The Market Is Rising. But How Much of It Is Actually Participating?

01What an index level does and does not tell you

Most headline equity benchmarks, including Malaysia's FTSE Bursa Malaysia KLCI (FBM KLCI), weight constituents by market capitalisation. The FBM KLCI selects its constituents by ranking eligible Main Market companies on full market capitalisation, and currently represents approximately 60% of Main Market capitalisation.^1,2 A one-percent move in the largest constituent therefore carries far more weight than the same move in the thirtieth.

Think of a class average in which the marks of a few students are counted many times over. If those students do well, the average looks healthy, even if most of the class struggled. A capitalisation-weighted index works the same way: it tells an investor what happened to the aggregate value of the largest companies, not what happened to the typical company, and not whether the advance was shared.

That design is deliberate: it makes an index investable and representative of where capital actually sits. But it means the index answers a narrow question, and other measures are needed to answer the rest.

Breadth fills that gap. Simple measures include the ratio of advancing to declining stocks, the share of constituents trading above their longer-term averages, and the gap between capitalisation-weighted and equal-weighted returns. On 29 September 2026, for example, the FBM KLCI fell 1.56% to 1,643.96; 22 of its 30 constituents declined, and across the broader market decliners outnumbered advancers by 684 to 412.³ That was a broad decline. A narrow one, in which the index falls on weakness in two or three heavyweights while most stocks hold, would warrant a different interpretation.

02Capitalisation-weighted versus equal-weighted

The divergence between the two approaches is easiest to see in a simplified example. Exhibit 1 sets out a hypothetical ten-stock index in which the three largest constituents rise and most of the remainder fall.

Neither number is wrong. The capitalisation-weighted figure correctly measures the change in aggregate value; the equal-weighted figure correctly measures the experience of the typical holding. The analytical point is that a widening gap between them is information. It signals that returns are being generated by a shrinking set of companies, which increases the portfolio's exposure to company-specific and sector-specific shocks.

The concern is not confined to Malaysia. The IMF's April 2026 Global Financial Stability Report found equity-market concentration near the top of its historical range in several major markets, including Korea and the United States, and noted that high concentration increases vulnerability to sector- or firm-specific shocks.⁴

03Earnings growth or multiple expansion?

A price return can be decomposed, approximately, into the change in earnings and the change in the valuation multiple applied to those earnings. The distinction matters because the two components behave differently. Earnings growth is anchored in revenue, margins and cash generation. Multiple expansion reflects what investors are willing to pay for those earnings, which depends on interest rates, risk appetite and narrative.

In the earnings-led case, the market has largely paid for delivered results. In the multiple-led case, it has paid in advance for results not yet delivered, leaving the return more exposed to a rise in discount rates or a disappointment in guidance. The IMF illustrated a related dynamic in early 2026: its staff attributed roughly 7 of a 12-percentage-point rise in cumulative returns among a cluster of AI-linked firms between September and December 2025 to mutually reinforcing price correlation within the group rather than to earnings.⁴

A widening gap between the headline index and the typical stock is not noise. It is information about how concentrated the market's risk has become.

04Sector leadership and the Malaysian benchmark

Concentration in Malaysia has historically been as much about sectors as about individual names. Bursa Malaysia and FTSE Russell have announced that the FBM KLCI will expand from 30 to 50 constituents, the first change to its methodology since it was reduced from 100 to 30 constituents in 2009. Their simulations indicate that the expansion would bring Technology, Energy and REITs into the index for the first time and moderate the weight of Financial Services.⁵

The change will be phased in. New constituents enter at half their final weight on 21 December 2026 and at full weight on 21 June 2027, and coverage of Main Market capitalisation is expected to rise from approximately 60% to approximately 70%. A proposed 10% single-company cap was considered and not adopted.¹

Two practical consequences follow. First, comparisons of FBM KLCI performance across the transition will compare different baskets, so long-run return and valuation series should be read with that in mind. Second, the sector composition of the benchmark is moving closer to the composition of the economy's growth: the World Bank has reported that AI-related products accounted for more than 70% of Malaysia's export growth in early 2026.⁶ Greater representation of technology-linked companies may broaden the index, but it may also import a new source of concentration.

05Regional dispersion and the currency layer

Southeast Asian markets have not moved together. According to figures compiled by CIMB Securities, in the first eight months of 2026 Thailand's SET Index rose 26.6% and Singapore's STI 23.9%, while Malaysia's KLCI gained 2.7% and Indonesia's JCI fell 24.5%.⁷ Dispersion of that magnitude means that a regional allocation decision is a set of distinct country decisions, each with its own sector mix, policy setting and flow dynamics.

For a cross-border investor, the exchange rate is a further, separate source of return. Bank Negara Malaysia reported that the ringgit had depreciated by 0.9% against the US dollar in 2026 up to 12 August, and by 1.0% on a nominal effective basis.⁸ Exhibit 3 shows how the same local-currency return translates differently depending on the currency path.

Currency and equity returns are also not independent. The IMF has found that rising global risk aversion reduces portfolio flows to emerging markets, with non-resident investors cutting holdings more sharply than residents.⁹ In a risk-off episode, an unhedged investor can experience equity and currency losses at the same time.

Exhibit 4 shows the ringgit's path against the US dollar so far in 2026, using Bank Negara Malaysia's 5pm middle rate. It strengthened to 3.8875 per US dollar in late February, weakened to 4.1490 in late June, and stood at 4.0705 on 2 November, close to where it began the year. A broadly unchanged year-to-date figure can conceal swings of several per cent along the way.

06Implications for investment assessment

None of this argues against capitalisation-weighted benchmarks. It argues for reading them alongside a small set of complementary measures before drawing conclusions about market conditions or making allocation decisions:

• Compare capitalisation-weighted and equal-weighted returns, and track the share of constituents participating in an advance.
• Decompose returns into earnings growth and multiple change, and test how sensitive current valuations are to a change in discount rates.
• Identify which sectors and companies are driving index performance, and whether that leadership is diversifying or concentrating.
• Treat each Southeast Asian market as a separate decision, and assess currency exposure explicitly rather than as a residual.
• Adjust historical FBM KLCI comparisons for the 2026–2027 change in constituent count and sector mix.