Funds Flow into Malaysia as Iran War Shakes Asian Markets

SadaNews Economy - Even before the Iran war ignited a surge in energy prices, Malaysia had emerged among Southeast Asia's economies as a new preferred destination for global investors.

A rare period of political stability, combined with investment flows into high-value manufacturing and data centers, has enhanced Malaysia's appeal, especially at a time when neighboring countries face leadership changes and financial pressures.

As the conflict in the Middle East escalates, this distinction has been further strengthened, as investors turn to markets seen as more capable of absorbing fluctuations.

Malaysian Stocks Outperform Despite Iran War

The benchmark stock index in Malaysia outperformed its regional peers during March—at a time when the Iran war confused global markets—benefiting from the country being one of the few net energy-exporting Asian nations. In contrast, foreign capital outflows from local stocks remained relatively limited, despite a broad sell-off that affected most emerging Asian markets. The ringgit has also maintained its gains against the dollar since the beginning of the year, outperforming its currency peers.

Alexander Readman, a senior equity strategist at CLSA in Singapore, raised the market rating to "neutral" from "underweight" as long as the Iran war continues, stating, "It’s the destination that investors turn to when conditions worsen elsewhere."

He added that Malaysia is in a relatively strong position, achieving a current account surplus and being a net exporter of oil and gas, while the weight of energy in its consumer price index is lower compared to other countries.

Rising Oil Prices Give Malaysia an Extra Boost

The recent surge in oil prices, driven by the conflict in the Middle East, could provide an additional boost to Malaysia’s revenues, which derives from offshore oil and gas resources off the states of Borneo and Terengganu, at a time when other countries face increasing pressures from rising energy costs. It is estimated that revenues linked to the oil sector will comprise about 12.5% of government income in 2026.

This momentum has helped the country avoid sharp capital outflows seen in other markets; global funds recorded a net sell-off of about $80 million from local stocks since the beginning of the month until Friday, while the FTSE Bursa Malaysia KLCI Index only declined by 1.2%. Additionally, foreign investor flows into stocks remained positive during this quarter.

Policy Support

The economic initiatives put forth by Malaysia position it favorably compared to its Southeast Asian counterparts. While Thailand and Indonesia face policy uncertainty, Prime Minister Anwar Ibrahim's government has proposed plans to boost spending in the semiconductor industry and build capacity in manufacturing and renewable energy.

This strategy has contributed to an increase in foreign direct investment flows to a record level last year. The record growth in trade and the number of tourists has helped push Malaysia's growth to surpass most Southeast Asian economies by 2025. Despite geopolitical challenges, the government remains committed to its growth forecasts for this year.

Alongside its "defensive traits," Malaysia is also on a growth trajectory, according to Tutiana Josat, Chief Investment Officer for fixed income in Malaysia and head of global sukuk at Amundi in Kuala Lumpur, who expresses a positive outlook on local debts. She added that companies continue to expand, while demand for corporate issuances remains strong and encouraging.

Bank stocks, such as Malayan Banking, along with consumer companies like MR D.I.Y. Group, have been among the best performers on the index since the beginning of the year, benefiting from the economy's resilience.

Stocks in the oil and gas sector, including Petronas Chemicals Group and Petronas Dagangan, have also made gains.

Malaysia Outperforms Its Neighbors

James Chin, Professor of Asian Studies at the University of Tasmania, stated, "Many see Malaysia going through an excellent phase right now." He added that the country has a strong base of educated labor and infrastructure that surpasses most of its regional peers, enhancing its capacity to maintain its edge.

Indonesia faces challenges in regaining investor confidence after rating agencies downgraded their outlook and MSCI warned of the possibility of it dropping to frontier market status. In Thailand, rising household debt and weak economic growth are pressuring performance, while the Philippines is suffering from the fallout of a corruption scandal linked to public works projects.

However, the continuation of the war in Iran could lead to increased capital outflows from emerging markets, including Malaysia. Additionally, the support bill may rise if oil prices remain high, putting pressure on fiscal deficit reduction plans. Allegations of collusion among businessmen and officials related to anti-corruption efforts could also raise concerns among investors.

Capitalizing on Artificial Intelligence

Tan Teng Boo, CEO and Managing Director of Capital Dynamics, points out that Malaysia’s position within the global chip ecosystem is an attractive factor.

Admiring local tech companies, including Dufu Technology, Tan expects the benchmark stock index to rise to between 2500 and 3000 points in the next two years, noting that the Kuala Lumpur Composite Index closed trading on Monday at 1696.56 points.

Malaysia has successfully established itself in the fields of semiconductor assembly, testing, and packaging, with plans to expand into higher value production stages, including designing its own chips. The country is also emerging as a rising destination for AI data centers in the region, estimated to contribute around 14.1 billion ringgit ($3.6 billion) to Malaysia's economy by 2025.

Investment momentum continues in Johor state in the south of the country, which is a major center for data centers. The establishment of a common special economic zone with Singapore is also expected to pave the way for further projects in the region.

These developments enhance Malaysia's investment appeal at a time when funds seek safer havens amid turmoil.

Harvey Bradley, co-head of global interest rate strategies at Insight Investment, explains: "Investors are looking to identify markets that provide a greater sense of security for their capital in the near term, and Malaysia has been among the top markets to benefit from this trend."