Foreign buyers shifting to bond market for higher yields

This is due to expectations of rate hikes next year and the stronger ringgit, says senior trader


Foreign investors are seeking refuge in the bond market as the ringgit appreciates and fears over Russia’s pull-out from the oil cut agreement with OPEC would push crude prices lower.

A senior foreign-exchange trader said the ringgit’s rise to a one-year high against the US dollar of RM4.08 yesterday is resulting in a shift of foreign inflows away from the local equity market into ringgit-denominated bonds.

“Locally, foreign investors are shifting into bonds due to expectations of rate hikes next year and the stronger ringgit,” the trader told The Malaysian Reserve.

Moreover, the trader said the interest in the local stock market is largely coming from local investors. “Local bonds will bring in higher yields for investors if the Overnight Policy Rate increases,” said the trader.

The market is pricing in a rate hike as soon as Jan 25 next year, he added.

According to MIDF Amanah Investment Bank Bhd, foreign investors bought RM88.6 million in equities last week, which was insufficient to offset the RM297.1 million in net attrition posted in the previous week.

This positions November to be the fourth successive month that the local bourse is hit by foreign attrition after over RM300 million in net foreign outflow was recorded in October.

After peaking at a high of 1,792.35 on June 14 this year, the FTSE Bursa Malaysia KLCI (FBM KLCI) moderated over the past two weeks. The local bourse rose 5.96 points to close at 1,720.38 yesterday, but failed to make gains despite the market- friendly Budget 2018 announced by the government recently.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the equity market will play “catch up” to the stronger currency.

“For now, the OPEC meeting today is causing jitters — which may be holding back the larger oil and gas constituents on the bourse,” Innes said.

“The lower oil prices will not impact the ringgit too negatively, provided it does not plummet below US$50 (RM204) per barrel which is below Malaysia’s budget target of US$52 per barrel,” he said.

In the meantime, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the FBM KLCI remains in a healthy position due to its oversold position.

“From a technical point of view, the FBM KLCI is already in an oversold position ever since the index started to consolidate from September,” Mohd Afzanizam said.

“We view such movement as healthy as the market is adjusting to reflect the current situation, especially in key sectors that make up the index.”

Mohd Afzanizam added that the upside potential for the local bourse remains in sight as banking stocks are practising prudent underwriting standards and manageable household indebtedness, as reported in the third quarter of this year.

However, he said any changes to the US Federal Reserve’s interest-rate outlook next year — which is expected at gradual hikes — would impact fund flows into the local equity market.