This article first appeared in The Edge Malaysia Weekly on September 14, 2026 - September 20, 2026

Malaysia’s economy grew 6% year-on-year in the second quarter of 2026. That is the second-fastest pace of growth in the past three years, and well above the 4.4% recorded in 2019, before the Covid-19 pandemic. A GDP growth of 6% puts Malaysia among the fastest-growing economies in the region, outpacing Singapore (5.9%), Indonesia (5.3%), China (4.3%), South Korea (3.7%) and the Philippines (2.3%).

The labour market also appears healthy. Malaysia’s unemployment rate stood at just 3% in 2Q2026, close to a decade low, though edging up slightly from 2.9% in the preceding quarter.

These headline numbers paint a picture of an economy firing on most cylinders. Yet, Malaysians are far from upbeat on the economy and many say they are feeling more financially insecure.

Households are struggling to keep up with the rising cost of living even though the official inflation rate remains subdued. The Consumer Price Index (CPI) came in at only 1.8% in July. Businesses, especially micro, small and medium enterprises (MSMEs), are being squeezed between higher input costs and weaker demand, with many having to contend with ultra-competitive, China-based e-commerce platforms and Chinese enterprises setting up shop in the domestic market.

Is the divergence simply a matter of perception versus economic reality? Because people naturally tend to say they feel less positive than the fact of their circumstances. Or is Malaysia’s economic expansion not translating into better jobs, higher wages and living standards? As usual, we turn to the data for answers.

Let’s start with the obvious. GDP measures how much goods and services an economy produces, not how widely the income and benefits are shared. Nor does it tell us how sustainable the growth will be going forward.

Beneath the impressive 2Q2026 GDP headline growth, the underlying picture is mixed. A significant portion of economic growth was concentrated in a few areas of the economy, while some of the y-o-y strength was also amplified by a low base effect.

Case in point: Net exports surged 168.5% y-o-y to RM15.8 billion during the quarter, accounting for almost 40% of the 6% increase in GDP (see Chart 1). There are genuine fundamental drivers behind the improvement. The global surge in semiconductor demand, fuelled by investments in artificial intelligence (AI) data centres, underpinned Malaysia’s electrical and electronics (E&E) exports. Higher liquefied natural gas (LNG) exports also provided a boost, amid global energy supply disruptions due to the US-Iran war.

But the spectacular y-o-y growth rate was also partly a reflection of an unusually low base in the corresponding quarter last year. Net exports had fallen to just RM5.9 billion in 2Q2025 (see Chart 2), owing in part to weak oil prices — less than half the RM12.5 billion to RM21.5 billion recorded in each of the other three quarters of 2025.

In other words, net exports provided a powerful boost to GDP in 2Q2026, but part of what looks like extraordinary growth was simply a rebound from an exceptionally weak quarter a year earlier.

The other takeaway here is that the Malaysian economy remains deeply influenced by global commodity prices and demand and, in particular, oil and gas (O&G).

Aside from net exports, growth across most other expenditure components was less impressive.

Private consumption, which accounts for about 60% of GDP, grew 4.8% y-o-y in 2Q2026, just marginally higher than the 4.7% in the preceding quarter. But growth in the first six months was below the average growth of 5.5% recorded in 2025 and well short of the 7.7% growth seen in 2019, before the pandemic.

Private sector capital formation also lost momentum. After expanding by an average of 10.9% over the past two years, partly fuelled by a surge in data-centre investments, growth slowed sharply to 4.3% in 2Q2026.

Similarly, public sector investment growth eased to 6.3% during the quarter, down from an average of 10.9% in 2024 and 2025 — as major infrastructure projects near completion. Lower capital expenditure (capex) was also partly due to fiscal constraints as the government’s operating expenditure and subsidy costs rose.

