Franklin Templeton: Positive On Malaysian Corporate Credit, Sukuk Assets

KUCHING: Franklin Templeton Investments’ portfolio strategy in Malaysia is to remain positive on the corporate credit and sukuk assets as the country’s fundamental remains strong.

According to its executive director and head of Malaysia fixed income and sukuk, Hanifah Hashim, the government has also shown willingness in building a strong fiscal position especially introducing unpopular measures that could result in short term pain, but long term
gains.

The volatility that we are experiencing in emerging markets now, Malaysia including, started in October 2014,” she recapped in a statement on Thursday. “It was driven by external and domestic factors. “On the external front, the improving economic condition in the US has shifted the debate towards the timing and quantum of interest rate rise. There are also concerns of slowing economic growth outlook in Japan, China and the eurozone.

“The retreat in global oil prices exacerbated the volatility in the Malaysian market in December 2014, which has led to several domestic-driven factors to our local market. “The impact of weakening oil prices affected the local currency and resulted in the rise of 10-year MSG bond yield.”

As oil revenue makes up about 30 per cent of the total Malaysian government’s revenue, Hanifah affirmed that the slide in oil prices poses a challenge to the country’s fiscal health with some market participants raising concern that the government may not be able to achieve the fiscal deficit target of three per cent of gross domestic product (GDP) in 2015. “From my perspective, I believe this concern has been overdone as we believe the reduction in oil revenue as a result of the drop in oil prices can be compensated by removal of fuel subsidy in October 2014 and increase in revenue with the implementation of goods and services tax (GST) by April 2015.

“In addition, we believe the government have the fiscal tools available for maneuver should the need arises, as they seem resolute in keeping the country’s current account in surplus and hitting budget balance by 2020.” Looking ahead, Hanifah believed 2015 will be a challenging year for the fixed income market in Malaysia as improving US economic growth, while it is good news, but it will eventually lead to a rise in US interest rate. A rise in US interest rate could introduce some volatility in Malaysia’s local bond market as well, she added.

“On the other hand, while macroeconomic condition in the US appears to be strong, however, there are concerns on slowing growth in China, as well as flattish economic growth in Japan and the eurozone. “That means our market could see liquidity support from Japan, and to a lesser extent, the eurozone as well. These combined factors will push and pull global growth as a whole in 2015.

“In light of this, we believe interest rate in Malaysia will remain benign as the central bank would not want to risk the economic growth, and fragile business and consumer sentiments by hiking interest rate too soon, given the weak oil prices currently. “No doubt there will be a risk of inflation rate rising after the GST implementation, however, our thinking is, the central bank will prioritise growth over inflation, and not to mention the lower oil prices will balance out the inflation rate after GST.”

Originally published on www.theborneopost.com