Malaysia: back on the emerging market equities map

Malaysia has long been ignored by emerging market investors. But our analysis – and insights gleaned from regular country visits – suggest that the tide could be starting to turn.

The country has lagged the growth of other emerging market equities due to an extended period of political instability, with four government changes in six years, and one of the largest corruption scandals in the world – the 1MDB scandal. Add in significant inefficiencies in policymaking and poor economic as well as infrastructure-related development, and it’s not surprising that Malaysia has consistently seen net foreign outflows. Its share in the MSCI Emerging Markets index has dropped dramatically from 34% at the benchmark’s launch in 1988 to just 1.4% as of end January 2025. (see Fig. 1).

We’ve been looking for signs of that changing. Since the appointment of the current prime minister, Anwar Ibrahim, Malaysia has been successful in regaining some political stability, setting the foundation for pursuing major economic and policy reforms (such as lifting broad-based fuel subsidies which had ensured that Malaysia’s petrol prices were among the lowest in the world).

Supported by deep-pocketed government-linked investment companiesMalaysia’s government-linked investment companies are dominant domestic players, providing support to the local equity market and its premium valuation. This comes at the cost of poor market liquidity (only 13 stocks trading above USD 10m). Bursa Malaysia’s “value-up” plan could possibly address this issue.reallocating capital from overseas back home to support key economic sectors, Malaysia is set to free itself up from another lost decade and is positioning itself well for two of the perhaps most topical themes of the coming decade – technology and geopolitics.

On a recent visit to Penang – dubbed the Silicon Valley of the East and accounting for over 5% of global semiconductor sales – we experienced a vibrant technology hub. The region is home to three of the world’s leading chip makers. Penang has experienced a notable pick-up in investment demand amid worsening US-China trade tensions, with 95% of that investment coming from overseas (mainly US) (see Fig 2).

Thanks to a supportive government as well as long-standing relationships with Western companies and their long-established supply chains in Penang, Malaysia is seizing its opportunity by turning more selective on incoming FDI inquiries with the intention of moving further up the value chain across key technology segments like IC design, advanced packaging or equipment manufacturing. The National Semiconductor Strategy aims to attract RM500 billion (USD110 billion) in investment and create 10 local companies focused on design and packaging.

Further south, in Kuala Lumpur, we learned more about how Malaysia has captured recent AI developments by turning an inefficient energy network into a massive opportunity for multi-year domestic investment. Running on a relatively high energy reserve margin of around 40%, Malaysia has succeeded in attracting large cloud service providers, known as hyperscalers, looking to diversify their data centre locations. Microsoft and Google, for example, are each planning to build over 10 data centres in the country.

In addition to its stable and sustainable energy infrastructure, Malaysia also offers a strategic location for data centres (further strengthened by improving ties with Singapore and the planned Johor-Singapore Special Economic Zone), more abundant resources, and strong government support. The authorities have approved USD24 billion of data centre investment in 2021-23, with more in the pipeline. We therefore expect the data centre-driven construction boom to continue throughout this decade.

There may be some hurdles along the way, which could decelerate investment into Malaysia in the near term. There is broad-based caution across emerging Asia as Donald Trump starts his second US presidential term. Although much of the focus has been on China, Malaysia’s exports and currency could also be negatively affected by US tariffs (Malaysia is a relatively open economy with 80% of GDP derived from exports, and China as its largest trading partner). However, this should be offset by continued improvement in domestic consumption, driven by reform and greater political stability.

We are excited about Malaysia’s journey of realising its potential backed by an extended investment upcycle via technological advancements and ‘China/Taiwan + 1’ relocation plans considering a continued US/China decoupling. Providing neutral grounds for high-value supply chains (be it for Intel or BYD Electronics in Penang) or for hosting data (be it for Microsoft or ByteDance in Johor) has become a valuable market characteristic in a geopolitically fragile world. As a market long ignored by investors, Malaysia is back on the map for us.