KUALA LUMPUR (June 21): Malaysia's attractiveness as an investment destination took a hit following its addition to the US's watchlist on currency manipulation, along with declining yields following Bank Negara Malaysia's (BNM) overnight policy rate (OPR) cut, according to RAM Rating Services Bhd.
In its Bond Market Monthly released today, RAM said the RM4.2 billion of outflows in May paled in comparison to April's RM9.8 billion.
It said April's outflow came on the heels of concern over the removal of Malaysia from FTSE Russell's benchmark index at the next review in September, albeit somewhat alleviated by BNM's initiatives in May to enhance market liquidity and accessibility.
That said, the rating agency added that the current global uncertainties are unlikely to be resolved in June as investors still face risks and potentially negative developments.
RAM head of research Kristina Fong said that for one, US Federal Reserve watchers are becoming increasingly more sensitised to expectations of a rate cut, on the back of its more dovish tone.
She said that on the other hand, the global markets are also eagerly anticipating more clarity on the fate of future trade, as US President Donald Trump and China President Xi Jinping are set to meet at the G20 summit in late June.
"These developments could lead to different portfolio allocation strategies for active investors. As such, the impact is rather uncertain at this point.
"Norway's decision to exclude emerging markets' fixed-income securities from its Government Pension Fund Global in June could also result in some staggered rationalisation by the sovereign wealth fund. All said, we are not likely to see the end of market volatility just yet," said Fong.
RAM said in spite of weaker foreign demand, the yields of government and corporate bonds largely retreated in May, signalling strong domestic institutional support.
It said this also followed BNM's pre-emptive 25-basis-point cut in the OPR last month, amid rising concern about the effects of the destabilising trade war on Malaysia's growth trajectory.
The strong appetite was also highlighted by the robust bid-to-cover (BTC) ratios at government bond auctions in May, it said.
RAM said demand for longer-tenured Government Investment Issues (GII) was very strong, with the 15- and 30-year papers charting respective BTC ratios of 3.38 and 3.30 times. Meanwhile, the auction of 10-year Malaysian Government Securities (MGS) posted a BTC ratio of 1.84 times.