Feb 5 (Reuters) - Malaysian assets are drawing global investors as a soft U.S. dollar and rising geopolitical tensions spur diversification and the country's stability and growth are seen as an attractive alternative to stuttering regional rivals.

The increasing flow of foreign money illustrates a comeback for Malaysia, Southeast Asia's fourth-largest economy, after years of relative underperformance compared to its peers.

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But analysts are now increasingly bullish about the country's blend of steady economic growth, stable government, and a strengthening currency that is back to near its 2018 high.

Foreign investors poured $6.5 billion into local currency debt in 2025, the largest annual inflow in four years and the highest in the region, with demand staying firm in January.

Malaysia stands in a "sweet spot between low-yielders, such as Singapore, Thailand, and South Korea, and high-yielders such as Indonesia and India, which come with their own set of risks," said Rong Ren Goh, a fixed income portfolio manager at Eastspring Investments.

Malaysia attracted the highest foreign bond inflows in 2025, far surpassing high-yielding Indonesia

Prolonged political turmoil in Thailand, the region's second-largest economy, and eroding investor faith in Indonesia, Southeast Asia's largest economy, have also helped draw investor interest to Malaysia.

Just last week, Goldman Sachs raised its rating on Malaysian stocks while lowering its view on Indonesia.

"We find the macro, thematic, and positioning backdrop of Malaysia appears more favourable and warrants a more constructive stance," said Timothy Moe, the bank's chief Asia Pacific strategist.

Malaysia's benchmark stock index (.KLSE), opens new tab is up 12% in the past 12 months and last week rose to its highest since October 2018, as investors bet on an AI-driven data centre boom.

During the same period, Thai stocks (.SETI), opens new tab gained only 3% while Indonesia (.JKSE), opens new tab gained 15%.

Malaysia has drawn billions of dollars in data centre investments from U.S. technology giants, including Amazon Inc (AMZN.O), opens new tab, and Microsoft (MSFT.O), opens new tab. It has the biggest data centre project pipeline in Southeast Asia, an analysis, opens new tab by energy consultancy Wood Mackenzie showed.

Wall Street's main stock indexes ended lower after a volatile session on Tuesday, with the Dow dropping almost two-tenths of a percent,

"Malaysia is a rising star, driven by the AI cycle and substantial gain in market share of certain semiconductors and chips," said Samsara Wang, Asian sovereign analyst with PineBridge Investments.

"As long as the AI story is there, Malaysia will remain a beneficiary."

ROARING RINGGIT

Another pillar of Malaysia's appeal is the ringgit , which has gained about 17% since the start of 2024, the best-performing Asian currency in the period. Last week, it rose to its strongest against the U.S. dollar since May 2018 at 3.915.

Over the past 18 months, Eastspring has turned more constructive on the Malaysian ringgit, Goh said, improving the return outlook for its bonds, which has underpinned its overweight position in bonds and currency.

The blistering performance in Malaysian assets comes as the economy charges on, shrugging off the impact from U.S. tariffs. The economy likely expanded 4.9% in 2025, official advance estimates released last month showed, beating the government and central bank's projections.