Investors punished by liquidation find rare refuge in Malaysian assets

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(Bloomberg) — Investors looking for shelter from global market turmoil are turning to Malaysia.

The petroleum and crude palm oil exporter has seen its stocks, currencies and bonds outperform most of their peers since the outbreak of war in Ukraine. Soaring commodity prices are expected to bolster Malaysia’s coffers and increase its current account surplus.

The commodities boom is attracting funds to the Southeast Asian nation, after sentiment was hit earlier by political unrest and a growing budget deficit. The economy’s ability to attract capital could help it weather the volatility fueled by rising interest rates in developed markets.

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Ringgit sovereign bonds have gained 0.2% since Russia invaded Ukraine on Feb. 24, beating all but one of their top 19 emerging market peers tracked by Bloomberg. The benchmark 10-year yield has remained at around 3.3% over this period.

Much of the outperformance was due to Malaysia’s position as a net exporter of oil and agricultural products, according to Frances Cheung, rates strategist at Oversea-Chinese Banking Corp.

Malaysia is the only emerging Asian economy with an oil and gas trade surplus, with energy trade accounting for 0.4% of GDP, according to a March 7 note from DBS Group Holdings Ltd.

Brent crude has risen 44% since late February, with escalating tensions in Ukraine adding to jitters over a supply shortage. Palm oil prices hit a record high, giving Malaysia, the world’s second-largest producer, an extra boost.

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Ringgit securities also became less sensitive to fluctuations in Treasuries, meaning they were spared some of the volatility that rocked the world’s biggest bond market. The 60-day correlation between US and Malaysian 10-year debt has fallen to near zero from 0.30 six months ago.

Malaysian bonds could also benefit from JPMorgan Chase & Co.’s decision to remove Russian securities from its gauges. Such a move could raise the weighting of ringgit sovereign notes by 0.8 percentage points to nearly 10% in a JPMorgan emerging market bond index, Goldman Sachs Group Inc. said in a Feb. 28 note.

Certainly, a further rise in crude prices could become a burden for Malaysia. Exports account for about two-thirds of gross domestic product and the drag on global growth from more expensive oil is expected to be negative for trade. High commodity prices have already increased government subsidies on fuels and cooking oils, Finance Minister Zafrul Abdul Aziz told parliament on Thursday.

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But for now, other asset classes have also benefited. Malaysian stocks tumbled $1.03 billion this quarter, putting them on track for the biggest three-month inflow since 2017. The benchmark stock index has gained 4.5% since late January to beat all major peers in Asia.

Similarly, the ringgit has strengthened by 0.3% against the dollar since February 24, making it the best performance in the region after the Indonesian rupiah. The median forecast from a Bloomberg analyst survey is for the ringgit to climb to 4.13 by the end of the year, from around 4.19 currently.

“Rising oil prices provide a buffer for the ringgit in these uncertain times,” said Qi Gao, currency strategist at Scotiabank in Singapore. “By the end of the year, we expect a stronger ringgit as Federal Reserve rate hikes are fully priced in and global inflation concerns are likely to ease.”

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Robert D. Coleman