Malaysia’s economic ignition for 2026

KUCHING (Jan 11): While the global landscape remains complex, 2026 is emerging as Malaysia’s definitive ‘breakout year’, fuelled by well-defined policies and structural roadmap that continues to underpin investment themes, making it a leader amongst Asean peers.

Strong domestic fundamentals, supported by a positive labour market and stable household spending, are expected to continue driving Malaysia’s economic growth in 2026.

Further realisation of investments will also play a key role in supporting Gross Domestic Product (GDP) growth, with a record-high level of approved investment in 2025 suggesting that momentum is likely to remain strong in the near term.

As a trade-dependent economy, Malaysia remains exposed to downside risks from global trade fragmentation, which could temper growth.

Analysts with Phillip Research Sdn Bhd (Phillip Research) forecast Malaysia’s real GDP growth to moderate to 4.5 per cent in 2026, reflecting the high base effect from front-loaded activities in 2025.

It cited strategic initiatives under the 13th Malaysia Plan (13MP), aimed at strengthening economic fundamentals, are expected to support sustained growth and bolster the equity market in 2026.

“The 13MP from 2026 to 2030 emphasises digitalisation, high-value industry development, social mobility, and sustainability, reinforcing Malaysia’s ambition to become a competitive, high-impact regional AI and technology hub,” it said in its analysis.

“Also, the New Industrial Master Plan (NIMP) 2030 aims to transform the manufacturing sector into a high-tech, digitally integrated ecosystem, focusing on automation, advanced manufacturing, and technology-driven value creation.”

Building on these structural initiatives, Phillip Capital identified six investment themes that are likely to become key investment drivers for 2026:

i) rising FDI from trade diversion
ii) investment upcycles
iii) data centre expansion
iv) green energy transition
v) AI technology cycle
vi) Visit Malaysia Year 2026

Execution of these initiatives could improve investment visibility and support sector-wide valuation re-rating, it said.

“Most of these themes align closely with the government’s long-term policy agenda, offering a multi-year investment roadmap with strong visibility.

“Among them, data centre growth and energy transition stand out as particularly compelling drivers heading into 2026,” it continued.

Malaysia retains tariff advantage 

At the outset of the reciprocal tariff announcement on 2 April last year, Asean countries faced an average tariff of circa 33 per cent, with Malaysia at a relatively lower 24 per cent, providing the country with a discernible cost advantage.

Subsequent revisions lowered the average regional tariff to 24 per cent and Malaysia’s effective rate to 19 per cent, reinforcing Malaysia’s domestic appeal.

“Although countries like Vietnam and Cambodia have seen sharper tariff reductions, Malaysia continues to stand out as a preferred destination, supported by an established industrial ecosystem, strategic infrastructure, and integrated supply-chain connectivity,” Phillip Research asserted.

This comes as Asean benefits from supply chain diversification, whereby heightened US-China trade tensions have prompted multi-national corporations (MNCs) to ramp up capacity expansion across Asean, prioritising supply-chain diversification and risk mitigation.

Co-location of key suppliers within the region is increasingly encouraged, reinforcing ASEAN’s strategic importance as a manufacturing hub.

“E&E sector remains a magnet for FDI. Building on robust FDI inflows, Penang’s semiconductor ecosystem underpins Malaysia’s position in the global E&E industry, contributing 13 per cent of global semiconductor testing and packaging and 7% of overall semiconductor production.

“Intel’s recent announcement to invest an additional RM860m in its local assembly and testing facilities underscores the region’s strategic importance. Further, it reinforces Malaysia’s appeal as a destination for high-value investment.”

Meanwhile, analysts Jeremy Goh and Prem Jearajasingam from CGS International in its Malaysia Strategy report also noted during US president Donald Trump’s recent visit to Malaysia from October 26-27, 2025 in conjunction with the 13th Asean-United States Summit and 20th East Asia Summit, the US president signed Agreements on Reciprocal Trade (ART) with Malaysia and Cambodia, and announced frameworks for trade negotiations with Thailand and Vietnam.

