Bloomberg/Singapore

Malaysia’s ringgit and Indonesia’s rupiah are the most attractive emerging-market currencies to Morgan Stanley’s asset management arm after a selloff drove them to their lowest levels in 17 years.
The currencies are Asia’s worst performers this year as a slump in commodity prices hurts exports and the US prepares to raise interest rates. Morgan Stanley Investment Management predicts the ringgit and rupiah will outperform peers and says developing economies are unlikely to face a repeat of the so- called Taper Tantrum of 2013 when $70bn was pulled from their bond markets after the Federal Reserve signalled monetary stimulus would be cut.
“Malaysia is the cheapest from our medium-term foreign- exchange modelling in emerging markets, and Indonesia is second,” Jens Nystedt, managing director at the New York-based money manager, said by phone from Jakarta on Wednesday. “Given the selloff that we’ve seen in both currencies and bonds, you’re rewarded to take exposure at this point. India looks attractive but not as attractive.”
A Fed rate increase this year won’t surprise investors and further losses in emerging-markets exchange rates will be temporary as they’ve been declining over the past year, according to Nystedt. Narrower current-account deficits in Indonesia and India put them in a stronger position to endure outflows than two years ago, and both nations are candidates to exit Morgan Stanley’s “Fragile Five,” he said.
The list of markets most vulnerable to market disruptions includes Brazil, Turkey and South Africa.
“India and Indonesia have taken steps in the right direction given the new governments that have come in to being, and India in particular has been more bold when it comes to reforms compared to other markets,” Nystedt said.
The money manager, which oversaw $403bn at the end of June, also favours government bonds of the two countries along with Malaysian sovereign debt, he said.
The ringgit has lost 18% this year as a slump in crude oil prices hurt exports and allegations of corruption against Prime Minister Najib Razak spurred outflows. Najib has denied taking money for personal gain.
The rupiah has weakened 14% and the rupee has fallen 5.1% in the same period, data compiled by Bloomberg show.
Global investors hold 32% of Malaysian debt and 38% of Indonesia’s, official data show, the largest shares in Southeast Asia. Malaysia’s local-currency bonds handed investors a 2.6% return this year, compared with a 5.7% gain in Indian debt and a loss of 2.9% on Indonesian notes, according to indexes compiled by Bloomberg.
“In Malaysia the biggest risk that they have, in addition to political risk, is really the large ownership of the foreigners in the government bond market,” Nystedt said. “Given that we don’t expect a Taper Tantrum, we think we are being rewarded to take that risk at the moment.”
Futures contracts show a 32% chance for a rate increase Thursday, compared with 64.3% in December. If the Fed holds off and signals it may raise in October, that will provide short-term relief to markets, with Latin America and Eastern Europe benefiting the most as they tend to be most vulnerable, according to Nystedt.
The Fed will probably take a “dovish” approach amid subdued global growth and Morgan Stanley Investment Management expects only one increase of 25 basis points this year, he said, with the Fed funds rate rising gradually in coming years until it reaches 2.50% to 3% in 2018.
An increase this week will result in ‘‘a short-term selloff, but then we are taking away a major uncertainty and the market can recover somewhat,’’ he said. “If the Fed makes clear in that this is the only hike this year, and they’re going to be slow and keep rates low, that’s a scenario where emerging markets can stabilise after a day or two of adjustment.”