Can Malaysia break the FBM KLCI's 'lost decade' curse?

KUALA LUMPUR: Malaysia's stock market is approaching a critical test as two major reforms take shape, but whether they can finally help it break out of what many describe as its "lost decade" remains an open question.

The FTSE Bursa Malaysia KLCI (FBM KLCI) continues to trade below its historical valuation despite the country's economic expansion over the past decade, which has fuelled business growth and earnings.

Yet that growth has not translated into sustained gains for the benchmark, which stubbornly remains below its all-time high of 1,895.18 points recorded in April 2018.

According to MBSB Research, the FBM KLCI is currently trading at 14.8 times its 2026 earnings, below its 10-year average of 16 times, while consensus estimates point to 8.4 per cent earnings growth this year.

This means investors were previously willing to pay RM16 for every RM1 of annual earnings generated by the companies in the index. Today, they are paying 7.5 per cent less.

The FBM KLCI last closed at 1,630.87, down 13.95 per cent from its 2018 peak. It has since struggled to reclaim the 1,800-point mark, although investors would have earned additional returns through dividends.

MBSB Research has set an end-2026 target of 1,770 points and a preliminary target of 1,850 points for 2027. But what would it take for the benchmark to break through the 1,900-point mark?

The firm's research head Imran Yassin Md Yusof said the experiences of stock markets in Singapore, Japan and South Korea show that prolonged stagnation need not be permanent, and Malaysia could follow a similar path.

He said the "lost decade" description was more applicable to the FBM KLCI than to Bursa Malaysia as a whole, as the broader market, particularly mid-cap stocks, had performed better.

Year to date, the FBM Mid 70, which tracks mid-cap stocks, has risen 629.46 points, or 3.74 per cent, to 17,481.93. In contrast, the FBM KLCI has fallen 38.89 points or 2.33 per cent.

For the benchmark to achieve a sustained breakout, Imran said Malaysia would need to draw lessons from its regional peers, strengthen domestic investor participation and ensure that its planned reforms deliver tangible results.

LESSON FROM REGIONAL MARKETS

Singapore offers a particularly relevant comparison, having experienced its own prolonged period of stock market stagnation before the Straits Times Index (STI) broke out of its previous trading range.

The STI surpassed its previous record closing high of 3,906.16 points, set in October 2007, in February 2025 after more than 17 years, before climbing to a fresh record close of 5,801.96 points on Sept 4 this year.

Imran attributed part of the renewed interest in Singapore's market to initiatives aimed at improving corporate value, capital allocation and investor engagement.

Singapore introduced its Value Unlock Programme in 2025 to encourage listed companies to strengthen their corporate strategies, improve capital allocation and communicate more effectively with investors.

Japan and South Korea have also pursued measures to encourage listed companies to improve shareholder value.

Japan's Nikkei 225 surpassed its 1989 record in February 2024 after more than three decades, while South Korea's Kospi has recorded substantial gains, supported by domestic investors and the performance of major technology companies.

Imran said South Korea's experience demonstrated that a stock market could advance despite foreign fund outflows.

"Despite South Korea having consistently been seeing net foreign fund outflows, the domestic market is vibrant enough to take the index higher," he told Business Times in an interview.

He said Malaysia could similarly benefit from a stronger domestic investor base rather than depending too heavily on foreign capital.

"The domestic investors have more confidence in overtaking the foreigners in that sense. So it's not impossible for Malaysia to similarly see the same, potentially," he said.

While different factors have driven the recovery of these markets, Imran said their experiences offer Malaysia valuable lessons as it seeks to break out of its prolonged stagnation.

MALAYSIA'S TWO MAJOR REFORMS

The MY Value Up Programme, introduced by the Securities Commission and Bursa Malaysia in April, aims to encourage listed companies to strengthen their fundamentals, improve capital allocation and communicate their value more effectively to investors.

The programme initially targets 88 listed companies that collectively account for about 80 per cent of Bursa Malaysia's total market capitalisation.

Imran said the initiative could provide Malaysia with a catalyst similar to the programmes introduced in other Asian markets, particularly Singapore.

The key would be ensuring that companies translate the programme's objectives into tangible improvements, he added.

The second reform is the planned expansion of the FBM KLCI from 30 to 50 constituents, beginning in December 2026 and scheduled for completion in June 2027.

Imran said the change could address one of the benchmark's structural weaknesses by making it more representative of Malaysia's broader economy.

The existing index comprises just 30 companies out of more than 1,000 listed on Bursa Malaysia, with banking stocks accounting for about 40 per cent of its weighting.

That concentration means the benchmark does not fully capture growth across other sectors, including technology, retail and construction.

"So, the market overall could be doing well, but if the index is not, then people will say the market is bad," he said.

"By increasing it to 50 stocks, it is a bit more reflective, I guess, of Malaysia's economy."

A broader index could give greater representation to companies benefiting from newer growth areas, although its eventual performance would still depend on the constituents selected and their respective weightings.

EXECUTION HOLDS THE KEY

Beyond the two reforms, Imran said stronger domestic participation would be essential to sustaining a recovery.

He pointed to the surge in retail trading during the Covid-19 period as evidence that local investors could make a meaningful contribution to market activity.

Greater participation by institutional and retail investors could deepen liquidity and reduce the market's dependence on foreign fund flows.

He also said attracting larger, higher-quality listings could help generate investor interest, rather than focusing solely on the number of initial public offerings.

Ultimately, Imran said, the challenge was not a lack of initiatives but ensuring that they were implemented effectively.

He cited Singapore's experience, where companies had taken steps such as improving capital allocation and undertaking share buybacks as part of broader efforts to enhance shareholder value.

"I think implementation will be the key here," he said.

As for when Malaysia might finally break out of its prolonged stagnation, Imran was reluctant to name a specific year, citing uncertainties in the global market.

He expressed hope that Malaysia could emulate the experience of its regional peers by the end of the decade, but said the timing would depend on how effectively the reforms were carried out.

"Whether it's going to come in 2027, or 2028, or 2029, it depends, really," he said.