Fixed income markets experienced a sharp selloff in 2022, but this has led to improved yields and valuations. As attention shifts from inflation to slowing growth and the potential for a recession, fixed income’s defensive nature may attract more investors. Looking forward to 2023, we expect that inflationary pressures will stabilise, providing a favourable environment for fixed income investments. Additionally, global central banks are expected to slow down or cease their monetary policy tightening, which is likely to bolster the performance of fixed income assets.
On the domestic front, Malaysia growth outlook to risks is said to be balanced in 2023, with a projected growth rate of 4.0% bolstered by an improved labour market and government support. Meanwhile, market participants are generally expecting that Bank Negara Malaysia (BNM) to have concluded its monetary tightening cycle and will keep the overnight policy rate (OPR) at the range of 2.75%-3.00%, indicating at most 1 more rate hike, for the remainder of the year. According to BNM, the global growth outlook remains subject to downside risks such as higher than-anticipated inflation outcomes and a sharp tightening in financial market conditions. We agree with this assessment and foresee that volatility will persist due to ongoing inflationary pressures, weaker global growth, and elevated supply of local bond.
Despite these challenges, we believe there is an opportunity for investors to add high-quality fixed income assets to their portfolios at appealing valuations. We see attractive investment opportunities in high-quality domestic corporate credit segments, with attractive risk-return profiles in some segments of the asset class. We believe Malaysia’s fixed income market offers an attractive risk-reward profile, with abundant domestic liquidity and local bond yields having priced in sufficient rate hikes, making bonds being traded at very attractive levels.
Moreover, we anticipate that the demand for Malaysian bonds will rise due to the expectations of a less aggressive pace of Fed tightening, leading to a USD strength topping out. The Fed may be less motivated to hike rates going forward following further moderation in US inflation and the cooling job market, with rate cuts potentially on the cards towards the end of this year. Similarly, Malaysian sovereign bonds are well placed to benefit from a renewed global risk-on appetite due to their comparatively high yields. As interest rates are projected to remain steady, we favour long-duration bonds that offer higher yields than short-duration bonds. This is because the longer maturity of the bond exposes the investor to greater interest rate risk, which is compensated for by higher yields. Furthermore, holding longer-duration bonds can act as a safeguard against decreasing interest rates.
Fund Manager’s Commentary on the Fixed Income Market in March 2023
In March, The US Treasuries (UST) rallied massively after Silicon Valley Bank incurred heavy deposit withdrawals from its customers totalling USD42bn on March 9 and prompt the regulators to shut down the bank on March 10. This is the biggest bank failure since the 2008 financial crisis. Another bank that faced a similar fate was Signature Bank. The 2-yr UST yield plunged from 4.58% to 3.84% while the 10-yr UST was down by 23bps to 3.69% as investors expect the banking turmoil will pause the Federal Reserve (Fed) from more aggressive rate hikes. Another scandal affecting the bond market was the announcement from Credit Suisse on its annual net loss of 7.3bn Swiss francs. Unfortunately, another 25bps rate hike in the March FOMC meeting failed to stop the yield to fall further as the investors are still concerned about the spill-over effect of the AT1 bonds issued by Credit Suisse. The 10-yr UST was down by 22bps after the meeting to touch 3.28%. The Fed Fund Rate target range was 4.75% -5.00% after the March FOMC meeting. The Fed viewed the implication from the latest bank crisis would likely to slow down the economy, however, it will not lead to a broader financial meltdown. At the closing, the 2-yr UST was down 75bps m-o-m to close at 4.06%, while the 10-yr and 30-yr UST was down 44bps and 26bps m-o-m to 3.48% and 3.67%, respectively.
On the domestic bond market, Malaysia Government Securities (MGS) was actively traded as investors snapped government bonds as a safe-haven investment following the bank crisis in the US. The Monetary Policy Committee (MPC) kept the OPR unchanged at 2.75% in March, a second pause since January. In the Annual Report 2022, Bank Negara Malaysia (BNM) indicated that the central bank would maintain an accommodative stance but believed that domestic inflation remained a concern. Upside risks to inflation include worsening geopolitical conflict leading to higher commodity prices, extreme weather conditions, stronger-than-expected demand from China and higher input costs due to exchange rate developments. At the close, the 3-yr MGS decreased by 15bps m-o-m to close at 3.35% while the 10-yr decreased by 12bps to close at 3.90%. However, as for the 30-yr MGS, it increased by 7bps m-o-m to close at 4.45%.
Why should you add Fixed Income into your portfolio?
Fixed income investments have several advantages. Firstly, they offer a reliable income source through coupon payments made by the issuer, which can serve as a buffer against the volatility of the equity market and reduce portfolio risk. Moreover, fixed income can act as a hedge against inflation by providing a fixed rate of return that retains its value even in the face of rising inflation. Lastly, fixed income investments provide diversification benefit in a portfolio as they have a low correlation with equities, potentially decreasing the overall portfolio risk and generating a favourable risk-adjusted return for investors.
Our offerings: Phillip Managed Account for Retirement (PMART) and Phillip Managed Account (PMA) Unit Trust Mandates
Phillip Capital Malaysia offers a wide range of investment portfolios designed to meet your unique investment preferences and financial goals. Our investment offerings include Unit Trust Mandates that cater to investors who are interested in investing in both domestic equities and fixed income securities, as well as regional markets.
One of our offerings, the PMART UT, is a portfolio of EPF approved unit trust funds managed by award-winning fund managers. It allows investors to invest in multiple unit trust funds through a single investment and is reviewed and adjusted quarterly or as needed in response to major events. Separately, PMA UT is ideal for cash investors seeking a tailored investment solution via investment in multiple unit trust funds through a single investment. We offer both conventional and Shariah-compliant options to accommodate the preferences of all investors. We also offer both Moderate and Aggressive mandates that cater to different investors’ level of risk appetite.
Our asset allocation for PMART UT and PMA UT for the month of March 2023 is as follows. We include fixed income in our portfolio at a weightage ranging from 7% to 16% (depending on whether it is moderate or aggressive), which we believe can aid in diversification and reduce potential downside risks associated with equities.
- PMART UT (Conventional)
|Rest of the world||18%||26%|
- PMART UT (Shariah)
|Rest of the world||27%||30%|
- PMA UT (Conventional)
|Rest of the world||10%||10%|
- PMA UT (Shariah)
|Rest of the world||15%||16%|
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The information contained herein does not constitute an offer, invitation or solicitation to invest in Phillip Capital Management Sdn Bhd (“PCM”). This article has been reviewed and endorsed by the Executive Director (ED) of PCM. This article has not been reviewed by The Securities Commission Malaysia (SC). No part of this document may be circulated or reproduced without prior permission of PCM. This is not a collective investment scheme / unit trust fund. Any investment product or service offered by PCM is not obligations of, deposits in or guaranteed by PCM. Past performance is not necessarily indicative of future returns. Investments are subject to investment risks, including the possible loss of the principal amount invested. Investors should note that the value of the investment may rise as well as decline. If investors are in any doubt about any feature or nature of the investment, they should consult PCM to obtain further information including on the fees and charges involved before investing or seek other professional advice for their specific investment needs or financial situations. Whilst we have taken all reasonable care to ensure that the information contained in this publication is accurate, it does not guarantee the accuracy or completeness of this publication. Any information, opinion and views contained herein are subject to change without notice. We have not given any consideration to and have not made any investigation on your investment objectives, financial situation or your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any persons acting on such information and advice.