Monday, 11 April 2016

Malaysia's ringgit has done a stunning about-face as China starts buying Malaysian bonds

The market is saying that this recovery in oil prices will be pretty positive for the Malaysian economy," said Kelvin Tay, chief investment officer for southern Asia Pacific at UBS Wealth Management in Singapore.

SINGAPORE: Malaysia's ringgit has done a stunning about-face this year, with surging capital inflows turning it into Asia's best-performing currency from the region's worst in 2015.

Still, few expect the ringgit to regain all the ground lost last year, as inflows may have peaked as Malaysian risk assets are starting to look pricey to investors and analysts.

The ringgit strengthened 10 percent against the U.S. dollar in January-March, its largest quarterly gain since 1973, Thomson Reuters data shows.

In 2015, the ringgit had its worst year since 1997, shedding 18.5 percent on the back on plunging oil prices, anticipated higher U.S. interest rates and a financial scandal at state-owned 1Malaysia Development Berhad (1MDB).

Driving the currency's U-turn is the return of foreign investors, who have poured into Malaysian stocks and bonds on better crude oil prices, a surprisingly resilient economy and easier monetary policies from major central banks.

"The market is saying that this recovery in oil prices will be pretty positive for the Malaysian economy," said Kelvin Tay, chief investment officer for southern Asia Pacific at UBS Wealth Management in Singapore.

In February, exports rose faster than expected. Sales of electrical and electronic products, the biggest item, increased 8.9 percent from a year earlier.

JACKED-UP HOLDINGS

Through the week ended April 1, foreign investors bought a net 5.5 billion ringgit ($1.4 billion) of Kuala Lumpur stocks this year, data from the research arm of Malaysian Industrial Development Finance showed. Last year had total outflows of 19.5 billion ringgit, it said.

Offshore investors have raised their local bond holdings by 11.8 billion ringgit in January-March, central bank data shows, with increased interest in longer-tenor debt. For all of last year, foreigners slashed holdings by 11.1 billion ringgit.

The cautious stance of Federal Reserve Chair Janet Yellen on U.S. rate hikes has caused investors to seek higher yields in Asia, aiding flows into Malaysia.

"This combination of an attractive currency valuation and higher yields in a world of low or negative interest rates is drawing foreign investors back to the local Malaysian market," said Eric Delomier, Asia fixed income investment specialist for Capital Group of the U.S.

Analysts and investors have concerns, including valuations of Malaysian assets and leadership of the central bank as its internationally-respected governor, Zeti Akhtar Aziz, retires at the end of April, and her successor has not been named.

Malaysian bonds seem "a bit rich," said Maybank Investment Bank's fixed income analyst Winson Phoon in Kuala Lumpur. Earlier this month, the 10-year yield fell to 3.77 percent, the lowest since February 2015.

SMALL INFLOWS AHEAD?

"I don't expect to see a repeat large inflows in months ahead, although the direction should remain slightly positive," Phoon said.

On share valuations, "Malaysia is actually not particularly cheap or attractive, compared to other markets," Tay of UBS said. "We don't think earnings growth has actually improved among Malaysian corporates."

Local stocks were trading at about 17.3 times the past 12 months' earnings, according to Thomson Reuters data. That compared with 11.8 times for Indonesian stocks, according to exchange data.

Zeti has led Bank Negara Malaysia (BNM) since 2000, and investors are hoping for a successor with her credibility to help Malaysia's standing at a time of political crisis for Prime Minister Najib Razak, chairman of 1MDB's advisory board.

"Given the near-term challenges to a new BNM governor, oil prices and festering political risk from 1MDB, among other things, the ringgit's upside is limited," said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.

His year-end target for the ringgit is 3.70 per dollar, 16 percent appreciation from its 2015 closing. Late Friday, the ringgit was at 3.90.- Reuters

China starts buying Malaysian bonds

Ong: ‘The Chinese government is keen to buy more Malaysian bonds

KUALA LUMPUR: China’s government has started buying more Malaysian government securities (MGS) and this inflow of new foreign money could rise to 50 billion yuan (RM30bil) in total, according to International Trade and Industry Minister II Datuk Seri Ong Ka Chuan.

