(Bloomberg) -- A confluence of tailwinds is helping Malaysian equities outperform the region and the return of foreign funds points to further gains. 

Overseas investors have bought $502.9 million of local shares on a net basis in May, putting the market on track for its biggest monthly inflow since March 2022, according to Bloomberg-compiled data. Malaysia is the only country in Southeast Asia to see inflows this month as a budding artificial intelligence sector and political stability lure global money.

Malaysia is emerging as a key bet on AI in the region, given its position as a hub in the global chip supply chain and as tech giants invest billions of dollars in the country’s infrastructure. The government’s tenure past the one-and-a-half-year mark is also a welcome change after a rapid turnover of leaders, while efforts to carry out reforms help improve the outlook for the local market. 

The recent tariff hike by the US on Chinese protective equipment also bodes well for local glovemakers.

The country “is back on foreigners’ radar due to reduced political uncertainty, commodities’ advance and the prime minister has been inviting a lot of companies to invest in AI and green energy,” said Danny Wong, chief executive officer of Areca Capital Sdn. “This means good times for under-owned and cheap Malaysian stocks.”

The equity benchmark FTSE Bursa Malaysia KLCI Index has risen more than 10% this year in comparison to a nearly 3% decline in the MSCI Asean gauge. Analysts are projecting another 7% climb in the Malaysian measure over the next 12 months, which can take it above its December 2020 peak.

Read: AI Boom Draws Stock Traders to Southeast Asia’s Likely Winners

Foreign investors have recently escalated purchases of technology and transport shares, according to a CIMB Securities Sdn. note dated Monday, after previously picking up stocks in the utilities and health-care sectors. Chip companies Unisem M Bhd. and Inari Amertron Bhd. have gained 25% and 13% this year, respectively.

The country also offers a wider choice of AI-related stocks than some other neighbors. Utility firm YTL Power International Bhd. and power producer Tenaga Nasional Bhd. are among the key beneficiaries of the growth in Asean data centers. Malaysia is projected to capture about $115 billion of the $1 trillion potential add to Southeast Asia’s economy by 2030 from AI adoption, according to a report by consulting firm Kearney.

Alphabet Inc.-owned Google on Thursday joined Microsoft Corp. and Nvidia Corp. in pledging billions of dollars into helping Malaysia’s growing AI ambitions. Google committed to making $2 billion in investments in the country, including its first data center and Google Cloud effort in the region.

“Malaysia is starting to carve out a niche for itself in the AI ecosystem,” said Alan Richardson, a fund manager at Samsung Asset Management. “The country’s competitive advantage is lower cost and geopolitical stability to set up infrastructure to support AI power.” 

Read: Malaysia Fast Becoming an AI Darling in Southeast Asian Stocks

To be sure, the rally this year has raised valuations for the KLCI back to its five-year average of about 14 times its one-year forward earnings estimate. The other gauges in the region, including in Indonesia and Vietnam, are still trading below their five-year averages.

There is more upside for local stocks as sentiment among foreigners recovers and “political stability and AI investments will add” to the optimism, said Nirgunan Tiruchelvam, an analyst at Aletheia Capital. 

(Updates to add Google’s investment in ninth paragraph)

©2024 Bloomberg L.P.