Bank Negara Malaysia raised the overnight policy rate (OPR) by 25 basis points to 2% on May 11, 2022, which was a surprise move relative to the Monetary Policy Committee’s (MPC) statements in March, where it held rates unchanged and appeared dovish.

The May 2022 OPR increase seemed to suggest that Bank Negara’s action was in line with other central banks on the back of the latest positive indicators of growth domestically, as Malaysia’s first quarter 2022 gross domestic product (GDP) was at 5% year-on-year/3.9% quarter-on-quarter, exceeding the consensus at 4% y-o-y/2.5% q-o-q, and much better than 4Q2021 GDP of 3.6% y-o-y/4.6% q-o-q. The sustained reopening of the global economy and the improvement in labour market conditions continue to support the recovery of economic activities.

Inflationary pressures have increased sharply, owing to a rise in commodity prices, strained supply chains and, in particular, the Ukraine-Russia war. As a result, several central banks in the advanced economies are normalising their interest rate policies much faster to reduce the impact from inflationary pressures and play catch up to the US Federal Reserve’s tightening regime. Despite an increase in policy rate, the bond market had a relief rally post the first OPR increase since July 2020, as the eventual OPR hike had already been priced in by the local bond market since the market sold off up to May 2022, ahead of the rate decision.

On government securities, we recommend watching this space closely, as both the US’ and Malaysia’s selling in the government securities space could eventually see a rebound in bond prices as more economists revise global growth rates lower for 2023 and beyond. This could be a sweet spot for bonds because it may also mean that we are coming to the tail end of rate hiking. We are seeing these preliminary signals in the US yield curve, where the US economy could slow, and that should benefit the government bond market, as it trades closest to policy rate moves.

On July 6, 2022, Bank Negara further raised the OPR by 25bps to 2.25% at the Monetary Policy Committee meeting and is expected to do the same at its next meetings in September and November, but we assess that these increases overall have been gradual and not at an accelerated pace as the US or the advanced economies. The economic landscapes for both countries are different and therefore the quantum of their policy rate increases would also be different. For corporate bonds, we continue to like the AA-rated space because of the credit spread provided that is above government securities’ yield, which would enhance the bond portfolio.

Outside of Malaysia, we remain cautious of other Asian markets, owing to the tightening in the US and global financial conditions that typically lead to a weaker appetite for emerging market (EM) assets, although the spread differential favours Asia. Having said that, we remain constructive on China local government bonds, as they are the only developed market in which the People’s Bank of China (PBoC) is on an easing path. Still, few Asian countries are holding up better than many other EM countries globally in this crisis, backed by improved credit fundamentals.

Within Asia, we like investment grade versus high yield, although the approach to high yield is opportunistic in nature and on a selected basis, since it has been severely oversold. We tend to stick to names that have a stronger branding, where land banks are in tier-1 and -2 cities. However, the tier-3 cities we like are those involved mainly in the fast-growing economic regions with proven sales execution and funding access.

Despite all the negative sentiment in the Chinese property space, we feel that the tide is beginning to turn, although it would take some time for this sector to perform. The Chinese government has started to shift its policy tone on property with a variety of easing measures being introduced. On April 15, 2022, PBoC announced a broad-based 25bps reserve requirement ratio cut for all banks, the third RRR cut since July and December 2021, injecting RMB530 billion (US$83.2 billion) of liquidity into the interbank system to help support the economy. This was followed by a larger-than-expected cut in the five-year loan prime rate on May 19, 2022, a key benchmark for mortgage loans. The rate has fallen 15 basis points to 4.45%, the biggest drop on record.

In the light of these developments, we expect to see some meaningful recovery in the second half of 2022. We are convinced that the remaining resilient and high-quality developers could benefit from this recovery, as they have no imminent refinancing needs and have access to alternative funding channels.

Therefore, across all asset classes, be it bonds or equities, the key takeaway is to remain invested to hedge against inflation risk that is still acute at this juncture. Bonds would be in demand if global growth continues to slow while it grapples with inflation brought about by supply constraint risk. The need for income could be the dominating theme again and in the investment playbook once policy rates on average have peaked globally.