Thursday, 13 February 2014
Interest rates, exchange rates and foreign selling
Malaysian corporate bond yields have been rising since middle of last year. The 10 years AAA-rated yield is up by 10% to 4.6% yield to maturity. Besides higher cost of funding to Malaysian corporates, the market has also become tighter in liquidity.
This confirms our view in the special report, The State of The Nation, that interest rates will rise in 2014.
Another confirmation of our view in the special report is the continued exodus of foreign institution funds from Malaysian equities. Foreign investors sold RM3.7 billion of stocks listed on Bursa Malaysia in January 2014. This is 118% more than the RM1.7 billion sold by foreigners in December 2013. The first week of February 2014 saw a further RM1.1 billion of Malaysian stocks sold by foreign institutions.
Local institutions, like EPF, bought RM3.1 billion of the stocks sold by foreigners. Local retail investors turned positive in January, first time since August 2013, probably on expectation of a lunar new year rally.
Consequently, the Ringgit fell nearly 2% against the US dollar.
Note that this is despite the fact that the longer term US interest rates actually fell in January 2014. The perception of slower economic growth in US resulted in the fall in equity prices as funds moved into the safer treasuries, causing yield to fall as bond values moved up.
The effect on Malaysia is we saw no change in foreign ownership of Malaysian Government Securities (MGS), at around 45%. When, not if, the US interest rates rises (as it surely will with the US economic recovery becoming more evident), foreigners will sell our MGS. What will be the impact of this capital outflow?
The Edge Malaysia now has a weekly section on Update of The State of The Nation report. It aims to provide insight, analysis and understanding on what will happen to the economy, the stock market and the exchange rates.