Malaysia sees relief after drought of foreign portfolio flows

In the first two months of 2019, overseas investors bought a net $40 million of Malaysian equities, data from Bursa Malaysia exchange showed. They sold $2.7 billion of Malaysian equities in 2018.

“Slowly over the months, they (the government) have shown themselves to be more transparent. They are being methodical about the type of corruption they have to root out and there is going to be much more accountability focusing,” said Monem Salam, deputy portfolio manager at Washington-based Amana Funds.

“That is what is guiding the confidence back.”

Mahathir’s government unveiled a five-year plan to clamp down on corruption and introduced laws to regulate political funding and lobbying.

The measures were aimed to boost investor confidence after a multi-billion-dollar graft scandal at state fund 1MDB helped bring down the previous government. Malaysia reported 4.7 percent annual growth in October-December, the fastest in three quarters.
Inflation is not an issue; in January, consumer prices were 0.7 percent lower than a year earlier. During 2018, the bond market was hit by concerns there would be a higher fiscal deficit and possible sovereign rating downgrades, but the worries have started to wane.

“While a potential rating downgrade is not our base assumption, it did weigh on foreign demand for Malaysian bonds coming into 2019, leaving valuations adrift of their Asian peers,” said Yong Shao Fung, a senior portfolio manager at Nikko Asset Management. “That has reversed slightly in the current mild risk-on environment as comparatively high real rates and low/stable inflation outlook make the investment case for Malaysian sovereign bonds relatively attractive. ”

Malaysia’s 10-year government bond yield has fallen about 20 basis points this year to 3.9 percent.

Higher commodity prices, a pick-up in domestic consumption and favourable developments in foreign relations with trading partners such as China, Singapore and Japan would bolster flows into Malaysian bonds this year, said Credit Suisse analysts.

Also aiding optimism, Japan said in November it would guarantee Malaysia’s issuance of 200 billion yen ($1.81 billion) worth of samurai bonds in 2019.

Still, political questions remain. Prime Minister Mahathir Mohamed, aged 93, vowed to hand over power within two years of his election and it is not certain his designated successor, former deputy prime minister Anwar Ibrahim, will take over.

There is uncertainty about the fate of a $20 billion contract with China Communications Construction Co Ltd (CCCC) for a huge East Coast Rail Link project. In January, one Malaysian minister said it was cancelled, then another said negotiations on reducing the cost were under way.

The rail project “is still likely to go ahead in some form, maybe in reduced form, because Malaysia and China have interests to have some kind of deal on this,” said Peter Mumford, Southeast and South Asia practice head at Eurasia Group.

With the U.S-China trade dispute, there could be shifting of supply chains from China to Southeast Asia, and Malaysia is well-positioned to benefit, said Amana Fund’s Salam. “We are looking to add positions in Malaysian markets,” he said. – Reuters

Source : TheStar