FW: RHB Fixed Income Market Outlook 2018 - 13/12/17

​Fixed Income Market Outlook 2018 Stay defensive, maintaining overall duration neutral portfolio strategy   As 2017 gradually draws to a close, it is timely to articulate our views and key takeaways for the coming new year. While the outlook for global inflation remains subdued mirrored by still benign personal consumption expenditures (PCE) and core inflation prints from both the US and the Eurozone, we expect the reduction in the US Federal Reserve's balance sheet to continue, coupled with measures taken to normalise interest rates further. This is expected to influence upward pressure for global bond yields, which will eventually be a regional theme. The European Central Bank (ECB) will embark on its own tapering plans by reducing its monthly bond purchases to EUR30bn, from EUR60bn currently. This is set to happen from January to September in 2018. In Malaysia, prospects of the overnight policy rate (OPR) normalisation are still on the cards in 2018. Bank Negara Malaysia (BNM) at the November MPC commented that it may consider reviewing the current degree of monetary accommodation, following recent improvements in both global and domestic macroeconomic conditions. Our economics team expect BNM to increase the OPR by 25 bps to 3.25% next year. Given the rising interest rate environment both on the global and domestic front, investors should stay defensive by maintaining an overall duration neutral portfolio strategy.   In terms of gross MGS/GII supply in 2018, we estimate gross MGS/GII supply in 2018 to be c.MYR107bn, ie close to 2017's MYR107.5bn. While gross supply appears somewhat sizeable, due to combined MGS/GII maturing next year (MYR61bn, taking into account MGS switch auction of c.MYR6), the overall net supply remains benign, ie with only an estimated amount of MYR46bn. Funds from upcoming MGS/GII maturities in 2018 are expected to re-emerge as reinvestment flows, which would eventually provide support to the MYR bond scene. Improving fiscal position to bode well for Malaysia's sovereign credit rating outlook. Federal Government's debt-to-GDP ratio is anticipated to narrow to 50% in 2018, and the improving fiscal position would bode well for Malaysia's sovereign credit rating. The Government of Malaysia (GOM) remains committed to contain the total federal government debt-to-GDP ratio to below the self-imposed level of 55%. As reported in the Ministry of Finance's Economic Report 2017/2018, the federal government debt-to-GDP ratio has since narrowed lower to 50.9% as at end-Jun 2017. In terms of fiscal consolidation progress, the budget deficit is expected to narrow further to 2.8% in 2018 versus 3.0% in 2017. The GOM's improving fiscal position continues to bode well for and potentially reaffirm Malaysia's sovereign credit rating outlook. Projecting gross corporate bonds/sukuk issuances to range between MYR95bn-MYR100bn in 2018. Going into 2018, we expect the primary issuance momentum for corporate bonds/sukuk to range between MYR95bn-MYR100bn. On balance, the net issuance size of c.MYR58bn based on scheduled maturities of MYR42bn remains somewhat manageable. Given the combined corporate bonds/sukuk maturities of about MYR42bn in 2018, most corporations would likely front-load their financing needs in 1H18 by locking in lower funding costs. The cost of financing is expected to be more expensive going forward, as the global interest rate environment gradually ticks higher. In 2018, we expect issuances to remain driven by the GG segment, especially with the planned infrastructure projects. Amid a rising interest rate environment, investors should stay defensive by adopting an overall duration neutral portfolio strategy. Tactically, bargain hunting opportunities could still emerge as bond yields gradually adjust higher paving the way for cheaper investment entry. We have included some relative value fixed income strategies in this outlook report, as we believe compelling valuations still exit within the MYR bond space.

 

 

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