MARC Ratings Bhd chief economist Ray Choy.
KUALA LUMPUR: Anticipations of more interest rate cuts by the US Federal Reserve (Fed) in 2025 under the new US government administration, is likely to see a further decrease in the yield differentials between the United States and Malaysia, thus, potentially making local assets such as local bonds more attractive to investors.
This could also be a supportive variable for the ringgit recovery moving forward.
Apart from the Donald Trump’s factor to the US Presidency from Jan 20, 2025, the interest rate outlook is expected to have an equal or likely greater influence to global market movements, including in Malaysia.
Against this backdrop, Malaysian Rating Corp Bhd (MARC) chief economist Ray Choy said the historically less volatile outlook for the 10-year Malaysian Government Securities (10Y-MGS) would mean the yield gap between the 10-year US Treasuries (10Y-UST) could be reduced further and could be normalised.
“The good news for the 10Y-MGS is that the negative yield differentials with the 10Y-UST yield differentials will likely improve and eventually turn positive on the rising Malaysian overnight policy rate and the Fed interest rates spread,” Choy said at MARC’s Economic and Corporate Credit Outlook 2025 webinar yesterday.
He further elaborates that bond volatilities in the United States was actually higher before Trump was re-elected.
“After his re-election, bond volatilities actually declined so this actually gives an idea that there is scope for bond yields in the United States to actually experience calmer seas and decline over the next one to two years in line with the easing interest rate cycle there.”
Choy added that the United States bond markets appear to be looking forward and focused on the fact that interest rates there are actually declining, irrespective of the noises from the political sphere at the moment.
“We expect the recent rebound in US yields to actually subside and normalise to a lower level, especially with expectations that US interest rates will decline.
“More rate cuts are to come in 2025. The reality is that you need effects of the tighter monetary policy that have occurred in the last couple of years to play out its effects whereby growth will be slower and the unemployment rate higher,” he said.
On a related matter, the ringgit has held up well against the recent US dollar’s appreciation pursuant to the conclusion of the elections there, Choy pointed out.
Year-to-date (y-t-d), the ringgit had appreciated by 3.3% against the US dollar compared with a depreciation in other Asean currencies against the dollar, including the Thai baht, Singapore dollar, Indonesian rupiah and the Philippine pesos of 1%, 1.4%, 2.7% and 5.1%, respectively.
The ringgit has strengthened during this period, despite a a slight increase in the US dollar index or DXY.
Meanwhile, the liquidity from the Japanese yen carry trade may still continue in the foreseeable future.
Choy noted that “This has been a source for stability for emerging foreign exchange (forex) markets including Malaysia.
“This liquidity is exported out (from Japan) and provides a source of support for emerging market forex.
“The net Japanese yen futures have improved quite a lot from July 2024, which is basically an indication that there are not as many market participants who are shorting the yen at this moment,” he added.
“However, the yen has remained weak and also depreciated. The US dollar-yen cross shows a depreciation, which indicates the weak economy in Japan.
“It also reveals the Bank of Japan is also unlikely to be in a hurry to raise interest rates very much,” Choy said.
Choy, meanwhile, said the US trade protectionism may have some short term gains for Malaysia, although there might still be a price to pay in the longer term.
“Malaysia will stand to benefit from US tariffs in the short term, but in the longer term, there are opportunity costs in trade protectionism in any form,” Choy said.
“In the short term, some US protectionism may benefit the region but in the longer term we hope the trend towards this would decline all of these protectionism stems from economic nationalism.
“This is seen in the political and corporate developments where companies relocate manufacturing facilities back to their home economies,” he added.
Choy said these are some of the policies that have been proposed by Trump amid the highly stressed geopolitical relations around the globe at the moment.
Meanwhile, MARC chief executive officer Rajan Paramesran said he expects the property overhang in the residential segment locally to improve further as developers become more disciplined with their launches.
“There was about a 40% reduction from a peak of 37,000 to about 22,000 over the last four years.
“This decline would boost confidence in the sustainability of the housing recovery,” Rajan noted in his presentation.
But Rajan said there is still some concern on the office segment space.
“The outlook here is very dicey and challenging. The lettable areas continues to increase but at the same time occupancy levels have flatlined after declining sharply in 2021. But in the commercial space, hotels are showing the fastest recovery supported by tourist arrivals,” Rajan said.
Meanwhile, in GEORGE TOWN, US Ambassador to Malaysia Edgard D Kagan said that there will not be significant changes in the economic relationship between Malaysia and the United States, despite the strong desire to create more manufacturing jobs in the United States.
Kagan said the details wouldn’t be known until the new administration takes over.
“However, I am confident there won’t be a major change in the economic relationship between the United States and Malaysia, as trade has brought about tremendous benefits,” Kagan said in his opening remark on the United States-Malaysia economic and trade relationship at the Penang Institute yesterday.
On whether the United States would impose tariffs on Malaysian-made electronic products containing Chinese-made components, Kagan said it was dangerous for any country to become a vehicle or locale for mislabeling goods.
“Integrity of supply chain is critical, and it is one of the things that made Malaysia attractive to US investment.
“The perception is that Malaysia offers a good integrity supply chain. The Malaysian government recognises this fact,” he added.
Kagan said the integrity of the supply chain also means protecting intellectual property.
“Companies with cutting-edge technologies do not want to be operating at a location where their intellectual property can be stolen.
“Malaysia has a tremendous advantage as it has a reliable 5G network with trusted technology and supply.
“Malaysia should build on this as it climbs the value chain to attract production and research and development investments from companies that have cutting-edge technologies.
“These companies want to ensure their information is handled on a trusted network.
“If there are questions about that, there could be a negative impact on the future,” Kagan said.
Meanwhile, US investments in Malaysia have created 312,815 jobs. In 2024, Malaysian exports to the United States increased by 19.1%, making it the second-largest export market for Malaysia.
The two-way trade in goods between the United States and Malaysia also increased by 29.1% in 2024.
In 2022 to 2023, US companies paid RM5.7bil in taxes and invested RM1.9bil in research and development.
