by SULHI KHALID/ graphic by MZUKRI
FOREIGN investors remained net sellers of local bonds in the first six months of the year (1H19) with a total net outflow amounting to RM2.2 billion despite the global bond rally in June, according to Malaysian Rating Corp Bhd (MARC) in its monthly bond market report.
Malaysia’s bond market experienced heavy foreign outflows in April and May following weaker oil price, moderate GDP growth in the first quarter and US-China trade tensions.
“Malaysian Government Securities (MGS) accounted for most of the inflows during the period. However, the turnaround in June was unable to mitigate the heavy outflows seen in the last two months,” the credit rating agency said.
MGS accounted for most of the foreign inflows in June, followed by Malaysian Treasury bills.
Total foreign holdings of MGS rose to RM149.1 billion (May 2019: RM143.4 billion), while foreign share of total outstanding increased to 36.9% (May 2019: 35.8%).
Citing supporting global monetary policy adopted by global central banks as the main reason behind the MGS rally, MARC highlighted that investors remained cautious as the US Federal Reserve may cut its interest rate in the upcoming Federal Open Market Committee meeting this month.
Elsewhere, the European Central Bank (ECB) and Bank of England (BoE) maintained interest rates amid weak inflation readings.
The ECB is expected to hold key interest rates steady until 1H20 in order to ensure a sustained increase in inflationary pressures, while the
BoE is anticipated to adopt a dovish stance by keeping the bank rate unchanged at 0.75% as the UK proceeds with Brexit negotiations.
The lingering concerns over FTSE Russell’s possible move to exclude Malaysian bonds from its World Government Bond Index appeared to have subsided in June, MARC noted.
On April 15, FTSE Russell announced that Malaysia has been placed on its fixed-income watchlist for six months until September 2019, following the completion of its first fixed-income country classification review.
Analysts have warned that the consequences of a downgrade will trigger a significant capital flight out from the local bond market.
Singapore-based financial institution DBS Bank Ltd said it is confident that Malaysian bonds will be retained in the FTSE Russell index once the review is done in September.
Meanwhile, 1H19 also saw Norway’s sovereign wealth fund — which is the world’s largest — slashing its investments in Malaysian bonds, together with nine other emerging-market peers from its benchmark index.
AmBank Group in its research report said the pullout of RM8 billion by the sovereign fund will have little impact to the local bond market as the outflow will be gradual.
“In terms of size, Malaysia is the third-largest country with exposure to the fund after South Korea and Thailand,” the research house said.
The Norwegian wealth fund, currently worth US$1.05 trillion (RM4.32 trillion), invests around 30% of its assets in fixed income.
Issuances in the local corporate bond market in June were mainly from the financial services sector. In 1H19, the total issuance surged by RM23.4 billion to RM78.4 billion due to the large issuance of unrated sukuk by Urusharta Jamaah Sdn Bhd worth RM27.6 billion
Urusharta Jamaah is a special-purpose vehicle (SPV) company set up by the Ministry of Finance to buy and manage Lembaga Tabung Haji’s (TH) underperforming assets.
The SPV acquired TH’s underperforming properties and equities in exchange for RM10 billion in non-tradable sukuk and RM9.9 billion in Islamic redeemable convertible preference shares, as part of a corporate exercise to restructure TH.
The largest corporate bond issuers in June were CIMB Group Holdings Bhd (RM2 billion), followed by Hong Leong Financial Group Bhd (RM1.1 billion) and Hong Leong Bank Bhd (RM1 billion).