Case in point: Public consumption saw accelerating growth to 7.6% y-o-y in 2Q2026 — from an average increase of 5.7% over the previous two years — driven by higher spending on supplies and services as well as emoluments (pay hikes for civil servants). The increase in public spending contributed to the robust GDP growth in 2Q2026.

The sectoral breakdown of GDP tells a similar story (see Chart 3). Much of the acceleration in 2Q2026 came from stronger manufacturing growth and a recovery in mining and quarrying (O&G).

Electronics manufacturing (the largest segment in the manufacturing sector) was the biggest driver, expanding 17% y-o-y, while natural gas grew 19.3% y-o-y. Sustained investments in data centres also supported the information and communications sector, which has been recording stronger growth since 2024.

By contrast, growth in consumption-related sectors was considerably more subdued. Wholesale and retail trade, accommodation and food and beverage (F&B) services collectively grew 4.8% in 2Q2026, down from an average of 5.8% in 2025 and well below the 7.5% growth recorded in 2019.

Similarly, growth in the construction sector slowed considerably to 6.5% in 2Q2026, from 12.2% in 2025. The moderation was broad-based but particularly pronounced in the residential buildings and civil engineering subsectors.

Here’s the thing: While much of the GDP growth was concentrated in the E&E, information and communications, and mining and quarrying sectors, these sectors account for only a combined 10.7% of total employment in the nation.

They also do not create many jobs. Between 4Q2023 and 2Q2026, the total number of jobs in Malaysia increased by 3.5%. Over the same period, employment in E&E and information and communications grew by a slower 2.9% and 3.2% respectively. The number of jobs in mining and quarrying actually declined by 1.1%.

By contrast, domestically oriented sectors such as wholesale and retail trade, accommodation, and F&B services were the main sources of job creation. Employment in these sectors rose 6% over the same period and accounted for nearly half of the net increase in jobs nationwide.

This helps explain the disconnect between headline GDP numbers and how the economy feels to many households. Growth in AI-related semiconductors, data centres and O&G is strong, but it is concentrated in sectors with relatively limited employment reach.

The slowdown in domestic consumption, on the other hand, is felt across retail, restaurants, hotels and other labour-intensive sectors that touch a much larger percentage of the population.

Consumer sentiment is likely to be biased, influenced by higher price increases for everyday essentials that people experience frequently, even though the official inflation is low. The CPI is heavily weighted towards big-ticket items such as housing, utilities and transportation — where rental growth has been slowing and a material percentage of the CPI basket consists of subsidised, price-controlled or regulated items that may not reflect the average household spending.

The concentration of economic growth in a handful of sectors also means that investment opportunities on Bursa Malaysia are becoming narrower.

The most obvious beneficiary is the E&E sector. Semiconductor companies have performed strongly this year, alongside improving earnings, supported by rising demand linked to the global AI investment boom. The Bursa Malaysia Technology Index, which is heavily weighted with semiconductor-related stocks, is the best-performing sectoral index on the local market so far this year, gaining more than 30%.

You may wonder why we have not included any Malaysian semiconductor stock in our portfolios. Our main contention is valuation.

Compare the 10 largest semiconductor companies in the Bursa Malaysia Technology Index with the 10 largest semiconductor companies in the US Philadelphia Semiconductor Index. Malaysian semiconductor companies, on average, trade at higher valuations despite offering lower expected earnings growth (see Chart 4).

The difference in business quality is also significant. Many of the largest US semiconductor companies are global leaders in their respective niches, commanding substantial market shares and operating in areas where there are few credible competitors. This competitive advantage is reflected in their significantly higher operating margins (see Chart 5).

Malaysian semiconductor companies, by comparison, generally have much smaller technological moats and face intense competition from a much larger pool of similar manufacturers and service providers around the world.

That makes the valuation gap particularly difficult to justify. If investors want exposure to the AI-driven semiconductor cycle, we believe the leading global semiconductor companies offer better proxies than their Malaysian counterparts.

