The Star
PETALING JAYA: Fears of a recession in developed markets and expectations of a peak in interest rates have foreign funds flowing into Malaysian bonds, but out of local equities which could suffer earnings and valuation headwinds if business activities weaken.
Global investors hoping to lock in current rates ahead of a potential inflection point in the rate-hiking cycle by central banks in the second half of the year have been buying into Malaysian government securities (MGS) and government investment issues (GII).
“This has been a global phenomenon with three arcs regarding bonds and government securities. Because investors feel Bank Negara is reaching the end of its rate hike cycle, local investors view the current yield as attractive versus stocks that are getting held hostage to recession developments abroad and a local lack of conviction on the China recovery.
“This is mainly because of property market concerns,” Stephen Innes, Managing Partner at SPI Asset Management, told StarBiz.
The flows are also driven by the low bank deposit rates and recent press focus on this, he added, is leading investors out of bank deposits for higher-yielding government securities.
Furthermore, the US banking turmoil has led many investors to seek safer deposits like MGS. “Even though there is a US$250,000 (RM1.1mil) bank deposit guarantee, it’s not enough to cover wealthy investors,” Innes added.
Foreign funds bought RM6.6bil of ringgit-denominated debt securities in March (February: RM4.3bil), which helped offset another month of net selling in local equities worth RM1.4bil (February: RM200mil), according to UOB Global Economics and Markets Research.
For the first quarter of the year, foreign investors piled up RM11.4bil worth of Malaysian debt, the largest quarterly net purchases in two years, with flows concentrating on MGS, RM9.7bil, and RM4.6bil worth of GIIs.
They are also active in the primary market as the previous reopening of the 10-year GII drew solid demand with a bid-to-cover ratio of 2.093 times in January on a RM4.5bil issuance, Kenanga Research noted.
The buying helped Bank Negara’s foreign reserves rise by US$1.2bil (RM5.3bil) month-on-month to US$115.5bil (RM509bil) as at end March, the highest foreign exchange (forex) reserves level since March last year.
The improving market sentiment for local debt issues among foreign funds is also driven by expectation of translation gains with the ringgit strengthening against the greenback once US rates peak.
Analysts, however, remain uncertain about the sustainability of such gains.
“We have to see the rationale of the rate cut. If the pivot aims to slow down the impact of recession that is yet to happen, then a pivoting Federal Reserve (Fed) would have a short-term impact on the dollar, as there could be fund outflows into regional bonds with higher yield profiles.
“However, do note that the dollar may be viewed as a safe haven currency and is often sought after by investors during times of economic uncertainty as well,” said Nixon Wong, chief investment officer at Tradeview Capital Sdn Bhd.
He added fund flows may also look into equities in the Asian region that offer relatively higher growth profiles at reasonably attractive valuation, in addition to the potential forex gains on a weaker greenback.
Wong said reducing interest rates could be favourable to growth stocks and high-yield stocks as well. For now, foreign investors remained net sellers of equities for the seventh straight month.
The selling in March was the largest in six months, resulting in a cumulative net sell of RM1.9bil for the first quarter (1Q23), UOB noted in a report yesterday.
On a cumulative basis, foreign inflows persisted for the third consecutive month in March with a higher net inflow of RM5.2bil versus inflows of RM4.1bil in February, which took the total inflows to RM9.5bil in 1Q23, the highest net inflow in two years and purely driven by increased foreign purchases of Malaysian debt securities.
Innes also warned that if there were a recession in the United States, a hard landing scenario could trigger a global risk-off mode leading the US dollar to gain strength on safe-haven demand and flows into US bonds.
He added if international investors thought China’s growth would offset even a minor US recession, they would continue to buy MGS to get exposure to the ringgit.
‘The currency outlook is a significant factor behind capital inflows, as no investor wants to buy assets in a country with a poor currency outlook. Given expectations are for the ringgit to fall to 4.15-20 by year-end, so if the stars align for the ringgit (Fed cuts, no US recession and China economy fire on all cylinders), it will trigger lots of inflows.”
