Malaysia’s investment strategy in 2013
While the Malaysian Government Securities (MGS) yields are at risk of 2H13 steepening, analysts see risk sentiment to favour a shift toward corporate bonds
The MGS yields were likely to trade in a range-bound pattern in the beginning of 1H13 in view of the uncertainties from the general election (GE) as well as noises from global uncertainties, they opined.
“As the market is pricing for a better growth outlook with potentially higher consumer price index (CPI) and duration extension in 2013’s government bond auctions, yields are expected to be mildly bearish by 2H13,” RHB Research Institute Sdn Bhd (RHB Research) said in its recent 2013 Fixed Income Outlook and Strategy report.
“The extent of negative sentiment would largely depend on the foreign funds’ confidence in the Malaysian market post-election,” RHB Research chief economist Lim Chee Sing remarked.
However, the rise of yields would be capped as the central bank would unlikely move into policy tightening, whilst ample internal liquidity and demand would likely continue to support yields, he added.
The debt market research team further pointed out that in terms of fixed-income allocation strategy, risk aversion would continue to decline in 2013, particularly in 2H13, as the recovery became more entrenched.
As yield hunting was expected to continue for the rest of the non-government and non-government related entities bonds, the team lowered six out of 11 sectors on ‘overweight’ recommendation.
Lim said the overweight calls tended to have unique positives attached to them, such as the independent power producers and banking sector which came with sturdy financial profiles and robust liquidity in the secondary market.
In addition, new corporate bond issuances trickling into mega projects from the Economic Transformation Programme (ETP) could also boost prices in the primary issuance market, due to its ability to aid in price discovery, boost market liquidity and result in lower credit spreads.
“All in all, pockets of value are to be found in the private debt securities segment, although cherry picking in issuers with strong credit fundamentals and corporate governance is essential, particularly from the risk of regulatory changes post-election.
“From a credit ratings perspective, our theme of improving risk appetite in 2H13 ties in with the general ideas of trading down the credit curve, away from the govvies and moving towards the quasi sovereigns, ‘AAA’ as well as ‘AA’ and ‘A’ bonds,” he revealed.
Nonetheless, risk-on trades would still be heavily dependent on global signals and the pace of global economic recovery next year, which would be more pertinent given a continuation of trade opportunities amid instances of volatility in 2013.
In terms of sector, construction was expected to continue supporting the economy activity and lead the pace of economic growth with a projected 9.5 per cent growth for 2013, while manufacturing was projected to pick up in 2H13 on the back of improvement in external demand or by almost five per cent in 2H13 from 2.6 per cent in 1H13.
“On the expectation of a gradual removal of subsidies post GE to start after 1H13 and the low base effect, we project the headline CPI to increase slightly to 2.1 per cent from an estimated 1.7 per cent in 2012.
“Given that inflation is largely influenced by cost-push factors and the fact that the economy is expected to grow below its potential next year, there is a higher probability that Bank Negara Malaysia (BNM) may adopt a more accommodative stance.
“If the economic condition of the four major economies deteriorates in first quarter of 2013, BNM may likely cut the overnight policy rate by 25 basis points to 2.75 per cent in the first quarter itself,” he concluded.