That is the approach we have taken in our own portfolios. The Absolute Return Portfolio currently includes Nvidia, while the AI Portfolio has exposure to Broadcom, Cadence Design Systems, Marvell Technology, the Roundhill Memory ETF and China’s Naura Technology.

Another group of beneficiaries from the AI investment cycle are construction and electrical engineering services companies involved in building data centres locally. Many of these stocks are, however, already trading at relatively rich valuations of more than 20 times earnings.

Meanwhile, property developers that have benefited from selling land to data-centre operators, or from building and leasing data centres, have also seen their valuations expand to decade-high levels. In short, much of the AI data-centre investment spillover is already reflected in stock prices.

More importantly, these are largely project-based businesses. Unlike companies with a meaningful stream of recurring income, they need to continuously replenish their order books to sustain earnings. For example, land sales to data centres are one-off gains, unlike income from longer-duration property development projects.

Their revenue is closely tied to the level of data-centre capital expenditure. For earnings to keep growing, annual data-centre capex must also keep rising. If capex merely stays flat, revenue growth is likely to flatten as well.

This distinction is important because continued growth in the number of data centres does not necessarily imply continued growth in data-centre capex. If developers spend the same amount every year, the total installed base of operating data centres would continue to increase as new facilities are completed — but there is no “growth” in capex. And it is far from certain that annual capex is even sustainable at current levels.

According to Tenaga Nasional, data centres already connected to the grid as at June 2026 had a combined maximum demand capacity of 5.65gw. Yet, actual load utilisation stood at only 1.26gw, equivalent to just over 20% of that capacity.

In other words, capacity is substantially underutilised and much of the expected future demand is already embedded in existing capacity. With such a low utilisation rate, the pace of new data-centre investments is likely to slow as developers wait for demand to catch up with supply.

There are early signs that construction activity is already losing momentum. The pipeline of data centres under construction, as measured by their expected maximum electricity demand, peaked around 2.9gw in 1Q2025 before declining to about 2.2gw by 2Q2026. Meanwhile, data centres with signed electricity supply agreements but that had not yet broken ground fell to around 0.5gw in 2Q2026 (see Chart 6).

To be sure, one quarter does not a trend make. But the numbers suggest that the extraordinary pace of data-centre construction seen in the last two years may be starting to moderate. This makes the elevated valuations of construction companies and property developers all the more difficult to justify.

One proxy for Malaysia’s AI boom that we do like is OCK Group Bhd. The stock trades at a comparatively reasonable valuation of less than 10 times earnings. We added the company to the Malaysian Portfolio on Aug 27, 2026.

OCK started out primarily as a telecommunications infrastructure company, building, owning and leasing telecom towers and providing network services across the region. In recent years, however, it has expanded into a broader digital infrastructure platform, with businesses spanning fibre connectivity, digital solutions and mission-critical power systems.

OCK’s newer digital-infrastructure businesses have become increasingly important growth drivers. In FY2026, revenue from data-centre-related activities, including power solutions and fibre infrastructure, increased 55% y-o-y, while digital solutions revenue more than doubled.

What about O&G companies whose earnings have been boosted by the US-Iran war? As we wrote previously, the conflict disrupted the flow of energy through the Strait of Hormuz. But there is no underlying shortage of oil. The International Energy Agency expects the global oil market to return to surplus; that will continue to widen once the disruption ends.

The investment case for O&G companies, therefore, rests heavily on the probability of a prolonged conflict — to keep oil prices elevated. It is not a scenario on which we are comfortable placing our bets.

A more compelling way to gain exposure to the oil supply disruption, in our view, is through the plantation sector. Crude palm oil (CPO) prices rallied alongside crude oil earlier this year, partly because palm oil can be used as feedstock for biodiesel and, therefore, benefits when petroleum-based fuels become more expensive.

