Asia's FX Laggards Turn Leaders of Pack as Ringgit Rebounds

(Bloomberg) -- Better late than never. The Philippine peso and Malaysian ringgit have clambered aboard the Asian currency rally, advancing against the dollar and spurring flows into equity markets.

Global funds have poured $581 million into Malaysian stocks and $198 million into the Philippines since the end of March as the countries’ currencies strengthened 2 percent and 0.5 percent, respectively. That’s a dramatic turnaround considering both declined more than four percent in 2016 and hit decade lows this year.

The driving forces are slightly different. For the Philippines, investors are encouraged by tax reforms aimed at raising more than $3 billion in annual revenue to fund infrastructure spending. In Malaysia, the recovery in commodity prices has burnished the appeal of equities: the Kuala Lumpur Composite Index has risen for five straight months.

Asia's FX Laggards Turn Leaders of Pack as Ringgit Rebounds

If the Philippine tax amendments are passed, it would be “quite positive for equity flows and domestic resident flows as it’ll improve efficiency within the economy,” said Wilfred Wee, a Singapore-based fund manager at Investec Asset Management Ltd., which oversaw $114 billion as at the end of 2016.

The benchmark Philippine Stock Exchange Index advanced 4.8 percent in April, the top performer among major Asian stock markets. That was enough to persuade global funds to return after two quarters of outflows. The peso climbed from a 10-year low in March on optimism President Rodrigo Duterte’s tax blueprint will help fund a $160 billion infrastructure plan and preserve the Philippines’ investment-grade sovereign credit rating.

Asia's FX Laggards Turn Leaders of Pack as Ringgit Rebounds

“The Philippine government’s commitment to build infrastructure and overhaul the tax system, along with indications that first-quarter earnings could be better than expected, are attracting back foreign funds,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc., the nation’s biggest lender by assets. “The key for this outperformance to continue is the passage of the tax reform in the third quarter.”

Investors are picking Malaysian stocks on expectations higher crude prices will bolster state revenues and that government spending will increase ahead of a possible general election this year. The benchmark KLCI equities gauge is at its highest in nearly two years, boosted by the longest stretch of inflows since 2013 as the ringgit recovered from a near 20-year low.

Asia's FX Laggards Turn Leaders of Pack as Ringgit Rebounds

Not everybody is convinced.

“We have no equity exposure in Malaysia and have been out of the market for approximately one year,” Sat Duhra, a fund manager at Henderson Global in Singapore, said via email. “We consider the political risks, high valuations, weak currency and lack of yield opportunities to be negatives and consider that valuations and growth are far more compelling outside of Malaysia.”

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The general fervor also isn’t extending to bonds in either country, as a pickup in inflation hurts demand for fixed-income securities.

“There’s a bias for Philippine yields to go higher. I’m more comfortable with the currency than the rates story in the Philippines,” Investec’s Wee said.

The yield on Philippine government notes due in a decade climbed to 4.72 percent in March, the highest in more than four years, as consumer prices rose at the quickest pace since 2014.

Analysts are predicting the Philippines will be the first Southeast Asian economy to tighten policy in 2017, while annual economic growth is forecast to top 6 percent until 2019, among the fastest in the world. Governor Amando Tetangco said in an interview in April that inflation is within target and there’s no strong impetus for the central bank to change stance.

Global funds pulled more than $14 billion from Malaysian debt in the five months through March as appetite wilted after inflation hit an eight-year high. A central bank clampdown on trading in offshore non-deliverable forwards also stoked concern about capital controls, though the bank has said nothing is planned along those lines. Malaysian bonds have outperformed Asian peers more recently, and the 10-year yield was Tuesday heading for its lowest close since November.

“Foreign banks have lost interest because of the NDF curbs, but some foreign fund managers and central banks that hold Malaysian government securities have maintained their holdings,” said Gerald Ambrose, managing director of Aberdeen Asset Management Sdn. in Kuala Lumpur. “One way to gain exposure is to park it in equities. There’s a bit of earnings growth expectations, and domestic retail activity has increased on smaller stocks that might benefit from measures to be taken ahead of the general election.”