KUALA LUMPUR • Malaysian assets are back in favour as investors focus on encouraging signs of an economic turnaround instead of a scandal that has touched the top of government and as far as Hollywood.

The stark shift means that Prime Minister Najib Razak, who has weathered political attacks and protests going back to 2015 over allegations involving state fund 1Malaysia Development Berhad (1MDB), may call an early election to cement his hold on power.

The ringgit is easily the strongest major Asian currency this quarter, climbing twice as much as the next best, the Chinese yuan. Global funds have bought the most Malaysian stocks year-to-date since the same period in 2013, and net inflows to the bond market surged last month and in April.

Malaysia has been rocked by far-reaching investigations into 1MDB, yet double-digit acceleration in exports has lifted the economy, which grew 5.6 per cent year on year in the first quarter, the most since early 2015.

Mr Hakan Aksoy, fund manager at Pioneer Investment Management, said: "With improving macroeconomic conditions in Malaysia, we became more positive in mid-2017 for the general Malaysia outlook, although there are still political and corruption concerns.

"As long as we see improvement on the macro data with the support of global conditions and stable energy prices, we will keep our cautiously positive stance for Malaysia."

Overseas investors have bought US$2.48 billion (S$3.4 billion) of Malaysian equities this year, the biggest stock inflow in South-east Asia.

The FTSE Bursa Malaysia index hit its highest in two years on June 16 as technology, banks and construction shares soared.

The stock market's gains came as the ringgit rebounded from a 19-year low.

Bond investors have also returned. Malaysian debt securities drew more than RM16 billion (S$5.1 billion) in April and May after recording the longest stretch of outflows in two years.

The yield on 10-year notes has fallen 57 basis points to 3.89 per cent since reaching an eight-year high in November last year.

Still, not everyone is convinced. Nomura Holdings is underweight on Malaysian stocks, citing expensive valuations and doubts that the growth momentum can be sustained. "I find it difficult to justify buying Malaysia's genuine story while ignoring the risks on valuations and also the existing risk that the Malaysian market comes with," said Mr Mixo Das, Nomura's South-east Asian equity strategist. "The market probably goes up a bit more until the election, but what happens after that?"

A general election is not due until the middle of next year, but there is growing speculation that Datuk Seri Najib will call for polls this year, with growth holding up and opposition parties racked by infighting.

The economic outlook has helped to counter headlines involving 1MDB, which is at the centre of money-laundering allegations and probes in several countries.

The United States Justice Department is seeking to recover US$1.8 billion in assets it says were bought with funds misappropriated from 1MDB.

BLOOMBERG