Indonesia has raised its biodiesel mandate from B40 to B50, increasing the share of biofuel blended into diesel from 40% to 50% since July 1, 2026. The higher mandate could absorb an additional 3.5 million tonnes of crude palm oil domestically, equivalent to more than 10% of Indonesia’s annual palm oil exports. Tighter global supply would provide support to CPO prices.

In addition, palm oil supply is becoming structurally tighter. The Indonesian government has taken control of about 5.9 million hectares of oil palm plantation land since early 2025 as part of its crackdown on plantations operating illegally in forest areas. About 4.1 million hectares of the seized land has been handed to state-owned Agrinas Palma Nusantara for management. The transition creates uncertainty over how efficiently these estates will be managed and how much output can be sustained in the future.

Malaysia, meanwhile, has seen CPO production largely plateau over the past decade. Total production has barely increased, from 20 million tonnes in 2015 to 20.3 million tonnes in 2025, while planted area increased to just 5.7 million hectares, from 5.6 million hectares.

With the government committed to preventing further deforestation for palm oil cultivation, there is limited scope for any meaningful expansion in planted areas. In Peninsular Malaysia, plantation is also competing with property and, more recently, data-centre development, for use of the land.

At the same time, fresh fruit bunch yield declined from 18.5 tonnes per hectare in 2015 to 17.8 tonnes in 2025. The oil extraction rate fell from 20.5% to 19.7%. Part of this deterioration can be traced to the prolonged period of relatively subdued CPO prices before the pandemic, when planters had less incentive to undertake aggressive replanting and productivity-enhancing investments.

The consequence is that supply growth cannot be restored quickly, even if CPO prices surge higher today. Replanting ageing palms takes years before new trees reach peak productivity. In short, Malaysian CPO output is likely to remain constrained in the near term. This should provide another level of structural support for palm oil prices.

Plantation remains one of our key investment themes. Our two plantation stocks, United Plantations and Kim Loong Resources, make up nearly a quarter of the Malaysian Portfolio’s total value currently. The sector has also performed strongly, with the Bursa Malaysia Plantation Index rising 17.1% year-to-date, making it the second-best-performing sector after technology.

We are holding about 25% of total portfolio value in cash right now, after investing in OCK. Aside from the abovementioned stocks, the rest of the Malaysian Portfolio leans on the conservative side, with the remaining 40% invested in low-beta, high-yielding companies — Hong Leong Industries, LPI Capital, Malayan Banking and Public Bank.

Despite maintaining a consistently high level of cash, averaging 40%, the Malaysian Portfolio’s year-to-date returns are more than double those of the bellwether FBM KLCI. The portfolio also performed better than the FBM EMAS, which tracks the broader market.

The Malaysian Portfolio fell 0.6% for the week ended Sept 9. The top winners were Public Bank (+1.4%), Kim Loong Resources (+0.7%) and United Plantations (+0.7%) while the biggest losers were Hong Leong Industries (-3.9%), LPI Capital (-1.9%) and Malayan Banking (-1.3%). Total portfolio returns now stand at 213.5% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 6.3% over the same period, by a long, long way.

The Absolute Returns Portfolio, on the other hand, was up 0.3%. Last week’s gains lifted total portfolio returns to 31.6% since inception. The top gainers were Talen Energy (+5.8%), Sun Hung Kai Properties (+3.0%) and Schneider Electric (+1.5%). Alphabet – CL C (-1.6%), Microsoft (-1.0%) and Singapore Tech Engineering (-0.6%) were the three biggest losing stocks during the period.

The AI Portfolio, meanwhile, gained 4.3% for the week, recouping some lost ground in the recent tech selloff. Total portfolio returns recovered to 24.7% since inception. The biggest gainers were Marvell Technology (+13.8%), Hewlett Packard Enterprise (+13.6%) and Roundhill Memory ETF (+9.6%) while the top losers include Cadence Design Systems (-7.2%), Naura Technology (-2.9%) and Amazon.com (-1.0%).

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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