Malaysia Outflows to Flip on Real Yield After Vote: Asean CreditYumi Teso and Liau Y-Sing
A flood of money out of Malaysia should reverse, easing inflows into Thailand, Eastspring Investments and Societe Generale SA said, as Prime Minister Najib Razak looks set to remain in power after elections.
Foreign funds pulled 10.7 billion ringgit ($3.5 billion) from Malaysian bonds in February, the latest available central bank data show, as investors were spooked by uncertainty about the timing of the vote and whether falling support for Najib would jeopardize economic reforms. Global investors pumped $9.6 billion into Thai sovereign debt in the first quarter, official data show, driving a 4.4 percent rally in the baht.
The Malaysian leader, whose approval rating fell to an 18-month low of 61 percent in a survey released Feb. 26 by the Merdeka Center for Opinion Research, dissolved parliament April 3, and an election must be held within 60 days of that. The country’s 10-year bond yields 1.96 percentage points more than its inflation rate, the highest real yield in Southeast Asia followed by 0.82 percentage point in Thailand.
“I expect fund inflows to resume once elections are over, given the positive real yield offered by Malaysian bonds,” Guan Yi Low, who helps oversee $91 billion as Singapore-based fixed-income investment director at Eastspring, a unit of the U.K.’s Prudential Plc, said in an April 1 interview. “Given the outperformance of the Thai baht year to date, fund inflows may slow down in the near term,” she said, referring to Thailand.
Malaysian equity funds are more concerned by the election than overseas investors, Tan Ting Min, an analyst at Credit Suisse Group AG in Kuala Lumpur, wrote in a research note this week. He cited Bursa Malaysia Bhd. data showing locals pulled 2.4 billion ringgit from the country’s stocks in March, while foreigners bought a net 4.8 billion ringgit.
The ringgit touched a two-month high of 3.0613 per dollar today, according to data compiled by Bloomberg. Since declining 4.1 percent in the two months through March 18, it has recovered 2.1 percent to 3.0642 as of 11:30 a.m. in Kuala Lumpur.
“Elections are probably going to be held before the end of April and we expect to see funds coming back,” Wee-Khoon Chong, a rates strategist in Hong Kong at Societe Generale, said in an interview yesterday. “The risk-reward is still favoring the incumbent to continue another term.” Malaysian funds will shift money from Thailand back into their own country, he said earlier this week, adding that he expected a victory for the ruling coalition.
The Barisan Nasional alliance controls 137 seats in Malaysia’s 222-member parliament, with Najib’s United Malays Nasional Organisation, the biggest party, holding 78. At the last election in 2008, the coalition had its narrowest ever win during its unbroken run in power since independence in 1957.
Najib has streamlined the bureaucracy and opened up more industries to foreign investors, as well as starting a $444 billion private sector-led spending program that aims to propel Malaysia to developed-nation status by 2020.
The election may be the closest in history, Citigroup Inc. analysts Kit Wei Zheng in Singapore and Brian Tan, wrote in a report this week. A narrower Barisan Nasional win is unlikely to change policy direction, although a substantially weaker victory would raise the risk that some fiscal reforms with inflationary consequences could be postponed, they wrote.
The economy expanded 6.4 percent in the final three months of 2012 from a year earlier, the fastest pace since the second quarter of 2010, official data show. It may grow as much as 6 percent this year on domestic demand and investment, Bank Negara Malaysia said on March 20.
“If there’s status quo and Barisan Nasional stays in power, there’ll be a lot of pent-up demand for Malaysian ringgit assets and funds will probably find their way back onshore,” Lum Choong Kuan, head of regional fixed-income research in Kuala Lumpur at CIMB Investment Bank Bhd., a unit of CIMB Group Holdings Bhd., said in an April 1 interview.
Foreign funds have been shunning Malaysian debt due to the political uncertainty and avoiding Indonesian bonds because of its current-account deficit, boosting inflows into Thailand, central bank Governor Prasarn Trairatvorakul said March 20.
The yield on Malaysia’s three-year notes declined one basis point, or 0.01 percentage point, in 2013 to 2.98 percent, according to data compiled by Bloomberg. That compares with a drop of six basis points to 2.85 percent in Thailand, and a 15 basis point decline to 4.51 percent in Indonesia. Standard & Poor’s assigns Malaysia its seventh-highest investment grade credit rating of A-. It ranks Thailand one level lower at BBB+ and Indonesia three rungs below that at its highest junk rating of BB+.
Developing Asia will grow 7.1 percent this year, compared with an expansion of 3.6 percent in Latin America and 2.4 percent in central and eastern Europe, according to estimates released by the International Monetary Fund in January.
The region’s strong growth may encourage investors to shift money from other emerging markets into Malaysia, rather than pulling it out of Thailand, according to Koji Fukaya, chief executive officer and currency strategist at FPG Securities Co.
“This part of the region is in quite a good condition, while emerging markets are generally looking just so-so,” the Tokyo-based Fukaya said in an April 3 interview.
Malaysian inflation was 1.5 percent in February, less than 2.69 percent in Thailand in March, 3.2 percent in the Philippines in March and 5.9 percent in Indonesia in March, official data show. The real yield is 21 basis points in the Philippines and negative 38 basis points in Indonesia.
The cost of insuring Malaysia’s five-year government debt against non-payment with credit-default swaps increased 12 basis points this year to 90.2 basis points yesterday, and reached a seven-week high of 91.5 basis points on April 3, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets. Thailand’s bonds are still viewed as riskier, with the rate rising five basis points to 99.2.
While the political situation in Thailand has been relatively stable since Prime Minister Yingluck Shinawatra took power in 2011, the country experienced major civil unrest in 2008 and 2010, when protesters occupied a commercial district in the capital Bangkok.
“When everything settles, funds will come back to Malaysia and the pace of inflows into Thailand may slow,” Lam Chee Mun, a Kuala Lumpur-based fund manager at TA Investment Management Bhd., said in an interview yesterday. “On a historical basis, the political situation in Thailand has been more volatile compared to Malaysia. In terms of stability, investors still prefer Malaysia rather than Thailand.”