Malaysian bonds outperformed regional counterparts in May after Prime Minister Najib Razak’s election victory removed the risk of a power shift, prompting analysts to maintain forecasts for appreciation in the ringgit this year.
Government securities gained an average 0.3 percent, while local-currency notes in Singapore and Indonesia slumped 2.2 percent and 2.4 percent respectively, according to HSBC Holdings Plc indexes. Thai debt handed investors almost zero returns and Philippine bonds fell 1 percent. The ringgit will advance 3.2 percent by Dec. 31, ending the year stronger than 3 per dollar for the first time since 1996, the median estimate of 22 analysts shows.
Overseas investors boosted holdings of Malaysian bonds to a record as 10-year yields offer a 1.3 percentage-point premium over U.S. Treasuries and 2.6 points more than Japanese notes. The ringgit rallied to a 21-month high on May 7, two days after the re-election of Najib’s government, which has embarked on a decade-long $444 billion program to help achieve developed-nation status by 2020. Foreign-exchange reserves have climbed to the highest since at least 1998.
“Malaysia has a good macro profile and strong fiscal position, and foreign investors seeking yield find government bonds in Malaysia attractive,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, said in a May 22 interview. “Especially now that the uncertainty about the elections is behind us, investors don’t need to hold back any more.”
Emerging market local-currency bond funds drew net inflows of $265 million in the week to May 29, according to a Morgan Stanley report on May 30, citing data from U.S. research firm EPFR Global. Hard-currency debt funds saw outflows of $535 million. Overseas investors increased ownership of Malaysian government and corporate securities to 236.8 billion ringgit ($76.6 billion) in April, central bank data shows.
The ringgit will appreciate to 2.99 per dollar by year-end from 3.0885 as of midday in Kuala Lumpur, according to the analysts surveyed by Bloomberg. Barclays Plc predicted in a May 28 research report that the currency will strengthen to 2.90 in 12 months, bolstered by capital inflows.
Najib’s Barisan Nasional party alliance won the May 5 election after securing 60 percent of the 222 parliamentary seats, extending a 55-year grip on power for the coalition.
“Malaysia, due to the election concern, had lagged gains in other emerging-market debt and so had a catch-up rally after the vote,” Hideo Shimomura, who helps oversee the equivalent of $59 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s largest publicly traded bank, said in a May 31 interview.
Malaysia’s currency dropped in May along with other Asian exchange rates and bonds after Federal Reserve Chairman Ben S. Bernanke signaled stimulus measures that have fed inflows to developing nations may be decreased, while housing and consumer confidence data beat economists’ forecasts.
The ringgit’s weakness is likely to be short-lived as Malaysia’s economic growth and sustained current-account surpluses provide support, according to Barclays’s report, whose authors included foreign-exchange strategist Hamish Pepper.
The currency weakened 1.7 percent, faring better than a 3.3 percent loss in the Thai baht and a 2.6 percent drop in the Philippine peso, according to data compiled by Bloomberg. Indonesia’s rupiah declined 0.7 percent as the central bank intervened last week.
The yield on Malaysia’s 3.48 percent bonds due in March 2023 increased nine basis points, or 0.09 percentage point, to 3.46 percent in May, with much of the advance coming last week after Bernanke’s comments. The yield climbed 27 basis points in the five days and was the highest since April 4, data compiled by Bloomberg show. It reached 3.05 percent on May 17, the lowest level for a benchmark of that maturity since 2009.
In contrast, the rate on the 3.58 percent 2018 notes rose 16 basis points to 3.36 percent last week.
Thailand’s 10-year borrowing costs on local-currency notes increased 10 basis points to 3.51 percent in May, while Indonesia’s equivalent rose 48 basis points to 5.98 percent.
On a relative-value basis, Barclays recommended switching out of Malaysia’s 10-year debt into five- and 20-year securities.
Private and public-sector investment will probably gather pace given the uncertainties related to the election have been resolved, according to Barclays, which raised its economic growth forecast for Malaysia to 5.3 percent this year from 5.1 percent previously. The central bank will likely keep its benchmark interest rate unchanged at 3 percent for the rest of the year, the report said.
The incumbent government’s election victory “gave offshore investors more confidence that the status quo, in terms of policy, will be maintained,” Guan Yi Low, who helps oversee $91 billion as Singapore-based fixed-income investment director at Eastspring Investments, a unit of the U.K.’s Prudential Plc, said in a May 21 interview.
The country’s foreign-exchange reserves climbed to $141.4 billion as of May 15, the highest level since at least 2008, according to Bank Negara Malaysia. That compares with $136.1 billion a year earlier. The current account has been in surplus since at least 1999 and stood at $8.7 billion in March, data compiled by Bloomberg show.
Malaysia’s gross domestic product will increase 5 percent to 6 percent in 2013, after growth of 5.6 percent last year, according to the central bank’s annual report released March 20.
“As interest rates in the world remain suppressed, it makes sense for foreign investors to invest in assets that provide them with a better yield,” Esther Teo, Kuala Lumpur-based fixed-income head at Hwang Investment Management Bhd., said in a May 23 e-mail interview. “Malaysia is one of the obvious choices given our stability in the political and economic environment.”