GLOBAL AGENCIES' CREDIT RATING BUMP WILL BOOST MALAYSIA'S ATTRACTIVENESS TO MORE INVESTORS -- ECONOMISTS

By Rosemarie Khoo Mohd Sani & Fatin Umairah Abdul Hamid

An official credit rating bump from globally recognised agencies will make Malaysian bonds more attractive to a broader range of investors, said SPI Asset Management.

Its managing director Stephen Innes said with JP Morgan, a leading global financial institution, upgrading its rating on Malaysia independently to “neutral” from “underweight” after nearly six years, positive ripples are already being felt in the global bond market investment community.

“This move could also draw attention from local equity funds, as these comments open the eyes of international equity investors.

“Early indications suggest that investment flows are beginning to return, albeit in baby steps,” he told Bernama.

Regarding the impact on the ringgit, Innes said this would lead to real investment flows rather than speculative ones.

This, he said, is the primary driver of the local currency since the ringgit is not tradeable on the open market; hence, positive comments and upgrades from rating agencies could partially explain why the ringgit saw a rally.

However, Innes said that in the grand scheme of currency markets, the US Federal Reserve (Fed) wields significant influence.

“Until investors are certain that the Fed will cut rates, currency rallies in Asia, particularly among lower yielders, will likely encounter resistance.

“So, while Malaysia enjoys a moment in the sun with its bond market gaining favour and the ringgit showing strength, the overarching narrative is still dictated by the Fed's next move,” Innes added.

Foreign investors reassessing position on Malaysia

Meanwhile, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the bullishness from JP Morgan suggests that foreign investors are reassessing their position on Malaysia after taking into consideration several policy changes and initiatives which are meant to bolster the country's productive capacity.

He said unpopular measures such as subsidy rationalisation on fuel and electricity, a move towards market-based economies, the increase in service tax rate from 6% to 8% and the introduction of the low value goods tax suggested that the present government is committed to implementing economic reforms.

“The positive impact from these measures will be felt in the mid to long term as the government would need to redirect the savings and the extra income generated from the initiative towards education, healthcare and infrastructure.

“All this will help improve the country's potential growth which could translate into better earnings prospect among the listed firms,” said Mohd Afzanizam.

From the equity valuation point of view, the FTSE Bursa Malaysia KLCI (FBM KLCI) price-to-earnings (PE) multiple currently stands at 15.3 times, which is way below than the long-term average of 17.1 times, he said.

“Should the PE ratio revert to its mean level, I would not be surprised if the FBM KLCI surpasses 1,700 points.

“Not to mention that our ringgit is undervalued, as indicated by the central bank. In that sense, there is a clear incentive among the foreign portfolio investors to reassess their existing portfolio holding in Malaysia,” he said.

At present, the foreign ownership level in firms listed on Bursa Malaysia is around 19%, he said.

The highest level was at 25.8% in May 2013.

“If the foreign ownership would increase from the prevailing level, we shall see further upside to the current FBM KLCI level,” Mohd Afzanizam added.

On 10th July, JP Morgan head of Asia-Pacific (ex-Japan/China) Rajiv Batra, in an interview with CNBC, said the firm has upgraded Malaysia's rating from “underweight” to “neutral” after almost six years, crediting the country's policy reforms, data centre investments and infrastructure build-up.