KUALA LUMPUR (Oct 16): Malaysia’s semiconductor sector could face short-term disruption as fresh trade tensions between the US and China threaten to unsettle global supply chains, according to MBSB Research.

The research house warned that China’s new export restrictions on rare earth elements (REE) and battery technologies may delay production of advanced chips and related equipment, affecting global players and local back-end manufacturers.

“We believe that one of the most obvious implications of this latest round of escalation is supply chain disruption as REE and battery curbs could disrupt EV (electric vehicle) and semiconductor inputs, threatening production continuity for automakers and chipmakers globally. Malaysia being part of a global semiconductor supply chain may experience spillover effect,” said MBSB Research in a strategy note.

“From [a] trade perspective, disruptions to the global semiconductor supply chain will have negative implications to Malaysia’s production and trade outlook,” the research firm added.

REE are key materials in chipmaking, EV motors and defence components. While they account for only 0.4% of Malaysia’s total exports in the first nine months of this year (9M2025), the subsector represents nearly 6.8% of mining exports.

MBSB Research said REE exports fell 9.6% year-on-year to RM4.5 billion in 9M2025 amid weaker demand, particularly from China, Thailand and Japan.

The renewed trade friction follows China’s move on Oct 9 to impose sweeping export controls on REE and related technologies from Nov 8, citing national security non-proliferation obligations. The US retaliated with a 100% tariff on all Chinese imports, effective Nov 1, in addition to the existing duties, and this effectively pushed rates on many goods above 130%.

MBSB Research said the latest curbs could lead to higher input costs and affect the stability of production and delivery of electrical and electronics products, automotive (particularly EVs), and green-energy supply chain in Malaysia.

However, it also sees potential for Malaysia to attract foreign investment in REE processing and related technologies as companies seek to diversify supply chains away from China.

"Malaysia could attract more investment into this industry, potentially getting more FDI (foreign direct investment) from the US to de-risk their supply chains. We could gain from being a larger player in the REE sector. Therefore, Malaysia would potentially benefit from the value-chain upgrading, hence, developing an alternative regional processing hub in Asia,” it noted.

“However, Malaysia may need to navigate the geopolitical environment to strike a balance,” it said.

Despite external risks, MBSB Research maintained its year-end 2025 FBM KLCI target at 1,650 points and expects domestic-centric sectors to stay resilient.

“Overall, we foresee a situation whereby the local equity market would remain generally sanguine, premised on baseline expectations of continued resilient macroeconomy and corporate earnings performance.

“Moreover, the prospect of return inflow of foreign funds (in view of burgeoning world’s monetary liquidity with further US Fed rate cuts) would generate an additional fillip to the equity market,” it said.

MBSB Research reckoned that sectors with heavy reliance on external factors, such as semiconductors, may be susceptible to unforeseen tariffs or other restrictions.

On the other hand, domestic-centric sectors are the safer bets.

“We recommend a tactical strategy of focusing on domestic-centric companies at least until some clarity after the intended meeting between US President Donald Trump and his Chinese counterpart Xi Jinping scheduled on Oct 31 during the Apec summit in South Korea,” it said.

MBSB Research's top stock picks include Fraser & Neave Holdings Bhd (KL:F&N), AEON Co (M) Bhd (KL:AEON), Leong Hup International Bhd (KL:LHI), Padini Holdings Bhd (KL:PADINI), Pharmaniaga Bhd (KL:PHARMA), Petronas Dagangan Bhd (KL:PETDAG), Gamuda Bhd (KL:GAMUDA), Malayan Cement Bhd (KL:MCEMENT), Mah Sing Group Bhd (KL:MAHSING) and Matrix Concepts Holdings Bhd (KL:MATRIX).