Norway's sovereign wealth fund, the world's largest, will streamline its US$300bil fixed-income portfolio by cutting emerging market bonds from the benchmark index it tracks. Currently worth US$1.05tril, Norway’s Government Pension Fund Global (GPFG) has invested around 30% into fixed income with the balance 70% invested in equities. Its latest decision did not affect the equities market. Amongst the 10 countries, Malaysia’s fixed income is affected.

The fund’s exposure to our government bond is US$1.96bil or approximately RM8.0bil, equivalent to 5.3% of total foreign holdings in our MGS as at end-March 2019. If the entire RM8.0bil flow out of our MGS at the same time, it will impact the MYR against the USD, weakening the local currency by 0.62% while the 10-year MGS yield will rise by 7bps. However, we believe the outflow of the RM8.0bil will be gradual and hence will not cause a major impact.

Besides the fund’s fairly low exposure of 5.3% to total foreign holdings in our MGS, the strong liquidity in our bond market, added with healthy macro fundamentals such as steady growth, healthy reserves, current account surplus, low inflation and real money flows should support yields. Hence we are projecting the 10- year MGS yield at 3.75%–3.80% as our “prudent” levels with room to reach 3.70% if a 25bps OPR rate cut is instituted. In the event there is no rate cut, we expect the10-year yield to move back to our original levels of 3.90%–4.00%. We expect total gross issuance of MGS/GII in the primary market for 2019 to hover between RM120bil and RN125bil with the MYR corporate bond and Sukuk market total issuance at RM80–85 billion for the year.

Norway's sovereign wealth fund shifts to renewables

• The Norwegian wealth fund, currently worth US$1.05tril, has invested around 30% into fixed income with the balance 70% in equities. Its latest decision did not affect the equities market. The world's largest fund will streamline its US$300bil fixed-income portfolio by cutting emerging market bonds from the benchmark index it tracks. Both the government and corporate bonds, which have a total value of US$17bil as at the end of 2018, would be affected.

• GPFG’s proposal to cut its fixed income portfolio will have to be agreed by parliament. With the Norwegian government holding a majority, a white paper is expected to be passed in June. Countries affected from the fund’s decision are Chile (US$362mil), the Czech Republic (US$50mil), Hungary (US$63mil), Israel (US$117mil), Malaysia (US$1.9bil), Mexico (US$5.7bil), Poland (US$1.05bil), Russia (US$1.2bil), South Korea (US$6.3bil) and Thailand (US$241mil) as presented in Table 1.

• In terms of size, Malaysia is the third largest country with exposure to the fund after South Korea and Thailand as presented in Table 1. Meanwhile, Asian countries which are enjoying flows from Norway's sovereign wealth fund are Indonesia (US$2.9bil), India (US$2.1bil), China (US$1.3bil) and Philippines (US$0.6bil) as illustrated in Table 2.

• Although the fund may have cut its exposure to these 10 countries, GPFG can still buy into emerging market bonds if it wants to actively invest in this area. However, the fund will be capped at 5% of the fixed-income portfolio. Also, its decision does not affect the equities market. Hence, the fund’s exposure into our equities is US$1.56bil. Table 4 demonstrates the exposure into our top 3 companies with the highest Norwegian Sovereign Fund exposure.

• Besides, the fund's present mandate for renewable investments is expected to double to US$14bil. It will invest in unlisted renewable infrastructure projects like wind or solar farms – something long demanded by environmental groups. Though the new mandate represents only 1.3% of the present value of the fund, it is a start that should be viewed as a sign of increasing exposure in the future.

Foresee minimal impact on Malaysia

• The fund’s exposure to our government bonds is US$1.96bil or approximately RM8.0bil. As at end-March 2019, total foreign holdings in our MGS was RM150.7bil as reflected in Chart 1 while Chart 2 shows the holdings in GII. Hence, the fund’s exposure is about 5.3%. In the event the fund decides to withdraw all the RM8.0bil from the MGS holdings, it is expected to add about 0.6% upward pressure on the Malaysian ringgit (MYR) against the USD. At the same time, the 10-year MGS yields used as the benchmark should rise by 7bps under this extreme scenario. Table 3 illustrates the funds exposure in our fixed income and equities.

• However, we believe the outflow of the RM8.0bil will more likely be gradual. Besides, with a fairly low exposure of around 5.3% with respect to total foreign holdings in our MGS, added with strong liquidity in our bond market, we do not expect any major impact on the yields.

• Besides, we believe our bond yields are well supported by healthy macro fundamentals such as steady growth, healthy reserves, current account surplus, low inflation and real money flows. We project the 10-year MGS yield at 3.75%– 3.80% as our “prudent” levels with room to reach 3.70% if a 25bps OPR rate cut is instituted. In the event there is no rate cut, we expect the10-year yield to move back to our original levels of 3.90%–4.00%.

• We expect total gross issuance of MGS/GII in the primary market for 2019 to hover between RM120bil and RN125bil with 1Q2019 gross issuance amounting to RM40bil and expect higher volume of matured MGS/GII papers at RM69bil (2018: RM62.8bil). Chart 3 shows the total gross issuance of MGS/GII in the primary market.

• At the same time, we foresee a healthy appetite for our MYR corporate bond and Sukuk market that saw a total issuance of RM10bil in 2018. In 1Q2019, the total issuance stood at RM25bil and we project volume to remain healthy with a total issuance of RM80–85bil by the end of the year. Chart 4 shows the total gross issuance of corporate issuances.

• Meanwhile, challenges for our bond market in 2019 come mainly from external noises that remain high in the cards. Uncertainties surrounding US trade noises with the EU, Japan and India while negotiations with China are still ongoing, Brexit, the US economy outlook, elections (eurozone, India, Indonesia, Thailand and the Philippines) and outlook of the Chinese economy remain high on the table.

• Other external challenges are political noises and geopolitical tension that can heighten fears amongst investors who would clamour for safe haven assets until such adverse noises soften. During this period, we can expect the level of volatility to swing between 2% and 4%, much depending on the severity of the adverse noises and how long these last. On the domestic side, the focus will be on growth and policy certainties.

Source: AmInvest Research - 11 Apr 2019