Investors punished by sell-off find rare haven in Malaysia assets

[KUALA LUMPUR] Investors looking for shelter from the upheaval in global markets are turning to Malaysia. The exporter of oil and crude palm oil has seen its stocks, currency and bonds outperform most of their peers since the war in Ukraine broke out. Soaring commodity prices are expected to boost Malaysia's coffers and enhance its current account surplus.

The commodities boom is luring funds to the South-east Asian nation, after sentiment was hit earlier by political turmoil and a widening fiscal deficit. The economy's ability to attract inflows could help it weather the volatility fuelled by rising interest rates in developed markets.

Ringgit sovereign bonds have gained 0.2 per cent since Russia invaded Ukraine on Feb 24, beating all but 1 of their 19 major emerging-market peers tracked by Bloomberg. The benchmark 10-year yield has held around 3.3 per cent in that period.

Much of the outperformance has been driven by Malaysia's position as a net exporter of oil and agricultural products, according to Frances Cheung, a rates strategist at OCBC.

Malaysia is the only emerging Asian economy which runs an oil and gas trade surplus, with trade in energy accounting for 0.4 per cent of gross domestic product (GDP), according to a Mar 7 note from DBS.

Brent crude has rallied as much as 44 per cent since late February as escalating tensions in Ukraine add to jitters about a shortage of supply. Palm oil prices have climbed to a record, giving Malaysia, the world's No 2 producer, an added boost.

Ringgit securities have also become less sensitive to swings in Treasuries, which mean they've been spared some of the volatility which has rocked the world's biggest bond market. The 60-day correlation between US and Malaysian 10-year debt has fallen close to 0 from 0.3 half a year ago.

Malaysian bonds may benefit from JPMorgan Chase & Co's decision to drop Russian securities from its gauges. Such a move could push up the weighting of ringgit sovereign notes by 0.8 percentage points to almost 10 per cent in a JPMorgan emerging bond index, Goldman Sachs Group said in a Feb 28 note.

To be sure, a further rise in crude prices may become a burden for Malaysia. Exports account for about two-thirds of GDP and the drag on global growth from costlier oil is expected to be negative for trade. High commodity prices have already raised government subsidies on fuels and cooking oils, Finance Minister Zafrul Abdul Aziz said in parliament on Thursday (Mar 10).

But for now, other asset classes have also benefited. Malaysian equities have reeled in US$1.03 billion this quarter, putting them on track for the biggest 3-month inflow since 2017. The benchmark stock index has gained 4.5 per cent since end-January to beat all major peers in Asia.

Similarly, the ringgit has strengthened 0.3 per cent versus the dollar since Feb 24, making it the region's best performer after the Indonesian rupiah. The median forecast in a Bloomberg survey of analysts is for the ringgit to climb to 4.13 by year-end from around 4.19 now.

"Rising oil prices provide a buffer for the ringgit in these uncertain times," said Qi Gao, a currency strategist at Scotiabank in Singapore. "By the end of the year, we expect a stronger ringgit given that the Federal Reserve rate hikes will be fully priced in and global inflation concerns will probably recede." BLOOMBERG