Fund managers largely believe that a weakening dollar would benefit investment options in emerging markets.
PETALING JAYA: As equity markets globally continue to trend higher on the back of dovish comments from the US Federal Reserve (Fed), especially since December 2023, it will be interesting to see what this holds for Malaysian bonds, especially Malaysian Government Securities (MGS).
After all, textbook wisdom usually dictates that bonds move inversely to equities.
However, the strengthening of the US dollar over the past 18 months has thrown that theory out the window, since both have been battered by the rise of the greenback. Fund managers largely believe that a weakening dollar would benefit investment options in emerging markets.
According to Abrdn Islamic Malaysia Sdn Bhd chief executive Gerald Ambrose, the MGS would also stand to gain.
“Yes, a waning greenback would be good for MGS and almost all emerging market equities and bonds, if the market’s belief that the Fed will cut interest rates by 1% to 1.25% in 2024 turns out to be true.
“That was what caused the remarkable rally in the United States and global equities, as well as bonds, in the last two months of 2023.”
Ambrose told StarBiz that his concern is that since that perceived pivot by the Fed in early November, the market has got “way ahead of itself”, as there is hardly any sign of economic slowdown in the United States to warrant any rate cut.
Looking at the November numbers for Malaysia and the United States, he observed that comparing the inflation rate for the month at 1.8% with the 10-year MGS yield standing at 3.8% would result in a real yield of 2%; as higher November inflation at 3.1% pared down net yield to 0.8%.
The 10-year treasury was only offering yields of 3.9% compared to November’s consumer price index of 3.1%.
“Both are positive but the MGS real yield is higher. The differential should close,” he said.
Chief investment officer for Tradeview Capital Nixon Wong agreed that emerging markets would stand to gain from a lowering greenback, especially markets with a high-yield profile such as Malaysia.
As such, he said the reduction of the yield gap between US Treasuries – following Fed rate cuts; and MGS with Bank Negara keeping the overnight policy rate stable, does mean it would be a smart move to hold the latter to enjoy both yield compression and an improving ringgit.
Casting an eye ahead with a focus on fundamentals, Ambrose is of the opinion that the ringgit is still undervalued in the eyes of many market observers, while predicting that the local currency could strengthen to approximately RM4 to the dollar by year-end.
Likening the pummelled ringgit to an extended rubber band that has to de-stretch in time, he used food as an example that the Malaysian note needs to rebound, saying: “A Big Mac in Singapore costs 1.7 times more than it does in Malaysia if we do the currency conversion.
“We just need a catalyst for a rebound to occur, such as a revitalisation in exports, an acceleration in tourism or domestic demand, or even a realisation that Asean is free of the toxic economic problems of the West and is dirt cheap.”
These triggers, said Ambrose, would be beneficial for the ringgit, MGS, Malaysian equities, as well as real assets, as Tradeview’s Wong also noted that the potential inflow of foreign funds should lift the local currency this year too.
Meanwhile, a fund manager with another local research firm contended that whether the MGS would see gains against US Treasuries would still depend on noise emanating from the Fed, partially echoing Ambrose’s point.
“There are several geopolitical issues still ongoing and the United States is having its election this year. Hence, we believe many things are still up in the air, especially as the year progresses,” he said.
However, looking immediately ahead over the short term, he said as long as inflationary data does not show an increase in prices, then the scene should be positive for many investments, including the MGS.