According to the White House statement, Malaysia will: i) eliminate or reduce tariffs on nearly all US exports, and allow non-discriminatory or preferential market access for US agricultural and industrial goods, and ii) address a range of non-tariff barriers to ensure that US exporters can access its market.

Malaysia will also make several commercial purchases from the US, such as LNG, coal, telecommunication, aircraft, semiconductors, aerospace components, and data centre equipment.

Both nations also signed an MOU that will lead to an expansion of trade and investments in critical minerals.

In return, Malaysia – alongside Cambodia, Thailand and Vietnam – was designated as “Aligned Partners”, in which extra exemptions from the reciprocal tariffs were accorded to selected goods.

“Recall that prior to the signing of the ART, there were already three rounds of “broad based” reciprocal tariff exemptions announced on 2 Apr, 11 Apr and 5 Sep – we estimate this to account for 46.5 per cent of Malaysia’s exports to the US in 2024.

“With the new exemptions for “Aligned Partners”, Malaysia’s cumulative exemptions from US reciprocal tariffs rises to 62.8 per cent by our calculations – which is one of the highest in Asean.

“In turn, we estimate that these exemptions collectively lower Malaysia’s share of exports to US exposed to reciprocal tariffs from 12.4 per cent of its GDP to 4.6 per cent.”

Trade policy uncertainty has shifted from being an acute shock to a persistent constraint, commented Public Investment Bank Bhd (PublicInvest Research).

“The regime is no longer defined by sudden, system-wide disruptions, but by an ongoing drag through higher frictional costs, compliance burdens and periodic headline volatility.

“In practical terms, this reduces the probability of a broad-based external demand collapse, but it increases uncertainty around margins, pricing power and investment timing, particularly for tariff-exposed sectors.”

PublicInvest Research noted that technology-linked trade remains more resilient, supported by the artificial intelligence (AI) capital expenditure (capex) cycle and ongoing semiconductor and data infrastructure investment.

By contrast, non-tech trade is more vulnerable to tariff pass-through, softer final demand and substitution effects that take time to stabilise. This divergence matters more than the headline level of trade growth.

“For Malaysia, the takeaway is that external risks are likely to be targeted and episodic rather than systemic. The key exposures sit around sector-specific actions, particularly semiconductors, and enforcement-related frictions that can affect shipment timing and order visibility.

“This keeps the export outlook supported at the aggregate level, but with higher dispersion across industries and greater sensitivity to policy headlines.”

Investment upcycle reinforces domestic growth

On the domestic front, rising infrastructure spending is set to strengthen sector visibility.

Malaysia’s infrastructure investment is set to accelerate under the 13MP, with a total allocation of RM611 billion, including RM430 billion in government development expenditure. This represents an eight per cent increase from the 12MP.

A further funding of RM120 billion from government linked investment companies (GLICs) and RM61 billion through public-private partnerships (PPP) highlights a growing role of partnership-driven execution.

Budget 2026 continues to emphasise connectivity, industrial hubs, and sustainable urban development, providing a supportive backdrop for the construction sector as infrastructure spending gathers momentum.

“The 13MP envisages the rollout of several large-scale infrastructure projects, expected to sustain demand in the construction sector,” Phillip Research said, noting that projects that were likely to be implemented include the Sabah Ulu Padas Water Supply Scheme (circa RM4 billion), Penang LRT Segments 2 and 3, PenangñPerak Water Transfer project (circa RM5 billion), and Johor’s Automated Rapid Transit.

Meanwhile, industrial land availability supports Malaysia’s next phase of industrial growth. Malaysia has over 500 industrial parks designed to cater to various industries, including small-scale, halal, biotechnology, eco-parks, and high-technology sectors.

“Malaysia’s push to accelerate high-value industrialisation continues to centre on several flagship economic corridors, including the JohorñSingapore Special Economic Zone (JS-SEZ), Carey Island Development, Kulim Technology Park, and the Port Dickson Free Commercial Zone.

“These zones remain federal and state priorities aimed at attracting high-value investments in advanced manufacturing, data centres, logistics, and green technologies.

“The availability of large, strategically located industrial landbanks has become a strategic enabler for national development, and converting plantation land is helping accelerate the rollout of industrial infrastructure.”

