Government bonds still attractive | The star
PETALING JAYA: The asset management arm of the world’s fifth-largest bank has expressed interest in buying more long-term Malaysian government bonds.
This seems to be a sign of confidence in the Malaysian debt market, at a time when capital flows out of the country are increasing.
In June this year, Malaysia recorded the highest foreign portfolio outflows at RM5.4 billion, the largest since March 2020.
In an exclusive interview with StarBiz, JP Morgan Asset Management noted that Malaysia continues to be one of its favorite bond markets in Asia.
Jonathan Liang, managing director and head of Asia ex-Japan, an investment specialist for global fixed income, currencies and commodities, said Malaysia offered “relative value” in terms of investment bonds. status among Asian countries.
The Malaysian government bond space is more attractive even compared to some of the developed or larger markets in the region such as South Korea and China, he added.
He also said the asset management company would increase its exposure to the benchmark 10-year Malaysian government securities (MGS) once yields rise further.
“If they (the 10-year yields) reach a level of, say, 4.7% or more, we will look to add to our position for our dedicated Asian fixed income portfolio.
“The current 10-year MGS yield isn’t there yet, but it’s also not far off the mark. We’re watching it.
“We already have a position in MGS, but we may look to increase it if yields rise,” Liang said.
As of July 22, the yield on the benchmark MGS 10-year (3.58% coupon) was recorded at 4.01%, according to data from Bank Negara.
It should be noted that the 10-year rate had risen to 4.38% at the end of April before returning to 4.17% at the end of May.
The yield rose again to 4.26% at the end of last month and has since moderated to the current level.
Currently, Malaysian bonds make up about 3% of JP Morgan Asset Management’s Asian bond portfolio.
Commenting on the government’s planned austerity drive, Liang said it would be beneficial for bond market investors, including JP Morgan Asset Management.
“This is because the country’s budget balance could improve, given the austerity measures.
“While the economy might slow down a bit due to the austerity drive, inflation would also slow down accordingly. So that’s beneficial for government bonds.
“As an MGS investor, we welcome this (the austerity drive),” he said.
Considering that the austerity campaign could lead to a reduction in MGS issuance, Liang explained that it will drive up MGS bond prices, benefiting investors like JP Morgan Asset Management.
“If you have a lot of supplies (new MGS bonds) coming in, the price goes up. But when you have less supply, prices go up,” he said.
When asked why Malaysia is one of the company’s favorite markets in Asia, Liang attributes it to the nature of the local economy.
“Malaysia, in general, is a little less sensitive to the slowdown in world trade and the decoupling that is taking place between China and the rest of the world.
“Inflation is also less of an issue in Malaysia compared to many emerging countries. So, for that reason, we like long-term Malaysian government bonds,” he says.
On the growing capital outflows affecting the country, Liang pointed out that this is a global phenomenon and not exclusive to Malaysia.
“Globally, almost all emerging market countries are experiencing capital outflows due to rate hikes by the US Federal Reserve.
“It may continue but I don’t see why it (the releases) should speed up,” Liang said.
In June 2022, Malaysian debt securities saw a larger outflow of RM4.1 billion, compared to equity outflows worth RM1.3 billion.
At MGS alone, foreign holdings were recorded at RM188.9 billion or 36.5% of MGS’s total assets, which was the lowest holding since May 2020.
Liang also spoke about the threat of recession on the global economy.
He said that the United States, being the largest economy in the world, would experience a recession next year.
“Europe could fall into recession sooner, given its set of challenges,” he said.
Liang pointed out that the world was entering phase two of the market cycle, in which the Federal Reserve’s continued monetary tightening would have a real impact on the US economy.
“Right now we think recession is a distinct possibility, but as we get closer to recession, that’s when we enter phase two,” he said.
While a recession could be inevitable next year, Liang thinks it could be a “very shallow recession”, thankfully.
The impact of the potential slowdown would be far from what was experienced during the Great Recession of 2007-2008 and the economic collapse triggered by the Covid-19 pandemic.
The potential downturn is unlikely to be caused by a systemic imbalance, like the subprime mortgage crisis that led to the Great Recession.
“It (the potential slowdown) seems to me to be the year 1999, which saw the bursting of the ‘dot-com’ bubble.
“The S&P 500 index was trading at 60 times the price-earnings (PE) ratio, then a three-year bear market occurred until 2002, before bottoming out in 2003.
“But it was just a contraction in the PE, basically, because the Federal Reserve raised rates.
“As far as the recession goes, it’s been very shallow,” he said.
Fast forward to the current state of the economy, Liang said U.S. consumer and business balance sheets are in “pretty good shape.”
“I think we’re going into this recession in pretty solid shape and so, I don’t think a crisis like the one in 2008 would result from it this time around,” he added.