Jonathan Liang, managing director and head of Asia ex-Japan investment specialist for global fixed income, currency and commodities, said Malaysia offers “relative value” in terms of government bonds among Asian countries.The Malaysian government bond space is more attractive, even compared to some of the developed or larger markets in the region such as South Korea and China, he added.
PETALING JAYA: The asset management arm of the world’s fifth largest bank has expressed its interest to buy more long-term Malaysian government bonds.
This appears to be a sign of confidence in the Malaysian debt market, at a time when capital flows out of the country have been increasing.
In June this year, Malaysia recorded the highest foreign portfolio outflows at RM5.4bil, the biggest since March 2020.
In an exclusive interview with StarBiz, JP Morgan Asset Management noted that Malaysia continues to be one of its preferred bond markets within Asia.
Jonathan Liang, managing director and head of Asia ex-Japan investment specialist for global fixed income, currency and commodities, said Malaysia offers “relative value” in terms of government bonds among Asian countries.
The Malaysian government bond space is more attractive, even compared to some of the developed or larger markets in the region such as South Korea and China, he added.
He also said that the asset management firm would increase its exposure in the benchmark 10-year Malaysian Government Securities (MGS), once the yields rise further.
“If they (10-year yields) get to a level, say 4.7% or more, we would look to add to our position for our dedicated Asia fixed-income portfolio.
“The current yield for 10-year MGS is not there yet, but it is also not far from the level. We are watching it.
“We already have a position in MGS but we may look to add to it if the yields go higher,” said Liang.
As of July 22, the yield for the benchmark 10-year MGS (3.58% coupon) was recorded at 4.01%, according to Bank Negara data.
It is noteworthy that the 10-year yield had risen to 4.38% by end-April before retracing to 4.17% at end-May.
The yield once again increased to 4.26% by the end of last month and has since moderated to the current level.
Currently, Malaysian bonds represent about 3% of JP Morgan Asset Management’s Asian fixed-income portfolio.
Commenting on the government’s planned austerity drive, Liang said it would be beneficial for the bond market investors, including JP Morgan Asset Management.
“This is because the country’s fiscal balance could be improving, given the austerity measures.
“While the economy may slow a bit because of the austerity drive, inflation would also slow as a result. So, that’s beneficial for government bonds.
“As an MGS investor, we actually welcome that (austerity drive),” he said.
Considering that the austerity drive may result in a reduced issuance of MGS, Liang explained that this would push the prices of the MGS bonds up, hence benefiting investors like JP Morgan Asset Management.
“If you have a lot of supplies (new MGS bonds) coming in, the price goes up. But when you have less supplies, prices go up,” according to him.
When asked why Malaysia is one of the firm’s preferred markets in Asia, Liang attributes it to the nature of the local economy.
“Malaysia, generally speaking, is a little less sensitive to the slowdown in global trade and the decoupling that’s going on between China and the rest of the world.
“Inflation is also less of a problem in Malaysia relative to many emerging market countries. So for that reason, we do like long-term Malaysian government bonds,” he says.
On the increasing capital outflows that have been affecting the country, Liang pointed out that it is a global phenomenon and is not exclusive to Malaysia alone.
“Globally, almost all emerging market countries are seeing capital outflows because of the rate hikes by the United States’ Federal Reserve.
“This may continue but I don’t see a reason why it (the outflows) should accelerate,” said Liang.
In June 2022, Malaysian debt securities saw a bigger outflow of RM4.1bil, as compared to the outflows from equities worth RM1.3bil.
Looking at MGS alone, foreign holdings were recorded at RM188.9bil or 36.5% of total MGS outstanding, which was the lowest shareholding since May 2020.
Liang also spoke about the threat of recession on the global economy.
He said the United States, being the world’s largest economy, would see a recession next year.
“Europe could fall sooner into recession, given their set of challenges,” he said.
Liang pointed out that the world is entering phase two of the market cycle, whereby the continued monetary tightening by the Federal Reserve would have a real impact on the United States’ economy.
“At the moment, we think recession is a distinct possibility, but as we get closer to recession, that’s when we get into phase two,” he said.
While a recession may be unavoidable next year, Liang thinks it could be a “very shallow recession”, fortunately.
The impact of the potential downturn would be nowhere close to what was experienced during the 2007-2008 Great Recession and the economic meltdown triggered by the Covid-19 pandemic.
The potential downturn is not likely to be caused by systemic imbalance, like the subprime mortgage crisis that led to the Great Recession.
“It (potential downturn) feels to me like in the year 1999, which saw the bursting of the ‘dot-com’ bubble.
“The S&P 500 Index was trading at 60 times price-to-earnings (PE) ratio and then, a three-year bear market happened up till 2002, before bottoming in 2003.
“But it was just a PE contraction, basically, as the Federal Reserve raised rates.
“In terms of the recession, it was a very shallow one,” he said.
Fast forward to where the economy is currently, Liang said the balance sheets of the consumers and corporates in the United States are in “pretty good shape”.
“I think we are going to enter this recession in a pretty solid shape and therefore, I don’t think a crisis like that of 2008 would be the result this time,” he added.
