Kenanga Research has foreseen Malaysia’s technology up-cycle to remain intact in the first quarter of next year, supported by a still expanding global semiconductor up-cycle and a resilient front-end capex outlook, which should continue to favor Malaysia’s front-end beneficiaries.

That said, the research house said in its note on Monday that its conviction isn’t as high as before on rising risk in the first half of 2026 (especially the first quarter of 2026).

This will be driven by artificial intelligence (AI)’s “circular” capital flows that could amplify downside if monetization disappoints, memory tightness that is lifting device costs and may weigh on consumer demand with spill-over risk to personal computers (PCs)/storage, and ongoing auto supply-chain uncertainty linked to Nexperia.

According to Kenanga, global semiconductor cycle still has runway with market nearing $1 trillion by 2026 led by logic/memory.

It is noted the World Semiconductor Trade Statistics (WSTS) lifted its 2025 forecast to 22 percent year on year ($772 billion) and expects more than 25 percent growth in 2026 ($975 billion), driven by AI-related demand and continued data-center investment, with logic and memory leading again (more than 30 percent year on year in 2026).

“This reinforces our overweight view since last quarter where the current 24-month up-cycle (that began in November 2023) could plausibly extend into mid-2026 or beyond, consistent with historical cycle duration and the structural AI/high-performance computing (HPC) upgrade cycle,” said Kenanga.

Meanwhile, front-end (web front end [WFE]) remains a key anchor for 2026 with capex cycle looking early rather than late, according to the research house.

It is noted that the Semiconductor Equipment and Materials International (SEMI) projects WFE to rise to $116 billion in 2025 (+6 percent) and $125 billion in 2026 (+8 percent), led by foundry/logic and an acceleration in memory equipment.

Importantly, tool spend has yet to fully reflect the scale of fab announcements (spend still skewed to facilities/infrastructure), implying the equipment upturn may have further room to broaden as 2nm/GAA/backside power and high bandwidth memory (HBM)/DDR5 transitions progress.

“For Malaysia’s front-end ecosystem, this constructive trajectory should translate to better prospects for local beneficiaries,” said Kenanga.

It added that historically, such cycles support stronger order intake, a deeper tender pipeline, higher utilization and improved revenue visibility across the segment.

Kenanga also noted that AI “circular capital flows” are supportive near-term but raise tail risk if monetization disappoints.

Cited Bloomberg, it noted that large, interconnected funding and procurement arrangements can effectively lock in graphics processing unit (GPU) demand and fund outsized capex, further reinforcing Nvidia’s dominance at the center of the AI build-out.

However, with several players still cash-burning and revenue scaling lagging expenditure, it opined that any shortfall in AI adoption or returns could quickly ripple through closely linked counterparties such as cloud providers, hyperscalers, AI labs and semiconductor suppliers, amplifying downside.

Kenanga also foresees memory tightness may spill over into weaker smartphone/PC demand.

According to the research house, the tightening memory market—driven by suppliers prioritizing higher-margin AI products (HBM and advanced DRAM) and a lagged recovery in conventional DRAM/NAND capacity after prior capex restraint is pushing up component costs and constraining availability for consumer devices.

“This has direct implications for end-demand where IDC now expects global smartphone shipments to grow 1.5 percent in 2025 (to 1.25 billion units) before contracting 0.9 percent in 2026, citing memory-related cost inflation, record-high average selling prices (ASPs) and pockets of component shortages,

“The risk is not limited to handsets as PC and storage channels are also seeing cost pressure and potential volume elasticity as elevated memory pricing filters through, creating a less favorable demand backdrop for consumer-facing semiconductor supply chains into the first half of 2026,” it said.

Kenanga also highlighted that auto chip supply disruption risk remains a watch point.

According to the research house, the Nexperia situation has evolved into a supply-chain watchpoint for high-volume discretes/power devices used across electronic control units (ECUs).

“While some flows are resuming selectively, governance/export-control uncertainty keeps near-term visibility limited, thus raising the risk of localized production hiccups and higher procurement costs if restrictions re-tighten,” it noted.

Analysts see risk-fraught recovery for Malaysia’s technology sector in 2026