Leverage economic zones for long-term value creation. SD Guthrie stands out as a key beneficiary of Malaysia’s industrialisation drive, underpinned by its active presence across various economic zones through structured joint ventures and a clearly articulated land monetisation strategy.

In Johor, the group is developing the 935-acre Eco Business Park 8 (EBP8) within the JS-SEZ, poised to capture growing cross-border industrial and data-centre demand.

In Selangor, SD Guthrie’s partnership with the state government and Sime Darby Property will transform Carey Island into an education-cum-technology and halal hub, unlocking up to 2,470 acres through phased industrial development.

Meanwhile, in Negeri Sembilan, collaborations with state agencies to support the 1,420-acre Port Dickson Free Zone, anchoring the broader Malaysia Vision Valley agenda.

Renewable energy’s alpha play

For years, Malaysia’s renewable energy (RE) sector was seen as a ‘steady-but-slow’ utility play.

That changed on January 1, 2026 with the official rollout of the carbon tax and the launch of the Solar Accelerated Transition Action Programme (ATAP), signalling the industry’s transition from policy-heavy rhetoric to an execution-led bull cycle.

According to Phillip Research, the structural foundation for Malaysia’s energy transition is now complete, providing investors with unprecedented visibility into multi-year earnings growth.

It affirmed that Malaysia’s solar sector continues to benefit from sustained policy support, improving investment visibility, and a progressively diversifying energy mix.

“The reaffirmation of national renewable targets, ongoing regulatory enhancements, and supportive financing frameworks under the National Energy Transition Roadmap (NETR) provide a strong structural foundation for growth,” it explained.

“Importantly, the NETR is now transitioning from policy articulation to execution, offering investors clearer visibility on project rollout across large-scale utility-scale, rooftop, and corporate solar initiatives.

“The integration of battery energy storage systems (BESS) within the broader energy transition framework further strengthens the sector, enhancing grid stability and expanding the addressable opportunity set for solar companies.”

Malaysia continues to advance its environmental, social and governance (ESG) agenda with the introduction of a carbon tax under Budget 2026, targeting high-emitting sectors such as iron, steel, and energy.

The measure is intended to incentivise emissions reductions and the adoption of cleaner technologies, while aligning domestic competitiveness with emerging international standards, such as the European Union’s Carbon Border Adjustment Mechanism (CBAM) set to take effect in 2026.

Proceeds from the carbon tax are earmarked for supporting green technology deployment, R&D, and other decarbonisation initiatives, providing both a regulatory signal and a funding mechanism for Malaysia’s energy transition.

Crucially, Malaysia is introducing a series of programmes to ensure a steady capacity pipeline and long-term sector growth. Under the Large Scale Solar (LSS5+) programme, the full 1,975MW capacity quotas have been fully allocated, with Engineering, Procurement, Construction, and Commissioning (EPCC) contracts progressively awarded.

Looking ahead, the tender process for the LSS6 programme is expected to commence in 1H26, extending the pipeline of utility-scale solar capacity.

The government is set to launch the Solar ATAP in early-2026, a new rooftop solar scheme replacing NEM3.0, designed to accelerate distributed solar adoption and broaden participation across the commercial and residential segments.

“The government’s consistent and timely execution of NETR initiatives is expected to sustain investor confidence in Malaysia’s energy transition ambitions while underpinning a multi-year earnings growth trajectory for renewable players,” Phillip Research said.

“We believe solar players are strategically positioned to capitalise on the expanding project pipeline and benefit from improving execution momentum across utility-scale and distributed solar projects.”

AI technology cycle

According to Malaysia’s Digital Ministry, 2026 will be a significant milestone in its efforts to eelvate Malaysia into an AI-driven nation.

The ministry noted that the country’s AI ambitions goes beyond technological development, as it involves creating a comprehensive ecosystem that integrates policy, talent, digital trust and investment, enabling Malaysia to position itself as a competitive, high-impact regional AI hub.

To realise this goal, the government has allocated RM1.36 billion to the ministry under Budget 2026 which is inclusive of RM248.5 million for operating expenses and RM1.11 billion for development projects.

