Malaysia At Turning Point

Malaysia’s business cycle indicator assessment doesn’t make cheerful reading. Among eight Asian countries in our analysis, Malaysia’s overall indicator score ranks second lowest, just above Indonesia.

The profit cycle remains in a downswing. Since 2015, the return on equity for listed companies has stayed below the pre-pandemic (2013–2019) average of 10.8%. However, returns have improved for the second consecutive year, reaching just under 10% in 2023. Corporate balance sheets remain healthy, despite modest declines in cash flow and retained earnings per share. The credit cycle has yet to turn, with the two-year real cost of borrowing rising to 2.8%, exceeding the upper 2% threshold—an indication that monetary policy remains tight.

That said, Malaysia is in a stronger position than Indonesia, and we are overweight on Malaysian equities. The stabilisation of the profit cycle signals that the Malaysian business cycle is approaching a sustainable upswing. The key reason for our overweight stance this year lies in Figure 1.

Malaysia has reached a pivotal moment in attracting foreign direct investment (FDI). Global companies are relocating and expanding in Malaysia, driving domestic investment and pushing the economy further up the value-added production chain.

Penang, Selangor, and Johor are leading Malaysia’s semiconductor and digital economy growth. Penang, known as the “Silicon Valley of the East,” aims to secure US$115 billion in investments by 2030. Achieving this goal will require substantial upgrades to power and water infrastructure to support the expanding semiconductor sector. In the Klang Valley, Selangor is focusing on integrated circuit (IC) design, with plans to establish five IC design parks and cultivate unicorn startups by 2030. Meanwhile, Johor is emerging as a key tech hub, attracting significant data centre investments, with over 50 applications submitted and 10 already operational.

The Johor-Singapore economic integration presents new opportunities for investors. Singapore has firmly established itself as a global leader in technology and digital innovation. However, its growing demand for AI and cloud computing faces challenges such as land scarcity, high energy costs, and stringent resource management policies. As Singapore expands its digital capabilities, deeper collaboration with Johor is becoming increasingly crucial to overcoming these constraints.

Strategically positioned at the southernmost tip of Peninsular Malaysia, Johor has grown into the country’s third-wealthiest state, benefiting from its 400-km coastline along key trade routes. Its economic transformation accelerated with the 2006 launch of Iskandar Malaysia—a special economic zone modelled after China’s Pearl River Delta—attracting substantial global investment. Johor’s well-developed logistics network, three major ports, and diverse industrial base spanning petrochemicals, engineering, and telecommunications make it a critical player in Malaysia’s economy. Additionally, the East Coast Economic Region (ECER) bolsters growth by offering tax incentives for manufacturing and oil & gas investments.

Johor’s pro-business policies—such as the Johor Fast Lane (JFL), which expedites investment approvals—have attracted multinational corporations including Mercedes-Benz, Wiwynn, and Bridge Data Centre. The state has also become Malaysia’s largest data centre hub, drawing industry giants such as Nvidia, Microsoft, and GDS International. The recent signing of the Johor-Singapore Special Economic Zone (JS-SEZ) agreement in January 2024 is set to strengthen ties with Singapore, leveraging Johor’s land and cost advantages to complement Singapore’s innovation ecosystem.

Key infrastructure projects, including the Johor Bahru-Singapore Rapid Transit System (RTS), scheduled for completion in 2026, and the potential revival of the Kuala Lumpur-Singapore High-Speed Rail (KL-SG HSR), will further enhance connectivity and economic integration. Johor is also advancing green energy initiatives, such as the Sultan Ibrahim Solar Photovoltaic Park and the RM9.5 billion Maharani Energy Gateway (MEG) in Muar.

Despite the promising outlook, challenges remain. The JS-SEZ faces regulatory differences between Malaysia and Singapore, a shortage of AI and data science talent, and the need for sustainable energy solutions to support the growing number of data centres.

Nonetheless, Figure 2 illustrates that FDI inflows have been on a rising, albeit erratic, trend since 2021. In 2023, inward FDI totalled US$48 billion—nearly a 20% increase from the previous year. European investors accounted for 28% of total direct investments, followed by Singapore (22%), China (15.7%), and the US (12.7%). Approximately 75% of investments flowed into the services sector, with information and communication services taking the lion’s share.

The stabilisation of the corporate profit cycle, the ongoing investment upcycle and increasing FDI suggest that the GDP and domestic demand slowdown in the second half of 2024 is likely to be temporary. Consumption spending remains healthy, while the construction sector is expanding at double-digit rates. Manufacturing is strengthening, and bank lending is rising, driven by increased borrowing for non-residential property, manufacturing, and fixed asset investments (Figure 3).

Malaysia’s central bank has yet to begin an easing cycle. Since May 2022, the overnight policy interest rate has steadily increased but has remained unchanged at 3% since May 2023. Bank Negara Malaysia does not appear to be in a hurry to lower rates, even though headline inflation is easing and was rising by 1.5% YoY in February. The central bank acknowledges that inflation is manageable, global commodity prices are expected to decline, and ringgit weakness is being driven by external factors. At the same time, it states that monetary policy remains supportive and consistent with growth prospects.

Where to Invest

We are overweight on Malaysian equities while underweighting government bonds. The focus is on high-tech, AI, industrials, and consumer discretionary stocks. Malaysia’s business cycle is set to strengthen. The profit cycle is stabilising, the investment upcycle is gaining momentum with increasing FDI and infrastructure spending, and the Johor-Singapore Special Economic Zone is poised to accelerate economic integration and push Malaysia further up the value-added chain.