PETALING JAYA: Malaysian bonds and equities are still on the radar of investors, especially following the recently concluded general election as policy measures are still favourable to growth.
Analysts in a Reuters report pointed out that investors were now looking to where policymakers were supportive of growth, and as a consequence, were now more discerning about which bonds and stocks to buy in South-East Asia's growing economies.
“Unlike in 2011 or 2012, when the simple risk-on and risk-off switches could trigger flows in and out of the region, investors are a lot more discriminating,” the report noted, adding that dynamics had changed with marked differences between countries.
They said that while Malaysia was in demand at the conclusion of a tight election, so were high-yielding rupiah bonds despite a recent downgrade to Indonesia's sovereign ratings outlook.
“You want to invest where the policymakers are going to be helpful,” said Gary Dugan, chief investment officer at Coutts, a London-based private bank.
Coutts is underweight the Philippines, hesitantly invested in Thailand and underweight Indonesia, where Dugan believes there is a risk that interest rates will have to be increased, as policymakers fumble over a much-needed decision to reduce fuel subsidies.
However, a Citibank report citing data from fund tracker EPFR showed that the region “is undoubtedly in flavour”, with Asian regional funds excluding Japan being the only ones with meaningful inflows last week, receiving US$386mil, where as Greater China funds saw US$302mil of outflows.
The news agency said data compiled by ANZ Bank showed Malaysia received US$144mil (RM430.2mil) and Indonesia US$161mil (RM481mil) in the week to May 8, the highest in South-East Asia. Thailand got US$132mil (RM394mil) and the Philippines, just US$102mil (RM305mil).
While the Philippines continues to impress markets with growth rates and reform talk, investors find Philippine bonds and stocks expensive, and do not want to bear the risk of those promised reforms being derailed, despite the surprisingly early upgrade to investment grade last month.
“High-yielding Thailand, meanwhile, is giving foreign investors cold feet with talk of capital controls and a public feud between the central bank and finance minister over what to do about the strong baht. Some have pulled money out. Others are staying invested in Thai bonds to ensure they get the benefit of a possible rate cut,” the Reuters report said.
But the report added that in a world of “scarce growth and earnings”, being fussy cannot be an option for many investors, particularly for benchmark-tracking fund managers.
“That explains why money continues to seek Indonesian and Thai assets, despite signs these markets are frothy, as they should be after a few years of extremely loose central bank policies across developed markets,” the report said. Foreigners hold a record 34.4% of Indonesian government bonds.
“Foreign investors have maintained an underweight position in Indonesia but are net buyers because emerging market funds get sizeable inflows,” said Ashish Agrawal, a rates strategist at Credit Suisse. “In some sense, they are reluctant buyers of bonds. Everyone is focused on the implication of measures taken, if any, to reduce fuel subsidies, something that the rating agencies have also highlighted.”
Still, at the margin, foreign investors prefer Indonesia to the more expensive Philippines, where the equity market trades at nearly 18 times 2013 earnings, which is hard to justify for an economy growing at 7%.
Likewise, its US dollar bonds carry lofty prices, even after accounting for the superior Philippine rating. Philippine bonds due 2037 are trading at a spread of 66 basis points (bps) over US Treasuries, compared with Indonesian bonds due the same year at a spread of 153 bps.
In April, Indonesia saw inflows of US$1.848bil (RM5.52bil) while the Philippines saw outflows of US$449mil (RM1.34bil).
But valuations pose less of a risk than the possibilities for unexpected policy moves, such as that of Thailand cutting rates to deter hot money, or of the Philippines or Thailand imposing capital controls.“The greater risk going forward is that one day you wake up and find the currency has adjusted by 45 percentage points,” said Dugan.
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