Globally, the semiconductor cycle remains positive. WSTS projects the global semiconductor market to expand by 26.2 per cent to reach US$975 billion in 2026 estimates, driven by strong demand growth in both memory and logic segments, underpinned by accelerating AI and data-centre deployment.

The industry’s investment cycle remains supportive, with global semiconductor equipment spending poised to reach record levels as leading foundries and memory players commit sustained capex towards advanced nodes, capacity expansion and advanced packaging.

Phillip Research observed that Malaysia lags global peers amid limited AI exposure and uneven end-market recovery.

“Despite the strong global backdrop, Malaysia’s technology sector has underperformed against global peers, reflecting limited direct exposure to the AI value chain and uneven recovery across key end markets,” it said.

“Local technology names have been predominantly more exposed to the automotive and consumer electronics segments, where demand normalisation has been slower due to prolonged inventory digestion.”

While broad-based tariff uncertainty has largely been resolved, the research house cited sector-specific tariff risks as residual overhang.

Thus, the NIMP 2030 as well as the National Semiconductor Strategy (NSS) aim to address these structural gaps by repositioning Malaysia higher up the value chain.

“Key initiatives focus on expanding into higher-value areas such as front-end integrated (IC) design and wafer fabrication, reducing reliance on labour-intensive manufacturing, and nurturing local IC design capabilities.

“At the same time, the policy framework seeks to attract foreign investment into wafer fabrication while strengthening the broader R&D ecosystem.

“Early evidence suggests a gradual but meaningful shift is underway. Selective technology players are expanding into the front-end segment, broadening total addressable markets and increasing exposure to AI and data-centre opportunities.

“Capacity expansion is ongoing to accommodate the rising demand, with EMS players taking a larger role in AI and data centre hardware production, such as servers and optical transceivers.”

The ongoing AI and data centre build-out is expected to sustain industry capex and wafer fabrication equipment orders, with Malaysia’s trade-diversion dynamics further reinforcing its strong position within global supply chains.

While semiconductors increasingly resemble the ‘new oil’ in terms of strategic importance, Phillip Research noted that investor interest is likely to remain selective.

Preference continues to be on companies with exposure to AI and data-centre, it said, as well as growing front-end segment exposure.

“While pockets of opportunity exist, broader sector sentiment is likely to remain cautious, reflecting uneven recovery in legacy end markets and ongoing structural transition.”

Data centre demand to pick up

The surge of data centre investments in Malaysia has catalysed a structural shift in the nation’s industrial landscape, positioning local electrical and mechanical firms as the primary beneficiaries of a burgeoning digital economy.

According to a JP Morgan report, Malaysia’s mechanical, engineering, and plumbing (MEP) sector – traditionally viewed as a secondary support industry – is now emerging as a high-growth powerhouse.

The financial markets have already begun to recognise this transformation, with the market capitalisation of MEP businesses compounding nearly three times between 2024 and late 2025, while related stocks have more than doubled in value.

This meteoric rise has led analysts to characterise Malaysian electrical specialists as the “next billionaires,” underscoring their dominance in the most technically demanding and lucrative segments of data center construction.

Currently, Malaysian firms are outperforming its regional competitors in the electrical sub-segment, which constitutes the largest and most complex portion of the project scope.

Their proficiency in both executing intricate electrical works and supplying specialised equipment has not only solidified their market position but has also attracted a wave of newly listed companies eager to capture engineering, procurement, construction, and commissioning (EPCC) opportunities.

Despite this rapid appreciation, the sector is still described by JP Morgan as ‘an underappreciated beneficiary with significant upside potential’.

This perspective is rooted in the reality that while the necessary grid infrastructure is largely in place, the physical construction and specialised MEP systems for many facilities are still in progress or awaiting contract awards.

These upcoming milestones are expected to trigger further positive rerating catalysts for the companies involved.

A critical nuance in the current market is the gap between grid readiness and operational capacity. While players like Tenaga Nasional Berhad has indicated that 3.5GW of data centre projects are technically completed, this figure primarily reflects readiness at the grid level rather than fully energised data halls.

