Malaysia's Slowing Industrial Production Amid Trade Tensions: Near-Term Risks and Opportunities in Manufacturing

Malaysia's industrial sector faces a critical crossroads in early 2025, with the April Industrial Production Index (IPI) growing just 2.7% year-on-year—well below the 3.9% consensus forecast—amid escalating trade tensions and sector-specific headwinds. While manufacturing remains the linchpin of growth, declines in mining and electricity output, coupled with U.S. tariff threats, are testing the resilience of export-reliant industries. Yet, within this slowdown, pockets of opportunity emerge in domestically oriented sectors such as food processing and basic metals, offering investors a path to navigate risks while capitalizing on undervalued equities.

The IPI Slowdown: Manufacturing Growth Under Pressure

Malaysia's manufacturing sector grew 5.6% YoY in April, driven by robust performances in vegetable/animal oils (22.8% growth) and electronics (11.1%). However, this expansion contrasts sharply with a broader moderation in the IPI, which has averaged just 2.4% year-to-date—a significant deceleration from 3.6% in the same period of 2024. The divergence stems from two key factors:

1. Trade Tensions: U.S. tariff threats on electronics and palm oil derivatives continue to weigh on export-oriented industries. For example, Malaysia's electronics sector, which accounts for 15% of manufacturing output, faces a 10% tariff on semiconductor imports into the U.S.—a critical market for its $80 billion electronics industry.
2. Structural Weakness in Mining & Electricity: Mining output collapsed 6.3% YoY in April due to falling natural gas production (-10%), while electricity generation declined 1.6% as utilities grapple with rising costs and underinvestment in renewable infrastructure.

Navigating Risks: Where to Hedge Exposure

Investors must tread cautiously in sectors directly exposed to trade disputes and external demand volatility:
- Electronics Manufacturing: While semiconductor sales are projected to grow 11.2% globally in 2025, Malaysia's sector remains vulnerable to U.S. tariffs and inventory gluts.
- Oil Derivatives: Palm oil exports, a key driver of the 22.8% growth in oils and fats, face retaliatory tariffs from the EU and India, which collectively account for 30% of Malaysia's palm oil exports.

Opportunities in Resilient Sub-Sectors

Domestic demand-driven industries are proving more insulated from external shocks:
1. Food Processing: Output surged 8.2% YoY in April, fueled by rising demand for processed foods in Malaysia's growing urban population. Companies like Sime Darby Plantations and Genting Plantations, which focus on palm-based consumer goods, offer stable cash flows and undervalued equity multiples.
2. Basic Metals: Manufacturing of fabricated metal products and basic metals grew 5.0% and 6.0% YoY, respectively, benefiting from infrastructure spending under Prime Minister Anwar Ibrahim's stimulus plans. Firms like Malaysia Smelting Corporation (MSCB) could see tailwinds from government-linked projects.

Investment Strategy: Balance Caution with Selective Exposure

• Underexposed Equities: Target companies in food processing and basic metals with low debt and high domestic revenue exposure. For example, Genting Plantations (GSPL) trades at 12x forward earnings—well below its 5-year average of 16x—despite 20%+ EBITDA growth from palm-based consumer products.
• Tech Sector Caution: Avoid pure-play electronics manufacturers unless valuation discounts reflect tariff risks. Instead, consider diversified conglomerates like Sime Darby, which derive 40% of revenue from logistics and real estate.
• Avoid Mining Plays: Natural gas producers like PETRONAS remain exposed to volatile commodity prices and regulatory uncertainty.

Conclusion: A Sector-Specific Play

Malaysia's manufacturing sector is far from a lost cause. While trade tensions and structural shifts in mining/electricity sectors pose near-term risks, domestically oriented sub-sectors offer a defensive haven. Investors should prioritize firms with strong domestic revenue streams and minimal exposure to export taxes, while maintaining a watchful eye on geopolitical developments. The key to success lies in selective exposure to underappreciated champions of Malaysia's industrial base.

In this environment, patience and sector-specific analysis will reward investors seeking to capitalize on Malaysia's industrial evolution.