On the global context, one of the major factors that has contributed to the increased volatility in the global equities this year was the tightening global liquidity. According to the data compiled by Bank of America Merrill Lynch, the number of rate hikes globally is almost approaching the pre-Lehman levels, indicating substantial liquidity withdrawal around the globe and it has now become one of the top concerns for most of the investors.
The next question that investors might ask would be, “Is Malaysia joining the global monetary tightening this year? Are we likely to see more interest rate hikes by the Bank Negara Malaysia moving into 2019?”
In this article, we will be sharing our view on the 2019 Malaysia’s monetary outlook and how should investors position their investment portfolio.
Malaysia Is Well Ahead Of The Others
If one can recall, early this year, our local central bank, Bank Negara Malaysia (BNM) has raised the benchmark interest rate, Overnight Policy Rate (OPR) by 25 basis points to 3.25%. The decision to increase the interest rate was viewed as a move to normalize the monetary policy instead of tightening it following the rate cut back in 2016 on the concerns regarding the slow economic growth due to the subdued private spending and other external uncertainties like BREXIT vote.
|Figure 1: Malaysia's Interest Rate
On the tightening path, Malaysia is well ahead of the other central banks as we have started to tighten the monetary policy in year 2010 after the global financial crisis while US Fed was on the way loosening its monetary policy. As such, at this juncture, we do not see any need for the Malaysia’s central bank to follow the footstep of US or EU in tightening the monetary policy.
No Pressure For Monetary Tightening
The local economic growth as well as the headline inflation are the two major factors that the central bank would consider for the monetary policy decision. In the recent monetary policy statement that released early this month, the MPC is rather sanguine about the prospect of the local economic growth, mentioning that “the domestic economy continues to face downside risks stemming from any further escalation in trade tensions and prolonged weakness in the mining and agriculture sectors”.
On top of that, although the local inflation rate is expected to increase marginally next year due to the floating of domestic petrol price, effective 1st January 2019, we believe the local inflation is likely to remain contained given the absence of strong demand pressure.
Hence, given the expectation of moderated economic growth moving into 2019 together with the manageable headline inflation, we see no urgency for BNM to further increase the interest rate.
Given the expectation of no interest rate hike in 2019 for Malaysia, the local bond investors might want to consider the long duration bonds which are likely to outperform the bonds with shorter duration due to the higher term premium.
Apart from the long duration bonds, the Malaysia’s REITs (M-REITs) would be another sector that investors can consider given the stable interest rate outlook and the rather attractive dividend yield from the M-REITs which currently hovering around the 6% level.