In an exclusive interview with The Star, Ong said a senior representative of the Bank of China told him about this development recently when he met with the bank on issues pertaining to the use of yuan and ringgit in Malaysia-China direct trade.

“This could be one of the key factors contributing to the strength of the ringgit lately. China’s purchase of our MGS, which I am under the impression could rise to 50 billion yuan, will be very positive for our currency as it shows China’s confidence in our economy,” Ong said.

Other factors that had contributed to the strength of the ringgit in recent weeks included the recovery of crude oil prices, softer US dollar and the successful debt rationalisation of 1MDB, he added.

If China were to buy RM30bil worth of MGS, it would mean supporting 8.5% of Malaysia’s debts in the current MGS market. According to Bank Negara’s website, the value of outstanding MGS stood at RM352.06bil as at April 5, 2016.

Meanwhile, Malaysia’s debt markets saw inflows of RM11.5bil, versus RM1.4bil of outflows in February. The March foreign inflow was the largest monthly inflow since May 2014, according to a Nomura research note on April 7.

The inflows pushed foreign holdings of MGS to a historical high of RM171.5bil, the Japanese research house said. As a result, foreign ownership in outstanding MGS has risen to 48.7%.

Ong noted that Chinese Premier Li Keqiang had pledged to support the Malaysian economy – which was hit by a slowdown, local political problems, heavy outflow of funds and consequent plunge of the ringgit – when he visited Kuala Lumpur last November.

On Nov 23, the Chinese leader announced at a local forum that China would buy more MGS, issue yuan bonds in Kuala Lumpur and grant local institutional funds a quota of 50 billion yuan under the Renminbi Qualified Foreign Institutional Investor programme to invest directly in Chinese equities in the mainland.

The following day, the ringgit reacted positively gaining about 1% and the currency stabilised at around 4.25 to a US dollar in early December. MGS also gained.

“I was told China would use its reserves to buy our bonds. Its international reserves are high, at US$3.21 trillion (RM12.5 trillion) in March. With this development, I don’t think our ringgit will fall to 4.46 again,” said Ong.

Last month, Bank Negara said there were now more foreign governments and central banks holding MGS. A total of 29% was held by these two groups and 13% by pension funds.

The presence of these long-term investors is seen as reducing the risk of Malaysia facing sudden and massive outflows of capital in the event of unfavourable conditions, just like what had occurred last September, which saw the ringgit weakening to a multi-year low of 4.46.

Foreign inflow into the local stock market might be another factor that has boosted the ringgit. According to a Credit Suisse report, Malaysia saw a record net foreign equity inflow of RM6.1bil in March, which contributed to the ringgit’s 10.3% rise against the dollar in January-March 2016. At late trades on Friday, the ringgit stood at 3.9096.

Due to the recent new inflows, Bank Negara’s foreign exchange reserves had risen to RM412.3bil (US$96.1bil) as at March 15 from RM408.5bil (US$95.1bil) as at Jan 15. This reserves figure is an important buffer against capital flows and has an impact on the ringgit and the sovereign credit rating of the country. Moody’s recently noted this buffer has improved.

Ong also said China would like to see Malaysia conducting roadshows in the mainland so that there is better understanding of Malaysia’s fundamentals and its bonds.

“The representative of Bank of China also told me the Chinese government is keen to buy more MGS, but they also hope our central bank could go there to market our MGS. I have conveyed this to Bank Negara. It is up to them to act,” says Ong.

Ong, who is also MCA secretary-general, noted that China’s huge direct investments had also boosted the ringgit’s sentiment.

The ringgit rose sharply in March partly due to the conclusion of the sale of 1MDB’s energy assets to China’s state-owned China General Nuclear Power Corp for RM9.83bil, as the absorption of all the debts of Edra Global Energy Bhd has reduced the systemic risk to pubic finance, banking system and economy.

Ong is confident that Kuala Lumpur is able to attract more major Chinese investments into the country this year due to Malaysia’s strong bilateral ties with China as well as the many free trade agreements – including the Trans-Pacific Partnership Agreement – Malaysia has signed with various countries and groupings.

By Ho Wah Foon The Star

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