DBS Group Research forecasts Malaysia’s 1Q26 advance GDP growth at 5.5% year-on-year, compared with 6.3% in 4Q25. It expects growth to remain supported by export-focused electrical and electronics manufacturing and global AI-related demand.
It also links growth to domestic demand, with ongoing construction and investment activity. Services are expected to expand alongside manufacturing spillovers and continued household spending.
The outlook assumes resilient growth and contained inflation in 1Q26 despite a Middle East shock dated February 27. Headline inflation is projected to rise to 1.7% year-on-year in March from 1.4% in February.
The projected increase is attributed to higher food costs linked to festive spending and energy prices after global oil rose following the Iran war. The impact from oil prices is expected to be softened by fiscal subsidies.
The economic picture supports a cautiously optimistic stance for the next few weeks. Malaysia’s economy shows solid footing with expected 1Q26 GDP growth of 5.5%, a slight cooling from the 6.3% we saw in the final quarter of 2025 but still very strong. Given this backdrop, we should position for continued strength in equity markets, especially with the advance GDP figures due for release around April 15th.
We see particular strength in the technology sector, fueled by the global demand for AI components. The FBM KLCI has already risen over 4% this year, and derivatives tied to the technology index or specific E&E manufacturing stocks look appealing. Buying call options on these growth-oriented names could offer upside exposure while limiting risk.
Inflation appears well-managed, even with the March consumer price index data released yesterday showing a slight uptick to 1.8%, just above the 1.7% forecast. This mild pressure suggests Bank Negara Malaysia will likely hold its key interest rate at 3.25% in its upcoming May meeting, a stance it has maintained all year. This stability in interest rate expectations makes receiving fixed on short-term interest rate swaps an attractive position.
The Malaysian ringgit has shown resilience, trading in a stable range around 4.65 against the US dollar despite global oil price volatility. This stability, supported by strong economic fundamentals, suggests that selling volatility through short strangles on the USD/MYR currency pair could be profitable. We expect the currency to hold this range barring any major escalation in the Middle East.
The primary risk remains geopolitical, stemming from the conflict that began in late February. While fiscal subsidies are currently blunting the impact of higher energy prices, any worsening of the situation could trigger market volatility. We should consider buying some cheap, out-of-the-money put options on the broader FBM KLCI index as a hedge against a sudden downturn.
