Malaysia's AI-led stock rally falters in face of trade risks

Free Malaysia Today

2 days ago

While Malaysia has secured billions of dollars in pledged investments for its AI infrastructure, equity investors have turned cautious as Washington ramps up efforts to crack down on suspected semiconductor smuggling into China. (Pixabay pic)
KUALA LUMPUR : An artificial intelligence-led rally that helped Malaysian stocks outperform regional peers last year is fast unravelling, with escalating trade risks seen to further dampen the market's appeal.
Concerns are growing over the potential fallout from a US plan to restrict AI chip exports, which may undermine the country's burgeoning data centre sector.
Sentiment has also soured, with growth prospects clouded after president Donald Trump threatened to impose a higher tariff of 25% on Malaysia. That's weighed on the benchmark index, making it the worst-performing market in Southeast Asia after Thailand.
Analysts from UOB Kay Hian have lowered their year-end forecast for the FTSE Bursa Malaysia KLCI gauge twice this year to 1,620 compared to an initial estimate of 1,800 at the start of 2025. Meanwhile, JPMorgan Chase & Co is expecting the measure to be little changed from Wednesday's close of 1,529.24.
'The overall market has been hampered by uncertainties on AI, data centre feasibilities, largely brought about by the US AI Diffusion framework and the prominence of Deepseek,' said Syhiful Zamri, chief investment officer of Maybank Asset Management Sdn. That's also weakened sentiment toward related sectors, he added.
While Malaysia has secured billions of dollars in pledged investments for its AI infrastructure, equity investors have turned cautious as Washington ramps up efforts to crack down on suspected semiconductor smuggling into China. Chip sales to the Southeast Asian country are a focal point of a court case involving the defrauding of customers about the ultimate destination of AI servers.
The gloomy outlook is a sea change from optimism in the market at the start of the year. Outflows from local stocks have widened, with foreigners withdrawing a net US$2.7 billion so far in 2025, according to Bloomberg-compiled data. That compares to a net selling of US$942 million for the whole of 2024.
Potential levies on chip imports will also weigh on the economy, given that the US is Malaysia's third-largest market for semiconductor exports. Trump has also threatened an additional 10% tariff on any country aligning themselves with BRICS grouping of emerging-market economies.
'There's a tremendous amount of investor fatigue because of issues that investors did not anticipate,' said Nirgunan Tiruchelvam, head of consumer and internet at Aletheia Capital.
Among other headwinds include the rise of cheaper AI models like DeepSeek, which has raised doubts over the need for large and rapid investments into data centres.
Locally, a steep hike in power tariff is also expected to lift operating costs by 10% to 14% for large-scale operators, according to BMI Research. That may prompt tech giants to redirect investments to lower-cost markets like Indonesia and Thailand.
The KLCI gauge has declined 7% in 2025. Data centre-related stocks that were top performers last year, including YTL Corp and Tenaga Nasional Bhd, are among the biggest decliners on the gauge this year.
To some, the sell-off in Malaysian stocks may be overdone. Demand for data centres remains strong and the market is poised to benefit from any recovery in the segment.
'We took profit initially late in 2024 and early 2025, but after the sell-off, we bought back and doubled down,' said Chun Hong Lee, portfolio manager at Principal Asset Management.
Still, slowing economic growth may deter further inflows. The government is looking to revise downward this year's 4.5% to 5.5% projection on tariff risks.
Investors are likely to 'take a step back until they can see more certainty in terms of development in the US and how they deal with the restrictions', said Danny Wong, CEO at Areca Capital.