By G. Sharmila
It is clear that the Malaysian bond market has challenges that need addressing. However, experts say that there are bright spots yet and things to look forward to this year, although the road ahead is far from perfectly smooth.
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In previous articles, we discussed some of the challenges faced by the domestic bond market, including foreign outflows, the weak ringgit, an underdeveloped retail bond market, as well as the relatively inactive repo market for bonds.
One point raised in our previous article on the repurchase agreement (repo) market was the long-term investing view that investors hold when it comes to investing in bond. This long-term view and general aversion to risk remain a niggling problem.
Promod Dass
RAM Rating Services Bhd deputy chief executive officer Promod Dass said: “The short-term challenges for the bond market are macroeconomic challenges and the issue of sentiment. But the inherent challenge that our bond market has is that institutional investors are still very focused on investing in ‘AA-rated’ papers and above. What this means is that the ‘A-rated’ and ‘BBB-rated’ bonds don’t get to see much light of day.”
“So if an issuer gets a single ‘A’ or ‘BBB’ rating, there is typically not much demand. There’s a certain amount of risk averseness, but that’s the way the market has grown. This is an inherent challenge, if you ask me the same thing next year, I’ll say the same thing,” he told KINIBIZ in an interview.
“The second major challenge is that it’s a buy-and-hold market, there is not much secondary trading. It’s something that has been present since after the Asian financial crisis. In the United States and slightly more advanced countries in Asia, you have more secondary trading,” he added.
Others are concerned about the global macroeconomic conditions (particularly interest rates) and how that will impact bond yields of the Malaysian Government Securities (MGS).
Rajiv Biswas
According to IHS’ Asia Pacific chief economist Rajiv Biswas, a key factor that will affect emerging bond markets this year is the timing of the US Federal Reserve’s (Fed) decision for its first rate hike, as well as the outlook for oil prices.
“With political risks relating to the Saudi intervention in Yemen having driven world oil prices higher, this is could also push inflation expectations for the Malaysian inflation outlook slightly higher, as well as potentially affecting the timing of the Fed’s first rate hike decision. These factors could result in MGS yields rising in the second half of 2015,” he told KINIBIZ via email.
A rising interest rate environment is not good for existing bondholders. Say you bought a bond for RM10,000 at a 5% coupon or interest rate. If interest rates were to rise to 8%, new bonds issued would have a 8% coupon rate, so other investors would not be interested in your bond, which only has a 5% coupon rate. Therefore, the value of your bond would be lower than RM10,000.
This view is also shared by the Securities Commission (SC), which in its 2014 annual report noted that in 2015, yields are likely to respond to upward pressures arising from the prospective normalisation of US interest rates. “This may alleviate any adverse impact from any sell-off by investors and may even attract new fund flows into the capital market,” the SC said.
Another concern is the weak ringgit, which affects investor perception towards bonds, say experts.
A note by RHB Research on May 12 stated that the ringgit is likely to hover around RM3.60 to RM3.70 against the US dollar in the near term due to the large foreign holdings of fixed-income instruments in Malaysia.
“Meanwhile, an expectation of the US increasing interest rates and the risk of a possible sovereign credit rating downgrade by Fitch Ratings, could still come back to haunt the ringgit again,” the research house said in the note.
According to Ambank Group’s strategist, FX and rates, markets, Wong Chee Seng, the selldown in the ringgit is overdone. “We think the ringgit should be around RM3.20 or RM3.30 against the US dollar,” he added.
On a possible rating downgrade by Fitch Ratings, Wong said there is not likely to be a massive selldown if a downgrade happens and that the market has already priced this in.
“So if there is a rating downgrade that could only mean two things – one you (investors) don’t do anything. Two, you could buy on rumours, sell on fact. That kind of kneejerk reaction is really positive, another supporting evidence why ringgit debt is an attractive case for investment,” he told KINIBIZ in an interview recently.
Wong is confident that the supply side of the bond market will be robust, both for corporate and government papers.
“It would be more active on the supply side for the government papers, simply because the government had revised the fiscal projections.
“Initially, I think the fiscal deficit target was 3% of gross domestic product (GDP) because of the drop in oil prices and then, they revised it to 3.2%. What it means is the government needs more money. So you expect that the government is going to issue more papers. So the supply side, I think that’s going to be governed by that,” he said.
According to SC, fund raising activities in relation to several large Economic Transformation Programme (ETP)-related projects are expected to be carried out in 2015 and will contribute to the growth of the capital market.
“Sectors likely to source long-term financing through sukuk and corporate bonds include infrastructure as well as oil and gas.
“In view of these factors and reflecting the Malaysian economy’s diversity, long-term fundamentals and prudent macroeconomic management, the capital market in 2015 is expected to continue to record positive growth and remain resilient against any externally driven volatility in markets,” it added.
AmBank’s Wong is also confident that the outflow of funds from the bond market is something that is manageable.
“As for the flow of funds, I think the situation is not as dire as what some analysts predict – that Malaysia is going to see a massive outflow. So whatever money that in this system, I think will remain in the system. I mean, you won’t see massive outflows,” he said.
While it is heartening to know that on the whole, the domestic bond market appears to be progressing, it is important to note that to be a truly world-class bond market, it needs to have more retail and repo activities.
One hopes that the regulators and the investing community look at these issues more seriously and take the bond market to the next level.
Yesterday: Are we ready for a repo market?
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