KUALA LUMPUR (Dec 12): Mid- and small-cap stocks in Malaysia are set for a potential rebound in 2026, according to RHB Research.

Both the FBM 70 (-9.9%) and FBM Small Cap Index (-11.3%) posted a laggard performance in 2025, significantly underperforming the FBM KLCI (-0.1%).

In a note on Friday, the firm said after a weak 2025, the FBM 70 and FBM Small Cap Index are expected to benefit from historically alternating cycles of outperformance, lower valuations, and strong domestic liquidity.

“While the small- and mid-cap space is often favoured for its higher growth potential, we advocate a balanced strategy combining both value and growth names in the current environment,” RHB said.

It advises investors to focus on companies with solid earnings, stable margins, healthy cash flow and sustainable dividends, balancing growth and value amid global uncertainties.

Supportive domestic policies, such as the National Energy Transition Roadmap, the New Industrial Master Plan 2030 and Visit Malaysia 2026, alongside a weaker US dollar and corporate restructuring initiatives, are expected to boost sentiment.

Sectors likely to outperform include consumer, construction, industrial products, logistics, oil and gas, technology, and green energy. Laggard stocks may see renewed interest amid potential sector rotation and cyclical recovery.

It expects Malaysia’s economy to grow 4.7% in 2026, but the global outlook is uncertain. US economic and political developments — including inflation, US Federal Reserve decisions on interest rates, tariffs, US mid-term elections, and a potential lame-duck president — could create market volatility. A declining US dollar may also impact export-focused sectors.

RHB said a defensive start is recommended, but 2026 will likely be a trading market requiring nimble investors.

It is “overweight” on banks, energy, consumer, healthcare, property, basic materials, construction, real estate investment trusts, and technology. RHB expects the FBM KLCI to reach 1,720 points by the end of 2026, based on companies earning 15 times their projected financial year 2027 profits.