Inflows into bond market expected to continue

  • Markets
  • Monday, 06 Jan 2020

Fong: With global low interest rates, a continued hunt for yields this side of the world is to be expected.

PETALING JAYA: Capital inflows into the Malaysian bond market will likely continue in the first quarter of this year albeit it may not be smooth sailing throughout 2020.

Bond analysts told StarBiz that on the whole, they were positive on the country’s debt market, judging from the global accommodative monetary stance, US-China temporary trade truce, and the likely overnight policy rate (OPR) cuts this year.

These positive episodes, they added, would bode well for the domestic bond market and attract capital inflows. Bond issuance is expected to remain healthy due to higher development expenditure for the year and the ongoing infrastructure projects.

After three consecutive months of muted foreign flows, November saw a large wave of foreign bond investor interest in the Malaysian market. Total foreign holdings spiked RM8bil in November 2019, marking the largest monthly net foreign inflow since September 2017.

The sizeable inflow also increased the rate of foreign participation to its highest level since November 2018, as foreign holdings constituted 13.2% of total bonds outstanding in November 2019 (October: 12.6%), according to RAM Ratings.

Foreign buying interest mainly focused on the longer-term Malaysian Government Securities (MGS) and Government investment issue (GII), which made up the bulk of the overall net inflow.

AmBank Group chief economist Anthony Dass said global monetary policy is expected to remain accommodative in 2020 given the dynamics of the global business and economic climate which is still soft.

Mohd Afzanizam: Lower interest rate environment also helped entice more bond issues.Mohd Afzanizam: Lower interest rate environment also helped entice more bond issues.

However, he noted the impact from the accommodative monetary policy is more likely to be moderate as the advance economies have been sitting in a low interest rate environment since the 2008 global financial crisis.

“Thus, the region including Malaysia should benefit from capital inflow. That will bode well for MGS and also ringgit which is envisaged to be on a stronger note, likely to reach 4.00 vs the US dollar or even stronger partly due to the weaker greenback besides the “behaviour” of the yuan, ” he said.

Nonetheless, Dass said the potential capital flow into their region, including Malaysia may not be a smooth ride as global adverse noises remain.

“Although the current US-China trade deal is somewhat positive, it remains unclear what will happen after phase one has concluded.

“We have the US presidential election and political noises that includes Malaysia over the transition of power and the speed of implementing infrastructure projects announced in Budget 2020. However, for now, the volatility in 2020 is more on a lower downside risk on this region, including Malaysia, ” Dass added.

AmBank remains “neutral” on MGS as demand for the duration is positive although valuation wise it may appear expensive with the 10-year MGS yield about 75.3 basis points lower from the start of 2019.

Besides, Dass said there is a less cautious outlook on the potential exclusion of MGS from the World Government Bond Index (WGBI) by FTSE Russell. Continued discussion between Bank Negara and FTSE Russell indicates both parties aim to prevent market disruption, he said, adding that it implies the risk of MGS withdrawal from the WGBI as manageable.

RAM Ratings head of research Kristina Fong foresees some normalisation in foreign fund inflows in December 2019 after an unexpectedly large net inflow of foreign funds into the domestic bond market in November.

“Various supporting factors such as the benign Fed interest rate trajectory for 2020 and the trade war ceasefire in the drawing up of the phase one trade deal, actually point towards an impetus of sustained foreign interest in the Malaysian bond market in December (2019) as well as the start of 2020.

“In a global low interest rate environment, it will be challenging for investors to reap competitive returns, thus a continued hunt for yields this side of the world is to be expected, ” she noted.

Macro risks for Malaysia remain moderate and there are several positive drivers for the economy this year to allay investor concerns, Fong said. These include a potential stabilisation in global economic growth deterioration on the back of hopes of trade dispute reconciliation between the US and China and on the domestic side, a resurgence of investment activities. RAM expects GDP to come in at 4.5% for 2020, compared to last year’s anticipated 4.6%.

Gross corporate bond issuance for 2019 came in at a robust RM132.8bil, breaching RAM’s forecast range of RM110bil-RM120bil, Fong noted.

RAM expects the corporate bond issuance momentum to remain steady in 2020 on the back of a still healthy issuance pipeline, continued infrastructure financing needs and relatively attractive financing rates. As such, total corporate bond issuance is estimated to amount to RM100bil-RM110bil this year, the rating agency said.

Meanwhile, Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid is also bullish on the domestic bond market.

“From the bond yield perspective, the downside risks are still visible given that the possibility of OPR cut this year. Our baseline forecast is that the central bank will reduce the OPR in the first half of this year.

“Apart from that, the US dollar to the ringgit is still undervalued and this will motivate foreign funds to stay long in our bond markets. Lower interest rate environment also helped entice more bond issues to fund capital expenditure and to refinance existing borrowings. Therefore, primary markers should remain lively in 2020, ” he said.

Afzanizam noted that oil and gas companies are getting contracts and Petronas is expected to dished out more contracts based on the Petronas Activity Outlook 2020-2022.

Higher development expenditure of RM56bil this year could also lead to more bond issuance as construction players would be busy executing their infrastructure projects, he said.

“We are positive on the bond markets this year as ongoing global uncertainty would result in higher demand for fixed income securities as investors would want to protect and preserve their capital. Lower OPR also means further capital appreciation in bond prices as they move inversely with the prevailing interest-rate level, ” he said.

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