Over the past month, the market has experienced heightened geopolitical tensions in the Middle East (US-Iran war), alongside a shift in US trade policy under President Donald Trump. Despite these ongoing external developments, we remain positive on the Malaysian equity market.
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Middle East conflict: Limited direct economic impact on Malaysia.
With regard to the Middle East conflict, we believe the direct economic impact on Malaysia is limited, as Malaysia’s trade and tourism income have relatively low exposure to the Middle East economies. At the same time, as Malaysia is a net energy exporter, the direct impact from oil price movements on the broader economy remains contained.
That being said, there are some risks that investors should be mindful of. Firstly, with Malaysia continues to subsidise RON95 petrol for all Malaysians, capping the price at RM1.99 per litre under the Budi 95 programme, any war escalation that spikes up oil prices would increase subsidy spending from the government. Based on estimates, if the average oil price reaches approximately USD100 per barrel with the Ringgit staying at 3.95 against the US Dollar, it would widen fiscal spending to RM19.5 billion annually, which could weigh on the government’s fiscal consolidation efforts. Amid ongoing fiscal consolidation, we do not rule out the possibility of recalibrating the price cap of RM1.99 per litre upward should the conflict escalate further.
Additionally, a prolonged US-Iran conflict might have indirect spillover effects via the US, which accounts for 15.7% of Malaysia’s total trade, potentially dampening external demand and private investment. That being said, these risks are building on the assumption of a prolonged US-Iran confrontation, which is not in our base case at this juncture.
Figure 1: RON95 annual subsidy at subsidy price of RM1.99/L (RM bn)
Source: Bloomberg, Macrobond, CIMB Treasury and Market Research, iFAST compilations. Data as of 3 March 2026.
Figure 2: Malaysia’s top 10 export countries as of end-January 2026.
US tariff rollback: Temporary relief provides a silver lining.
On the trade front, the recent rollback of tariffs and the shift towards 10% tariffs under US Section 122, from the previous 19% rate, has been a welcomed development. While we acknowledge that this creates more unpredictability with regard to the next move by US President Donald Trump, we believe the positive takeaway here is that the temporary relief at the lower tariff rate might increase the attractiveness of Malaysia’s products in the US market, especially given that approximately 63.9% of exports, such as machinery and electrical and electronics (E&E) products, remain exempted.
As such, while global trade uncertainties persist, we opine that Malaysia’s export sector remains relatively well-positioned in the near term, supported by the lower tariff rate and broad exemptions across key export categories.
Oil & Gas sector: Do not chase the rally.
In terms of sector impact, we believe some upstream oil and gas players such as Hibiscus Petroleum and Dialog Group could see near-term benefits, given their exposure to oil prices and higher petroleum tanker rates. However, it is important to recognise that these companies are still heavily reliant on Petronas for their production sharing contracts.
More importantly, the majority of Malaysian oil and gas companies, with the exception of Yinson, are heavily dependent on Petronas’ capital expenditure. Based on the Petronas’s latest earnings results, total capex spending in 2025 fell by 23% y/y from 2024 levels, while management has guided for continued deferment and cuts to capital expenditure in 2026, indicating potentially limited upside for local OGSE (Oil & Gas Services and Equipment) companies that investors should not overlook.
As such, although Middle East tensions have lifted local oil and gas share prices in recent sessions, investors should be cautious about chasing this rally, as most Malaysian oil and gas firms are OGSE players that rely heavily on Petronas-linked contracts.
Remain positive on Malaysia.
Putting it all together, we believe the recent global developments, namely tariffs and the Middle East conflict, are likely to have a limited impact on the Malaysian equity market. The risks, while present, are deemed manageable under our base case assumption that the Middle East conflict will not be prolonged, and we remain constructive on the Malaysia’s equity market, as economic fundamentals remain intact, supported by resilient domestic growth, improving corporate earnings, and relatively attractive valuations.
In terms of sectors, we continue to advocate that investors focus on domestic centric sectors such as banks, construction, consumer and renewable energy, as these sectors have the lowest direct exposure to current geopolitical risks. At the same time, they stand to benefit from strong domestic economic momentum as well as supportive government policy direction, including infrastructure development, cash handouts to boost consumption, and the ongoing energy transition.
We continue to recommend the abrdn Malaysian Equity SGD and iShares MSCI Malaysia ETF (NYSE: EWM) for investors looking for exposure in Malaysian equities.
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