UOB’s Global Economics & Markets Research reported Malaysia’s 1Q26 GDP grew 5.4% year-on-year, slightly above estimates but slower than 4Q25. Domestic demand and services were the main drivers.
It said external headwinds were rising as the Middle East conflict entered its 11th week and the Strait of Hormuz remained effectively closed. It linked these conditions to higher downside risks to growth.
UOB kept its 2026 GDP growth forecast at 4.5%. It cited Bank Negara Malaysia’s 2026 estimate of 4.0%–5.0% and noted 2025 growth of 5.2%.
UOB expected Bank Negara Malaysia to keep the Overnight Policy Rate at 2.75%. It said the central bank may wait two to three months before considering any policy recalibration, depending on changes in growth and inflation conditions.
UOB’s outlook included targeted and tactical government measures aimed at supporting affected households and businesses. It also noted that further measures may be announced as conditions change.
With first-quarter growth for 2026 coming in at a solid 5.4%, the headline number looks strong, but we see significant risks brewing. The ongoing conflict in the Middle East and the closure of the Strait of Hormuz are creating major headwinds for the global economy. This uncertainty suggests that positioning for increased market volatility is the most prudent strategy for the next few weeks.
Given the high degree of uncertainty, we believe traders should consider buying protection against potential market downturns. For instance, purchasing put options on the FBM KLCI index or on export-oriented stocks could be a cost-effective way to hedge portfolios. The CBOE Volatility Index (VIX), a key gauge of market fear, has already climbed 15% in the last month, indicating that investors are pricing in higher risk globally.
Bank Negara Malaysia is expected to hold the Overnight Policy Rate steady at 2.75% as it waits for more clarity over the next two to three months. This stability in the short-term creates an opportunity in interest rate derivatives, where one could enter into swap agreements that bet on rates remaining low. We saw a similar period of central bank patience during the 2014 oil price collapse, which was eventually followed by significant policy action once the economic impact became clear.
The Malaysian Ringgit will likely experience choppiness, caught between Malaysia’s status as a net oil exporter and the negative impact of global trade disruptions. With Brent crude futures trading above $115 a barrel this past week, we expect sharp but unpredictable movements in the USD/MYR exchange rate. Using currency options to construct straddles could be a way to profit from this volatility, regardless of the direction the ringgit moves.
Last year’s GDP growth of 5.2% set a high bar, and the current forecast of 4.5% for 2026 already accounts for a slowdown. We should therefore use FBM KLCI futures (FKLI) for short-term, tactical trades rather than establishing long-term directional bets. Responding quickly to news about shipping routes and supply chain data will be more effective than following the broader growth trend.
The government is providing targeted support, but these measures may not be enough if the external situation deteriorates further. April’s inflation data, which showed the Consumer Price Index rising to 3.1%, also complicates the central bank’s position, limiting its ability to cut rates preemptively. Therefore, using derivatives to define risk and protect capital should be the primary focus.
