1,610 (from 1,700), based on a lower target PE multiple of 15x. Our KLCI EPS growth forecast has been reduced to 3.5%/5.6% for 2025/26E, compared to 7.4%/7.2% for our coverage universe. We downgrade the Gaming and Telecom sectors to NEUTRAL (from Overweight) and have recently initiated coverage on the Plantation sector. Notable changes in this report include our TP cuts across the Rubber Glove sector and downgrade on SunCon to Sell (from HOLD) following strong share price rally.

Source: Phillip Capital Research - 23 Jun 2025