PETALING JAYA: Stock market indices provider FTSE Russell retained Malaysian bonds on its FTSE World Government Bond Index (WGBI) watch list with the next review due in March next year.
As for now, Malaysia would remain in its WGBI with 0.4% weight of the index. A downgrade of Malaysia’s bonds would have excluded them from the WGBI.
In a statement yesterday, FTSE Russell stated that it had been engaging with Bank Negara and index users to understand the practical impact of the initiatives that were announced earlier this year by Bank Negara to improve market liquidity and accessibility.
“FTSE Russell and index users are encouraged by the efforts and engagement of the Malaysian authorities to address the deficiencies of the market in meeting the requirements for Market Accessibility Level 2 as stated in the FTSE Fixed Income Country Classification Framework.
“In the light of these initiatives, FTSE Russell has determined to retain Malaysia on the Watch List and not downgrade Malaysia to Market Accessibility Level 1 at this review.
“FTSE Russell will continue to monitor conditions in the bond and forex markets in order to assess the efficacy of the reforms, ” FTSE Russell said.
Malaysia’s bond market is the most foreign-owned in Asia, Reuters reported. Foreign holdings in Malaysia’s bond market were about US$157bil in July.
FTSE Russell also retained China’s onshore government bonds on a watch list for a possible upgrade that could allow Chinese debt entry to its widely tracked government bond index.
United Overseas Bank (Malaysia) Bhd senior economist Julia Goh said FTSE Russell’s statement highlighted that the latter and index users were encouraged by the efforts and engagement of Malaysian authorities to address concerns on market liquidity and accessibility.
Earlier, Bank Negara said it had positive engagements with FTSE following further liberalisation of the foreign exchange administration (FEA) rules to improve market liquidity and accessibility.
While these measures have helped to sustain Malaysia’s position in the WGBI for now, FTSE retained Malaysia on the watch list to ensure sufficient progress of reforms.
Goh said FTSE Russell’s announcement follows earlier reports that JP Morgan would include China in its benchmark bond indices from February 2020.
“Ultimately, we think FTSE Russell will retain Malaysia in the WGBI but lower the index weight for Malaysia to pave the way for China’s inclusion, ” she said.
Goh said ringgit bonds were sold off since last week ahead of the FTSE Russell announcement as well as cautious mood surrounding US-China trade talks.
“MGS yield curve steepened following the sell-offs although we think foreign investors may deem benchmark 3-, 5-, and 7-year MGS yields at 3.143%, 3.281%, and 3.378% respectively on Sept 26 as attractive under current low interest rate environment.
“We believe Malaysia’s stable macro fundamentals and “A-” rated sovereign ratings provides underlying support for domestic bonds, ” she said.
However, AmBank Research said FTSE Russell’s decision was negative to the market as it meant the overhanging concern on potential US$8bil (RM33.6bil) foreign outflows from the Malaysian bond market in the event of a downgrade would not immediately go away.
AmBank Research said apart from Malaysian bonds, a downgrade would hurt the ringgit, , the appetite for Malaysian equities as well.
AmBank Research said nonetheless, it was maintaining its end-2019 FBM KLCI target at 1,680 based on 17 times its 2020F earnings projection (+7.6%), which is at a discount to its five-year historical average of about 18 times.
“We believe the risk-off trade will prevail over the rest of 2019.
“Investors are likely to continue to lighten their positions in high-risk asset classes, i.e. equities and emerging market (EM) assets, while seeking refuge in safe-haven asset classes, i.e. developed market (DM) bonds and even zero yielding precious metals, ” the research house said.
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