KUALA LUMPUR (Jan 13): Malaysia is benefiting from shifts in supply chains, with the emergence of data centres, tech companies and semiconductor manufacturers in the country, said HSBC Global Research.

“This supply chain resettlement story is positive for the country," said its Asia-Pacific head of equity strategy Herald van der Linde in a virtual briefing on HSBC’s Asian 2025 outlook.

The expansion of data centres is expected to positively impact the utilities and banking sectors, van der Linde noted. 

As the US reduces its reliance on imports from certain parts of Asia, there is increasing potential for regional integration, said HSBC's chief Asia economist Frederic Neumann.

Neumann pointed to the example of the Johor-Singapore Special Economic Zone, where both economies are coming together to remove trade barriers and foster closer collaboration.

“In other words, challenges stemming from trade restrictions in the US could actually propel greater economic and trade investment integration within Asia," he added.

He also addressed concerns about the competition between Asean and China as manufacturing hubs, emphasising that Asean and China should not be viewed as competitors in a zero-sum game.

“We see a considerable portion of production capacity being relocated from China into Asean, as shown in the foreign direct investment (FDI) data,” Neumann said.

“This is a story of complementarity [between China and Asean] rather than direct competition. We see a much more integrated manufacturing sector between China and Asean, and we believe that will continue to be a positive growth driver for the Southeast Asian economies,” he added.

The research house also sees continued FDI, domestic demand recovery, and a strong pipeline of projects to support growth at 4.8% in Malaysia this year, compared with official forecasts of 4.5%-5.5%.

“Our consensus is slightly lower than the 5.2% we had pencilled in for last year, but it is still a very strong record considering the broader economic environment,” Neumann said.

This resilience in domestic demand is not unique to Malaysia, but reflected in other Southeast Asian economies, Neumann explained.

However, while Malaysia’s growth narrative is compelling, he added that relative valuations and strong investor positioning in Malaysian equities limit further upside.

“We are neutral on Malaysian equities at this particular point in time,” van der Linde said, as the research house maintained its expectations for the FBM KLCI to hit 1,850 points by end-2025, driven by the data centre boom and ongoing supply chain relocation.

Last year, the KLCI ended its three-year streak of annual declines, gaining 13.02% to close at 1,642.33 on Dec 31.

On Monday, the benchmark index opened 0.21% or 3.45 points lower at 1,598.96. At 11.50am, the index stood at 1,582.52 — 1.24% or 19.89 points lower from the previous close of 1,602.41.

Across the region, the Asian equity market faces headwinds from a strong US dollar and geopolitical uncertainties, but there are emerging positive trends that signal opportunities for investors, according to van der Linde.

“A stronger US dollar is simply not good for Asian equities. It means money is being reinvested in the US at higher rates. Therefore, there will be little interest to do that in Asian equities,” he said.

“[But] we see [industries] consolidation and diversification into foreign markets and returning cash to shareholders as positives that support Asian equities,” he noted.

Weak domestic demand, particularly in China, is driving companies to seek new export markets to boost profitability, he said.

Companies across China, Japan, South Korea, and Singapore are increasingly returning cash to shareholders via dividends and share buy-backs. In China, dividend yields are particularly attractive at around 5%, providing a steady return for investors even in stagnant markets.  

Additionally, while tariffs on Chinese exports goods to the US have raised concerns, their direct impact on Chinese-listed companies remains limited with just up to 1% of earnings impact seen, van der Linde said. 

On the currency front, the research firm anticipated the ringgit to trend at 4.6 against the US dollar by end-2025. At the time of writing on Monday, the local note had depreciated 0.31% and traded at 4.5070 against the greenback. Over the past one year, the ringgit has recovered 3%.