Analysts bullish on cheaper ringgit, bullish outlook on recovering oil prices

“The worst of the outflow pressure seems to be behind us now,” Deutsche Bank analyst Sameer Goel said in a note to clients this week, adding that the improving economic environment was another reason to buy ringgit bonds.

GDP growth in the first quarter of 2017 hit 5.6 per cent over the same period a year earlier, driven more by a pick-up in domestic demand than the modest recovery in the price of the oil and gas that Malaysia exports.

Citi analysts said they were bullish, mainly because the ringgit was cheap and the authorities seemed inclined to let it appreciate.

Another fund manager, Western Asset Management, shifted its allocation to Malaysian local currency bonds to neutral from modestly underweight early this year.

“We see yields, around 4 percent, as being attractive so we’ve slowly scaled back up and that’s probably in line with the rest of the market,” said Desmond Fu, an analyst at Western Asset Management.

Steve Ellis, a portfolio manager at Fidelity International, said he had been underweight ringgit bonds in late 2016 and early 2017 but has now changed to a neutral position.

It forged its own path then too, as emerging markets suffered massive capital outflows and currency depreciation, pegging the ringgit to the dollar for seven years from mid-1998. Kuala Lumpur rebuffed aid from the International Monetary Fund after rejecting the IMF’s conditions on restructuring its economy and emerged from the crisis stronger than its peers.

Malaysia’s latest salvo has brought the offshore ringgit NDF market to a standstill, traders said, while the currency is slowly beginning to strengthen again onshore.

The ringgit has risen five per cent this year and was trading at 4.28 per dollar at midday on Thursday compared with around 4.20 last year before the NDF directive was announced.

Currency reserves at US$97 billion are sufficient to pay for about eight months of imports. But Bank Negara still has a US$19 billion liability on its forward position it needs to recoup after pumping liquidity into the forex trading system.

To win the war conclusively, Bank Negara needs foreign investors to return in force, and that hasn’t happened yet.

Foreigners held 51.6 per cent or US$43 billion of government bonds in October last year.

That proportion fell to 38 per cent in March and is now just up to 40 percent.

“I don’t really see that suddenly fund managers have become exceptionally enthusiastic about Malaysian bonds,” said Desmond Soon, head of investment management for Asia ex-Japan at Western Asset Management.

“It’s just that there’s a move from substantially underweight to a more neutral position.” — Reuters