- Oil spurs ringgit rally after Moody's credit outlook cut
- Malaysia has 'done well to protect itself' in rout, fund says
It’s turning out to be a better quarter for investors in Malaysia’s Islamic dollar bonds as oil prices rally, funds return to emerging markets and the government overhauls its tax system.
The Islamic bonds due in 2025 have returned 4.3 percent since the end of December following a meager 0.9 percent gain in the previous three months, based on Bloomberg-compiled data. The notes pay 1.24 percentage points more than similar-maturity Treasuries, giving some protection for now to the rising odds of monetary tightening by the Federal Reserve that are pushing up U.S. yields.
The sustainability of bond gains will depend on the path for commodities and the trajectory for U.S. interest rates, according to Aberdeen Islamic Asset Management Sdn. A 50 percent increase in Brent crude from a 12-year low in January has bolstered sentiment for oil-exporting Malaysia, making the ringgit one of Asia’s best performers after the government kept its fiscal-deficit target and growth beat estimates.
“Malaysia remains a relatively stable credit story within the emerging-market universe,” said Hasif Murad, an investment manager at Kuala Lumpur-based Aberdeen Islamic Asset Management, whose parent oversees the equivalent of $2.9 billion. “Malaysia has done well to protect itself from the adverse oil effects by implementing a goods and services tax to diversify revenue.”
Moody’s Investors Service cut its outlook on Malaysia’s A3 credit rating in January to stable from positive, bringing it in line with assessments from Standard & Poor’s and Fitch Ratings, all of which are the fourth-lowest investment grades. That was before the government maintained its fiscal-deficit goal on Jan. 28 at 3.1 percent of gross domestic product, although it trimmed the growth projection to a maximum 4.5 percent from 5 percent.
Malaysia’s 10-year global sukuk should oscillate between a spread of 125-150 basis points over Treasuries, according to RHB Investment Bank Bhd., the Southeast Asian nation’s second-biggest Islamic bond arranger.
The improved returns in the past two months were a reflection of central banks such as those in Europe and Japan cutting rates to negative as a means to reflate their economies, along with a recovery in oil to $40 a barrel that turned around sentiment for underperforming exporters like Malaysia, said Angus Salim Amran, the Kuala Lumpur-based head of markets at RHB Investment.
“Elevated market volatility resulting from uncertainty on the timing of a Fed rate hike or hikes, a sustainable recovery in oil and commodity prices, and depressed economic performance will cap returns” around 4 percent, said Angus.
The 3.12 percent yield on Malaysia’s Islamic bonds has fallen 39 basis points from when Brent crude began its rally on Jan. 21. Ten-year conventional government notes in Germany and Japan pay 0.31 percent and a negative 0.05 percent, respectively. Indonesia’s 10-year sukuk returned 4.4 percent in 2016.
A Bloomberg index of emerging-market sovereign debt denominated in dollars has climbed 3.7 percent this year, similar to Malaysia’s sukuk. A gauge measuring the performance of U.S. Treasuries increased 2.2 percent.
“The macro landscape has become friendlier compared to the previous quarter,” said Fakrizzaki Ghazali, a Kuala Lumpur-based strategist at RHB Research Institute Sdn. “Gains could be capped in the near term on the supply factor as Malaysia plans another sukuk next month or in May.”