KUALA LUMPUR, July 10 — 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 US$444 billion (RM1.4 trillion) on infrastructure. Now the US$478 billion stock market is the region’s best performer, after Prime Minister Najib Razak’s May 5 poll victory sparked a 4.2 per cent rally in the KLCI index.

The gauge will probably rise 15 per cent 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 US$165 billion pension fund buys stocks, according to Samsung Asset Management. Malaysia has already weathered the 13 per cent 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 $US1.7 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.”

Global retreat

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 per cent yesterday to 1,766.49, up from its closing level of 1,694.77 before the election. The MSCI Southeast Asia Index has declined 10 per cent during the same period, while Brazil’s Ibovespa and Turkey’s Borsa ISE National 100 Index both sank 19 per cent. The Shanghai Composite Index dropped 11 per cent.

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 per cent against the dollar during the period, while the BofA Merrill Lynch Government Index of the nation’s bonds has dropped 1.3 per cent.

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.

Government spending

China’s economy, the biggest in emerging markets, may expand at a 7.4 per cent 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 US$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 per cent in the first trading day after the election results were announced. It fell as much as 4.5 per cent from the end of December through this year’s low on February 20.

Capital flight

Foreign investors bought about US$125 million of Malaysian shares during the past two months, according to the nation’s exchange. That compares with US$2.1 billion of outflows from Indonesia, US$2 billion from Thailand and US$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 per cent 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 favours 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 per cent pace in the first quarter, the weakest rate since 2009, as falling exports overshadowed gains in domestic spending. Foreign shipments dropped 5.8 per cent in May as the country shipped less palm oil and electronics.

Relative value

“Malaysia will see some slowdown,” David Gaud, a Hong Kong-based senior money manager at Edmond de Rothschild Asset Management, which oversees more than US$157 billion, said in a phone interview July 2. He favours 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 US$712 million ASEAN fund in Dublin beat 79 per cent of peers in the past year. Asean refers to the Association of Southeast Asian Nations.

EPF buying

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 US$3.7 trillion of global equity value since markets peaked. EPF bought about US$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 per cent in KLCI index companies while Khazanah Nasional Bhd., Malaysia’s US$27 billion state investment firm, owns at least 30 per cent 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 per cent, versus 3.1 per cent for the MSCI Southeast Asia gauge. Earnings in the Malaysia index are projected to rise 7 per cent in the next 12 months, double the 3.4 per cent 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.” — Bloomberg