July 10 (Bloomberg) -- At a time when slowing economic growth and political protests from Brazil to Turkey are spurring capital flight from emerging markets, Malaysia has turned into a refuge for equity investors.
The FTSE Bursa Malaysia KLCI Index was the biggest loser in Asia just four months ago as the closest elections in 55 years threatened the ruling coalition’s plans to spend $444 billion on infrastructure. Now the $478 billion stock market is the region’s best performer, after Prime Minister Najib Razak’s May 5 poll victory sparked a 4.2 percent rally in the KLCI index.
The gauge will probably rise 15 percent in the next 12 months and maintain the lowest volatility among the world’s biggest markets as Najib boosts spending to reach developed-nation per-capita income levels by 2020 and the nation’s $165 billion pension fund buys stocks, according to Samsung Asset Management. Malaysia has already weathered the 13 percent drop in the MSCI Emerging Markets Index as violence erupted from Sao Paulo to Istanbul to Cairo and economists predicted the weakest Chinese expansion since 1990.
“We have been adding” to Malaysia stocks, Gerald Ambrose, who oversees the equivalent of $1.7 billion as managing director at Aberdeen Asset Management Sdn., said by phone from Kuala Lumpur on June 28. “When the market falls, low volatility is a good thing.”
Aberdeen owns shares of Axiata Group Bhd., Malaysia’s biggest phone company by market value, and SP Setia Bhd., a Kuala Lumpur-based property developer, Ambrose said. He declined to identify which stocks Aberdeen has been buying.
The KLCI index rose 0.2 percent to 1,770.05 as of 9:55 a.m. local time, up from its closing level of 1,694.77 before the election. The MSCI Southeast Asia Index has declined 9.5 percent during the same period, while Brazil’s Ibovespa and Turkey’s Borsa ISE National 100 Index both sank 19 percent. The Shanghai Composite Index dropped 10 percent.
The KLCI index’s historical volatility level of 9.9 since global equity markets peaked on May 21 is the lowest among 45 developed and emerging countries, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index had a reading of 15.
Malaysia’s ringgit has weakened about 6.6 percent against the dollar during the period, while the BofA Merrill Lynch Government Index of the nation’s bonds has dropped 1.3 percent.
Emerging-market assets have been falling as slower economic growth strains political stability and speculation of reduced Federal Reserve stimulus spurs international investors to sell riskier securities.
China’s economy, the biggest in emerging markets, may expand at a 7.4 percent pace in 2013, the slowest annual rate since 1990, according to forecasts last month from Goldman Sachs Group Inc. and Barclays Plc.
In Malaysia, Najib’s victory over opposition leader Anwar Ibrahim has spurred investors to buy stocks. The ruling Barisan Nasional coalition pledged to build a mass-rail network, create a shopping district to rival Singapore’s Orchard Road and add oil storage facilities as part of its plan to achieve developed-nation status in seven years. Gross national income could rise to $15,000 per capita in 2018, two years earlier than the nation’s target, Najib said in a televised speech in March.
The KLCI index surged 3.4 percent in the first trading day after the election results were announced. It fell as much as 4.5 percent from the end of December through this year’s low on Feb. 20.
Foreign investors bought about $125 million of Malaysian shares during the past two months, according to the nation’s exchange. That compares with $2.1 billion of outflows from Indonesia, $2 billion from Thailand and $2.3 billion from Brazil.
“Malaysia has held up quite well in this period of capital flight,” Alan Richardson, whose Samsung Asean Equity Fund outperformed 97 percent of peers tracked by Bloomberg during the past three years, said in a July 1 phone interview. Malaysia is his biggest overweight position, and he favors companies in the construction industry that benefit from the government’s plans to boost infrastructure spending. Richardson, who is based in Hong Kong, didn’t identify specific stocks.
Malaysia’s gross domestic product expanded at a 4.1 percent pace in the first quarter, the weakest rate since 2009, as falling exports overshadowed gains in domestic spending. Foreign shipments dropped 5.8 percent in May as the country shipped less palm oil and electronics.
“Malaysia will see some slowdown,” David Gaud, a Hong Kong-based senior money manager at Edmond de Rothschild Asset Management, which oversees more than $157 billion, said in a phone interview July 2. He favors shares in the Philippines and Thailand.
Once investor appetite for riskier assets returns, Malaysia will probably rally less than emerging markets that tumbled in the past six weeks, according to Soohai Lim, who helps manage the Baring ASEAN Frontier Fund.
The KLCI index is valued at 16 times estimated earnings for the next 12 months, compared with 9.6 times for MSCI’s developing nations gauge and 14 times for the MSCI Southeast Asia Index, according to data compiled by Bloomberg.
“We have been using Malaysia as a funding source for some of the more oversold markets,” said Lim, whose $712 million ASEAN fund in Dublin beat 79 percent of peers in the past year. Asean refers to the Association of Southeast Asian Nations.
Stock purchases by Employees Provident Fund, which oversees retirement savings for more than 13 million Malaysians, have supported the KLCI index during the rout that erased $3.7 trillion of global equity value since markets peaked. EPF bought about $820 million of stocks in the KLCI index from May 21 through July 3, according to data compiled by Bloomberg.
EPF has average stakes of about 10 percent in KLCI index companies while Khazanah Nasional Bhd., Malaysia’s $27 billion state investment firm, owns at least 30 percent of companies such as IHH Healthcare Bhd. and CIMB group Holdings Bhd.
When investors “are selling markets in Asia, Malaysia is not on the sell list, because they know it’s well supported,” Gary Dugan, the chief investment officer for Asia & Middle East at Coutts & Co., said in an interview in Singapore on July 3.
Cash payouts in Malaysia have also attracted investors seeking more predictable returns, said Tock Chin Hui, the Kuala Lumpur-based head of equities at Manulife Asset Management Services Bhd.
The KLCI index has a dividend yield of 3.4 percent, versus 3.1 percent for the MSCI Southeast Asia gauge. Earnings in the Malaysia index are projected to rise 7 percent in the next 12 months, double the 3.4 percent pace for the regional measure, according to analyst estimates compiled by Bloomberg.
“In situations where volatility persists,” Chin Hui said, “such steady return augurs well for investors.”
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