Analysts have remained cautious on Malaysia’s technology sector second half outlook, as they believe the sector’s earnings revisions are still skewed to the downside amid several headwinds.
Hong Leong Investment Bank Research said in a recent note that it foresees three major headwinds underpin its negative view.
Firstly, the sector’s end-demand visibility remains constrained by unresolved US tariff policies, especially on sectoral tariffs for chips.
While the supply chain initially pulled in demand to mitigate tariff uncertainty, it is unlikely to continue doing so after channel inventories are well-stocked.
Secondly, Malaysian technology firms are facing rising cost pressures from the second half this year, which are difficult to fully pass on.
This includes higher electricity tariffs and the mandatory 2 percent pension fund contribution for foreign workers.
Thirdly, foreign exchange (forex) headwinds persist with the Malaysian Ringgit having appreciated by 5 percent year to date against US dollar.
“While early reads suggest that the second quarter earnings season (July-Aug) may demonstrate relative resilience, the outlook for third quarter-fourth quarter remains opaque with heightened risks,” said the research house.
Against this backdrop, it sees limited scope for a positive inflection in the near term; sentiment is likely to remain subdued until earnings expectations are reset and the outcome of US tariff policy becomes clearer.
Hong Leong also believes it’s still too early to call for sustained recovery (especially for the auto/industrial segments), despite improving commentary from the supply chain.
It noted major analog IC suppliers like Infineon, STMicroelectronics, and Microchip have recently talked about the bottoming of these segments after having gone through a prolonged downcycle that started in late 2022.
These developments have fueled expectations that the analog IC supply chain may be past the trough, with the upcoming second quarter earnings season likely to be upbeat.
“However, we think the sustainability of this recovery remains unclear. Notably, part of the first half strength could have been driven by front-loading of orders in anticipation of US tariff risks,
“If so, the risk of a double whammy in the second half (weaker end-demand coupled with elevated channel inventory) should not be ruled out, especially if macroeconomic conditions deteriorate and supply chains are disrupted due to tariffs,” it added.
Within the electronics manufacturing services (EMS) space, it expects the sector’s earnings prospects to differ between consumer-focused and industrial-focused EMS players in the second half.
It opined that consumer EMS names continue to face challenges from fragile end-demand and muted discretionary spending amid ongoing macroeconomic uncertainties.
“Although management guidance during the recent earnings season pointed to a stronger second half (driven by new product contributions from existing customers), we see potential downside risks to these expectations, particularly as the effects of reciprocal tariffs begin to filter through,” said the research house.
In contrast, it highlighted that industrial EMS players are likely to deliver more resilient performance, supported by their exposure to non-discretionary end-markets such as mission-critical communication systems, crypto mining equipment, switches, and server-related components.
“Although the supply relocation theme is likely to take a backseat for now, we remain optimistic that Malaysia can eventually secure a reduced reciprocal tariff ahead of the August 1 deadline (current rate at 25 percent),” it noted.
Kenanga Research also said in a recent report that near-term technology sector outlook for Malaysia remains cautious, with most potential clients of its covered companies are delaying relocation decisions pending policy clarity.
“In the interim, the prevailing policy uncertainty continues to weigh on sector sentiment, with clients adopting a cautious ‘wait-and-see’ stance before committing to production reallocation,” said the research house.
While the World Semiconductor Trade Statistics (WSTS) projects continued growth in global semiconductor sales for 2025, TA Securities also remain cautious about Malaysia’s technology sector outlook due to prevailing uncertainties surrounding the U.S. trade policy.
According to TA, U.S. policies are the most critical factor to monitor in the second half, given the country’s dominant position in the semiconductor sector.
With U.S.-based companies accounting for approximately half of the global semiconductor market share, it opined that any policy shifts are likely to have far-reaching implications worldwide.
“We believe the policy risk will likely persist in the coming months, potentially leading to delays in orders and capital expenditure plans as corporates adopt a more conservative approach in response to the lack of policy visibility,” it noted.