Currently, only about 0.5 to 0.6GW are live and operational, highlighting a massive backlog of MEP work yet to be finalised.

As this 3.5GW of capacity gradually converts into fully functional facilities over the next 12 to 18 months, contractors can expect a sustained flow of revenue.

With the MEP sector commanding approximately RM15 million per megawatt, the total addressable market is estimated to reach a staggering RM43 billion over the next five years.

Policy spillovers continue to bolster Malaysia as a regional data centre hub.Philip Research noted that the expansion of Malaysia’s data centre sector gained momentum following Singapore’s 2019ñ2022 pause in new data centre approvals.

Expansion activity gravitated towards Johor, supported by its proximity to Singapore, ample land availability, and lower power and construction costs.

This has attracted a steady inflow of investment, positioning Malaysia as a natural extension of Singapore’s data centre ecosystem.

“Malaysia gains from multi-year visibility supported by a growing 4GW pipeline. Despite earlier investor concerns over Nvidia chip export restrictions, on-the-ground execution has remained robust,” Phillip Research said.

“Based on our compilation, data centre-related contract awards reached RM15.4 billion in 2025, surpassing the RM7.9 bn recorded in 2024.

Backed by a visible 4GW development pipeline, Malaysia offers a compelling multi-year earnings runway for construction, mechanical, electrical, and process utility (MEP), and power infrastructure players.

Project awards are expected to gain further momentum in 2026 as more projects progress into build-out and fit-out phases.

VMY 2026: Tapping into tourism’s multiplier effect

Last but not least is Malaysia’s tourism push. Malaysia’s tourism sector has become a key economic driver, contributing some 15.1 per cent to GDP in 2024 and generating RM102.2 billion in receipts, surpassing pre-pandemic levels.

This growth was supported by strong inbound and domestic tourism, improved connectivity, and targeted campaigns. Inbound expenditure accounted for over half of internal tourism consumption, while domestic tourism remained resilient with 26 million visitors and RM98.4b in spending.

Tourism also sustained 3.5 million jobs, representing 21.6 per cent of total employment, and created spillover benefits for retail, food and beverage, and transportation industries.

These positive trends provide a strong foundation for the upcoming Visit Malaysia Year 2026 (VMY2026). VMY2026, themed ‘Surreal Experiences,’ aims to attract 47 million visitors and generate RM329 billion in tourism receipts.

Phillip Research noted that Budget 2026 has allocated over RM700 million to invigorate the tourism sector, including RM500 million directly for VMY promotion.

Additional measures include targeted support for homestays, tax exemptions for heritage operators undertaking renovations, medical tourism, and RM1,000 income tax relief on entrance fees to local tourist attractions and cultural programmes.

“The anticipated uplift in tourist arrivals should translate into higher discretionary spending, benefiting Malaysian real estate investment trusts (M-REITs), retail and leisure operators, particularly those located in high-footfall destinations.

“Overall, the anticipated surge in tourist arrivals should provide a meaningful tailwind for retail and leisure operators located in prime mall locations.”

Meanwhile, the team with MBSB Investment Bank Bhd (MBSB Research) has identified VMY2026 campaign as a cornerstone driver for the nation’s economic and equity market performance, projecting the FBM KLCI to reach a post-pandemic high of 1,750 points.

The research house notes that this influx of visitors will create a powerful multiplier effect across several key industries: airlines are set to see higher load factors, whilst mall operators, hotels, and healthcare providers catering to medical tourists will benefit from increased footfall and discretionary spending.

“Beyond the immediate impact of tourism, the broader Malaysian market is expected to gain further ground in 2026 due to healthy corporate earnings growth, which MBSB forecasts at 7.4 per cent across its coverage universe.

“This upward momentum is further supported by the formal rollout of the 13MP, which is anticipated to trigger a multi-year infrastructure upcycle and attract a return of foreign fund inflows as global uncertainties from 2025 begin to recede.”

While risks like geopolitical tensions and global trade shifts remain on the horizon, the combination of undemanding equity valuations and strong thematic catalysts suggests that Malaysia is well-positioned for a robust economic acceleration throughout the year, with projected total returns for recommended stocks reaching as high as 71 per cent.