Concerns over impact on local equities and bond markets

Monetising assets: Investors monitor the share market in Kuala Lumpur. An industry observer notes that EPF may likely be monetising assets that are profit-making, namely equities and bonds.

AS more withdrawals are made from the Employees Provident Fund (EPF), there are concerns that this will affect the local equities and bond markets.

This is given EPF’s significant size and position as the largest institutional shareholder and buyer of bonds.

It was recently reported that EPF estimates some RM45bil will be withdrawn by depositors via the i-Lestari and i-Sinar facilities by the end of 2021.

In addition, the reductions in contribution rates this year have resulted in the EPF losing RM8bil in opportunity cost this year.

Coupled with the additional RM9bil loss in opportunity cost next year, the EPF will see an impact in total cash flow amounting to RM62bil as a result of the withdrawals.

EPF CEO Tunku Alizakri Raja Muhammad Alias (pic below) was quoted as saying that the fund will need to liquidate some of its assets in order to have sufficient funds available for withdrawals.

Alizakri did not elaborate further as to which assets would be under consideration for the pension fund’s potential liquidation plans.

i-Sinar is an extension of the i-Lestari withdrawal facility, which has now reached an estimated total withdrawal of RM30bil and will end in March 2021.

It is estimated that some two million EPF members will be eligible to withdraw between RM4,400 and RM60,000 under the i-Sinar facility to help them face the Covid-19 pandemic hardship.

An industry observer notes that EPF may likely be monetising assets that are profit-making, namely equities and bonds.

“This may cause them to lose out on potential future profits.

“There is concern whether the sale of bonds by EPF may exert pressure on the prices.

“The EPF is a large buyer of bonds. If the fund will not be able to buy more bonds next year given its tightened purse strings, this also raises the question if funds like Retirement Inc Fund (KWAP) and the National Trust Fund have the capacity to absorb the excess.

“However, I believe that the EPF will be gradual in monetising its assets so that they will not shock the market, ” the observer says.

Fortress Capital Asset Management CEO Thomas Yong points out that the EPF has faced annual withdrawals of RM45bil to RM50bil in the past.

Despite that, the pension fund has been able to record net annual cash inflows from member contributions amounting to RM12bil to RM24bil.

“If the additional withdrawal of RM30bil under i-Lestari materialises, which translates to about 3% of EPF’s fund size, it could potentially mean that EPF will record net cash outflows from contributions for the first time.

“While the immediate concern is that domestic equities may experience a lower EPF investment presence, the likely impact could be in the fixed-income securities market where returns are lower as a result of the current low interest environment.

“Fixed-income investments currently make up close to half of EPF investments, ” says Yong.

As of the second quarter ended June 30,2020, equities made up 38.2% of EPF’s total investment assets.

On the other hand, fixed-income instruments, which entail Malaysian Government Securities (MGS), loans and bonds, made up 49.2% of the pension fund’s total investment assets.

The MGS and Government Investment Issues (GII) supply in 2020 is forecast to have a gross issuance of RM148.8bil and a net issuance of RM78.2bil.

As for 2021, the gross issuance and net issuance of MGS and GII are projected at RM160bil and RM92bil, respectively.

MARC senior economist Firdaos Rosli opines that there will not be any significant uptick in bond yields if EPF decides to liquidate its bond holdings.

“We believe that other investors would step in to absorb the excess.

“Looking at the latest data, EPF, one of the largest holder of government bonds, had reduced its government bond holdings in the second quarter of 2020 to 27.1%, as compared to 29.8% in the first quarter of the year.

“However, yields continued to trend lower as demand was largely supported by local banks and foreign investors, ” he says.

During the second quarter of the year, local banks increased their bond holdings to 33.8% from 30.9% in the preceding quarter, while foreign investors made up 22.6% of bond purchasers, representing a growth of 0.8 percentage points as compared to the preceding quarter.

Firdaos adds that the demand was largely driven by the global low-interest rate environment and Malaysia’s attractive real yield as inflation growth remains negative.

Moving forward, he expects the continuing easy monetary policies and low inflation will continue to support demand in the local bond market.

Meanwhile, RAM Rating Services Bhd CEO Chris Lee highlights that the monthly contributions by employers and employees remain substantial despite the Covid-19 crisis.

Prior to the Covid-19 crisis, EPF was recording net inflows of about RM2bil a month.

Lee says the government and EPF have been pragmatic with the introduction of i-Lestari and i-Sinar schemes as it is vital to ensure the immediate survival and stress relief for many of the working population.

“The fact that these people do not have sufficient savings are a result of many factors, and can be primarily attributed to the existing low wage structure for many jobs.

“This is a signal that the country needs to move up the value chain where a decent living wage is earned.

“Hopefully, this is short term and that together as a nation, we can turn around and restructure any shortcoming from the premature withdrawal of EPF savings.

“EPF is well managed and we have confidence in its ability and thought process to manage the current situation well, ” he says.

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