Foreign selling of fixed-income investments will continue due to sizeable maturity of Malaysian Government Securities (MGS) in the second-half of 2017 (2H17), coupled with a concern of a further interest-rate hike in the US.
Recent data on foreign holdings of fixed-income securities showed there was a sharp decline of holdings of RM26.2 billion to RM178.2 billion as at the end of March.
It was the fifth straight month of selling down, as foreign investors continued to adjust to the changing economic environment.
“Going forward, we believe Malaysia will continue to see some foreign selling in fixed-income investments on account of a sizeable maturity of MGS in 2H17,” said RHB Research Institute Sdn Bhd in a research report last Friday.
It noted that the quicker pace of sell-down this time around could also be due to a quicker pace of rate hikes by the US Federal Reserve (Fed), with two 25-basis-point (bps) hikes in the span of three months in December 2016 and March 2017, which was a stark contrast to just one rate hike for the whole year of 2015.
It said the sharp sell-off in March 2017, brings the total value of fixed-income securities sold down by foreigners to RM68.7 billion, or a decline of 27.8%, during the period between August 2016 and March 2017.
During this period, the 10-year MGS yield rose 57bps to 4.139%, while the 10-year US Treasury yield rose by 87bps to 2.387%, narrowing the interest-rate differential between the two countries, said the research house.
This was more severe compared to the sell-off during the period from July 2014 to August 2015, which saw a drop of RM59.4 billion, or 23.1%, to RM197.8 billion. During this period, the Fed was in the middle of dialing down its quantitative-easing programme and was preparing for the first rate hike, seven years since the global financial crisis, it said.
RHB Research said this might explain the sharper outflows from emerging markets. The Fed’s faster pace of monetary tightening, in turn, is due to the US economy gaining traction.
Meanwhile, inflation is gradually approaching the Fed’s target of 2% and the labour market is operating at full employment levels.
Additionally, the sell-off worsened after Donald Trump’s victory in the US presidential election in November 2016, which pushed up growth expectations, as he promised fiscal stimulus policies and tax reforms once he entered office.
The effect was reflected in the sharp 78bps rise in 10-year MGS yield to a high of 4.439% on Nov 9-29, 2016, before gradually moderating to 4.117% by mid-December 2016, said the report.
The situation was probably compounded by the central bank’s measures to stop offshore non-delivery in the ringgit forward market to stem speculation on the local currency, as foreign investors find it difficult to hedge their currency position, it said.
RHB Research added that the selldown still paled in comparison to the disposal of RM84.3 billion, or 66.6%, by foreign funds during the global financial crisis (April 2008 to August 2009).
Holdings in debt securities dropped sharply during the period as the global economic environment worsened, leading to spillover effects on export-driven Asian countries like Malaysia, which suffered a contraction in real gross domestic product growth of 1.5% in 2009, it said.
The Bank Negara Malaysia (BNM) data showed the sell-down in fixed-income market took a significant toll on the ringgit, which depreciated 7.6% in the final three months of 2016.
The ringgit has since stabilised, following BNM’s measures to deepen the onshore foreign-exchange (forex) market creating a consistent flow in demand for the ringgit.
The ringgit recovered slightly by 1.2% to 4.4325 against the US dollar for the year-to-April 12. This is likely due to the weaker US dollar following Trump’s failure to follow through with some of his campaign promises.
RHB Research said the central bank’s measures to discourage banks from engaging in the speculative ringgit non-delivery forward (NDF) activities and require exporters to convert 75% of all new export proceeds into ringgit have provided further support.
“Despite the massive March selldown in fixed-income markets, the ringgit, on the other hand, remained resilient and strengthened by 0.4%. Forex reserves also increased by RM400 million to RM95.4 billion in the same period, mitigated by a pick-up in exports, which should contribute to a larger current account surplus for the first-quarter (1Q),” it said.
At the same time, the strong foreign inflow of funds into the equity market suggests some switching of funds from the fixed-income market on the back of an improving economic outlook.
As it stands, the cumulative amount of foreign buying in stocks listed on Bursa Malaysia rose to RM6.4 billion as at April 7, with inflows in the month of March alone at RM4.7 billion, RHB Research added.
“Further, we believe the ringgit has overshot on the downside, due to the strengthening of the US dollar and earlier uncertainty after the central bank introduced measures to stop speculation by offshore traders.
As fundamentals remain intact and the Malaysian economy is still expected to grow at a steady pace, we expect the ringgit to recover gradually over time on higher commodity prices to settle at RM4.35 per US dollar by year-end,” said the research house.
RHB Research said volatility in the ringgit could persist in the near term and it could trade at a range of RM4.30 to RM4.50 per US dollar, given the expectation of further US rate hikes, vulnerability from large foreign holdings of fixed-income instruments in the country and volatility in oil prices.