Malaysian Bond Market: Reasons To Buy

Here are four main reasons why analysts are bullish on the Malaysian currency bond market particularly at the long end of the curve, with a buy call for both the currency bond and government bonds.

But first, let us see what RHB Bank analysts have to say on their top choice on investment in Malaysia.

“Our top choice to invest in Malaysia is the local currency government bond market. Our asset allocation view to overweight bonds, market-weight equities, and underweight cash in Malaysia has been in place since April 4, 2022.

“We continue to recommend to extend the duration in the local currency government bond market, with our average MGS 10YR yield1H23 forecast of 4.0-4.30%, followed by 3.90-4.20% remaining unchanged.

“The balance of risks to these 2023 forecasts are tilted towards lower yields. Malaysian 10YR government bonds are one of the top performers in the world on a yearly date basis across global asset classes and could remain as such in 1H23,” they say.

Bond Market: Four Main Reasons To Buy

The four main reasons why they are bullish on the local currency bond market, particularly at the long end of the curve are given below.

“This is not to say that in the near term some retracement of bond yields will not happen, but we would take these opportunities to add to local currency bond portfolios, particularly long-duration bonds,” they say.

Inflows to domestic gov’t bond market

“In the domestic bond market, we don’t observe much evidence of international buying and we believe positioning is light as far as foreign investors are concerned (Figure 3).

“Historically as we head out of the general election period, we notice from our daily proprietary indicator for flows to bond funds that activity increases significantly (Figure 3). We foresee Malaysia’s policy and economic outlook along with global factors, being bullish for the domestic bond market in 2023,” they write.

Positive outlook for bonds

Analysts say they expect fiscal consolidation to continue in 2023. Our 2023 fiscal deficit forecast remains unchanged for the time being at 5.5% versus around 6% in 2022.

In terms of monetary policy, they expect Bank Negara Malaysia (BNM) to be pre-emptive once it’s realized that some reduction of fuel subsidies is imminent which could imply that core CPI inflation momentum rises in the future.

In addition, the BNM stands ready to manage strong currency depreciation pressures both on a spot and nominal effective exchange rate perspective (NEER). Hence, monetary policy is geared towards reining in surges in inflation expectations before they actually materialize.

A central bank which is ahead of the inflation and currency depreciation curve usually implies that the trajectory of long term bond yields on a sustained and medium term basis is headed south. Our peak 2023 OPR forecast of 3.0-3.5% remains unchanged.

1. Resilient growth and inflation expectations being anchored is positive for debt sustainability in the future and is positive for bonds in 2023. We expect GDP growth to print 7.0% YoY in 2022, with the balance of risks tilted towards a print of 7.5-8.5%, followed by 4.5% in 2023. Our 2022 CPI inflation forecast is 3.4%, followed by 3.0% in 2023. For sovereign bonds, the key credit metrics to focus on, generally speaking are: 1) resilient GDP growth, which is true for Malaysia; 2) well anchored inflation, which is true for Malaysia; 3) well managed fiscal and monetary policy which is compatible with the future trajectory of debt/GDP, which we believe is prevalent in Malaysia; 4) stable balance of payments outlook, which is likely to prevail in Malaysia; and 5) political stability, which is the one factor which needs to be assessed as the new government is formed. Hence, four out of five credit metrics are positive for the outlook for local currency government bonds in Malaysia.
2. Global factors related to the US are positive for the outlook for the local currency bond market in 2023. We expect UST10YR bond yields to drop to 3.0-3.5% in 1H23, followed by 2.5-3.0% in 2H23. Our peak US Federal Reserve Bank (FED) Federal Funds Rate (FFR) forecast is 5.00-5.25, with some upside risks. Over long periods of time ,UST10YR yields and MGS10YR yields move together in terms of direction.

In foreign exchange the move down in USDMYR below 4.50 today is massive and we would be cautious in believing that these prints below 4.50 are sustainable. Would we go long USDMYR at current levels? Looks tempting.

We believe that USDMYR could trade back up to around 4.60 by year-end.Our 1H23 USDMYR forecast of 4.70-4.80 remains unchanged for the time being. The main reasons for our cautious stance on MYR against the USD are that:

· Historically, as we exit general elections, USDMYR has a tendency to rise after falling heading into elections.

· The ‘big dollar, e.g. DXY index, decline has been very fierce and we are wary that a reversal may occur in the next few weeks.

· USDCNY is headed to 7.30-7.40 in 1H23 and this will put upward pressure on USDMYR to reverse and be on an upward trend till 1H23. Our 4Q22 USDCNH estimate of 7.10-7.20 is on track, and we may hit the upper end of this range fairly soon.

· Weakening trade data in Malaysia over the course of the next 1-2 quarters is likely to induce upward pressure on USDMYR.

Implications of GE15 For Fiscal Policy

Following the changes in the ruling coalition, the balance of the risks is tilted towards a delay in Budget re- tabling. It could take until end-January 2023 to pass Budget 2023. We would be keeping an eye on any possible changes to the budget tabled by the previous government.

We view that ‘people-oriented’ measures and gradual fiscal consolidation would remain top priorities for the new government. Cash transfers and consumer friendly type policies would continue to be in the budget.

In line with the Government’s commitment towards consolidating the fiscal position for a more sustainable public finance in the medium term, we opined that a more targeted fuel subsidy approach might be implemented. Fuel subsidy reduction is still possible but GST reforms announcement is less likely in 2023.

To recap, the GST was abolished by Pakatan Harapan (PH) in 2018. The timing and scale of subsidy adjustments might become increasingly uncertain. Despite that, we viewed that the pace of the adjustment is likely to be gradual in view of still elevated living costs and inflationary pressures.

Another interesting aspect that we would remain watchful on would be the allocation of development expenditure (DE). In the previous budget, the transport subsector accounts for the largest share, constituting 17.3% of total DE through major infrastructure projects. Potential revision of the allocation might be possible, especially those that are new and existing projects that have yet to start the tender process.

For now, our base case is that some of the large-scale transport related projects are likely to be continued, i.e. ECRL, LRT3 and RTS Link. We also note that the long delayedMRT3 project tenders have gone out on 31 October, with a closing date of 16 November being put in place and awards will take place there-after. In our view, higher allocation ofDE could be tilted towards Sabah and Sarawak.

Another sector that we are watching is the possible allocation for the healthcare sector. All three main coalitions (PH, Perikatan National (PN) and Barisan National (BN)) have promised to raise the annual healthcare budget expenditure to 5% of GDP.PH and BN aim to do so within five years while PN promises to raise the healthcare allocation to above 5% of GDP without giving a specific time frame in their manifesto.

Key Developments

PH chairman Datuk Seri Anwar Ibrahim has been named Malaysia’s 10^th prime minister on 24 November, ending days of uncertainty following the results of the November 19 election which gave rise to a hung parliament. The nomination of cabinet members would be one of the key events that we would keep our eyes on.

Based on the news flow as at 5.50pm, 24 November, Gabungan Parti Sarawak (GPS) would join the unity government led by the 10^th Prime Minister Datuk Seri Anwar Ibrahim.