KUALA LUMPUR (July 8): Foreign shareholding of Malaysian Government Securities (MGS), which had risen to a record high of RM158.2 billion in the first half of 2015 (1H2015) or about 46.9% of the outstanding amount, is not a major concern, said Malaysian Rating Corp Bhd (MARC).
It said the presence of large domestic institutional investors will also serve as a strong buffer against external shocks, mitigating the impact on the financial market, should there be a significant reversal of foreign flows.
“While we acknowledge the potential risk of high foreign holdings of MGS, we do not see this as a major concern.
“We believe that foreign investors more or less shrugged off short-term adverse developments, but focused on the country’s long-term economic fundamentals when investing in local government bonds,” said its senior fixed income analyst Nick Lee Chin Fah in MARC’s 2H2015 bond market outlook report today, themed ‘Bracing for Fed Lift-off’.
“In addition, positive interest rate differentials between Malaysia and developed countries will likely keep luring offshore investors into the local market. Notwithstanding this, we do foresee a short-term impact of foreigners’ unwinding positions on the ringgit. As such, we see a limited upside on the ringgit in 2H2015,” he said.
The record high foreign shareholding came in despite lingering concerns of a US Federal Reserve’s (Fed’s) rate hike and possible downgrade by Fitch Ratings at the time.
Foreign holdings of Government Investment Issues (GII) had also surged to an all-time high of RM10.9 billion or 5.3% of outstanding GII in the market in the same period, from a mere RM5.3 billion or 2.8% of the outstanding amount at the start of the year.
The inclusion of GII papers in Barclay’s Global Aggregate Index helped infuse demand for the GII, not only from local investors but also foreign investors, which has also pushed GII yields lower, narrowing the GII/MGS spread to six bps, from 14 basis points (bps) at the beginning of the year.
Meanwhile, MARC is forecasting MGS yields to rise to 4.1%-4.5% in the second half of 2015 (2H2015), mainly due to the Fed’s expected interest rate hike this year.
On the GII, MARC maintained its view that the GII/MGS spread will hover around the current level of 5 bps to 15 bps throughout 2H2015, given the growing interest among local and foreign investors, and lower-than-expected supply of GII papers.
“Nonetheless, we believe the rise in [MGS] yields would not be too significant, as stable macro fundamentals, massive stimulus measures by the European Central Bank and accommodative monetary policy stance by the regional central banks would keep yields in check.
“We are also of the view that domestic institutional investors will provide support to local government bonds, should there be a significant rise in yields,” said Lee in the report.
MARC expects inflationary pressure to remain contained, despite an expected pick up in 2H2015.
“We believe it will remain contained and should not push up bond yields excessively, particularly on the longer end. Against a backdrop of relatively stable economic growth of circa 4.7%, we expect the BNM (Bank Negara Malaysia) to hold the Overnight Policy Rate (OPR) at 3.25% throughout 2H2015,” he added.