Market Review
On 4th December 2020, Fitch Ratings (Fitch) had downgraded Malaysia’s Long Term Foreign Currency Issuer Default Rating (IDR) to BBB+ from -A while revising the outlook from negative to Stable. This is on the back of more than 200 negative rating actions and more than 100 sovereign downgrades globally undertaken by credit rating agencies since the onset of Covid-19 outbreak since March. For Malaysia, the downgrade was also related to Covid-19 crisis which have weakened several of Malaysia’s key credit metrics, and lingering political uncertainty following the change in government last March weighs on policy outlook as well as prospects for further improvement in governance standards. On our defence, Malaysia as a country had handled the outbreak reasonably well with case-fatality ratio among the top 10% globally according to John Hopkins University, and introduced four stimulus packages worth a total of RM305 billion or approximately 20% of GDP to ensure livelihood of fellow Malaysians and businesses therefore economy as a whole. Measures to contain the domestic spread of the coronavirus, combined with weak investment and low tourism receipts due to the pandemic, have reduced economic activity, as it has in many countries globally. Fitch expects GDP to contract by 6.1% in 2020, before rebounding by 6.7% in 2021 due to base effects, a revival of infrastructure projects and an ongoing recovery of exports of manufactured goods and commodities. Next year, the government expects to vaccinate 30% of the population, based on agreements so far with vaccine producers. Fitch forecast growth of 4.6% in 2022, on expectation that Malaysia’s diversified economy will deliver strong medium-term growth.
What is the impact of this downgrade? Bear in mind BBB+ is still within investment grades from investors’ point of view, and there are other rating agencies out there still maintaining Malaysia’s ratings status. Nevertheless, the Fitch downgrade may have impact to future borrowing cost for our country, should we wish to issue long term borrowings denominated in foreign currency. For existing government debt issuances, we might see the yields inching up to commensurate the lower ratings i.e. higher risk of the debt category. This means the market value of long term government papers will fall, thus impacting portfolios which have exposure in it. The shorter term government papers and corporate Sukuk papers may also feel the impact but it will be less severe. Equity on the hand will not be directly impacted, unless foreign equity investors take this development as a signal to sell and exit our market, but foreign investor have been net seller of Malaysian equities continuously over the recent years thus any reaction may be relatively muted.
Investment Strategy
How does this impact our investment portfolios then? We are glad to share that our BIMB ESG Sukuk Fund do not have any long term government papers in its portfolio. What the fund do have is small positions on shorter-duration government papers as well as corporate sukuk. As explained above, the impact of the Fitch downgrades on these asset categories will probably be less severe. The fund is further shielded by its relatively short portfolio duration of 4.42 years and its relatively safe average portfolio rating of AA. Meanwhile, none of our equity funds especially those under type mixed-assets, flexible and balanced, have position in debt securities, thus the impact from the downgrades will be minimal, if any. As at 30 November 2020, the Fund 1 year total return performance is 4.67% and since inception is 11.71% for MYR class. The Fund remain the largest shariah global sukuk fund in Malaysia with AUM of RM147.42, according to latest Lipper report as at 30 November 2020. Due to its consistent total return, The Asset Triple A Islamic Finance Awards 2020, awarded the Fund as Best ESG Sukuk Fund 2020. The Fund is available for subscription with initial investment of RM1,000 for Class A. It is suitable for retail and corporate investors that seeks for potential higher return than traditional deposit instruments in this low OPR environment.
As a response to the Fitch downgrades, the Minister of Finance has issued a statement, taking note of Fitch’s concerns, and emphasised on the various key steps the Malaysian government has been able to undertake to support the economy. Key legislations have been passed in relation with the financing of Covid-19 measures, as well as for the protection of affected businesses and individuals until 2022. Budget 2021 was also recently passed at the policy stage on the back of continuous Government engagement with numerous stakeholders. Collectively, sound economic fundamentals and decisive fiscal measures have enabled Malaysia to respond swiftly, effectively and strategically to the challenging environment, whilst maintaining economic growth and resilience for the future.
Conclusion
Moving forward, we will continue to study the market dynamics in relation to this development. We may even consider having positions in longer-dated government papers should the yield moved up to levels attractive enough for our portfolio, especially if there are prospects of upgrades in the future. At the end of the day, we always strive to act in the best interest of our valued unit holders. Take care everyone and may things get much better next year.
Disclaimer
This presentation has been prepared by BIMB Investment Management Berhad (“BIMB Investment”) exclusively for the benefit and internal use of the recipient in order to indicate, on preliminary basis, the feasibility of possible transactions. Terms contained in this presentation are intended for discussion purposes only and are subject to a definitive agreement. All information contained in this presentation belongs to BIMB Investment and shall not be copied, distributed or disseminated in whole or in part without the written consent of BIMB Investment. This presentation has been prepared on the basis of information that is believed to be correct and accurate at the time the presentation was prepared, but that may not have been independently verified. BIMB Investment makes no express or implied warranty as to the accuracy or completeness of any such information. BIMB Investment is not acting as an adviser or agent to any person to whom this presentation is directed and such persons should consult their own advisers before engaging in any transaction. Such persons must make their own independent assessment of the contents of this presentation and should not treat such content as advice relating to legal, accounting, taxation or investment matters. BIMB Investment or its affiliates may act as a principal or agent in any transaction contemplated by this presentation or any other transaction connected with any such transaction, and may as a result, earn fees, charges, commission or other income. Nothing in this presentation is intended to be or should be construed as an offer to buy or sell, or invitation to subscribe for any securities. Neither BIMB Investment nor any of its their directors, employees or representatives are to have any liability (including liability to any person by reason of negligence or negligent misstatement) from any statement, opinion, information or matter (express or implied) arising out of, contained in or derived from or any omission from the presentation, except liability under statute that cannot be excluded.
Investors are advised to read and understand the contents of the Master Prospectus of BIMB ESG Sukuk Fund, dated 1 August 2018 and any Supplemental Prospectuses issued thereafter, which have been registered or deposited with the Securities Commission who take no responsibility for their contents, before investing. A copy of the Master Prospectus (including any supplemental prospectuses) can be obtained from the Head Office of BIMB Investment Management Berhad, authorized consultants or from our authorized distributors. You are also advised to read and understand the contents of the Unit Trust Financing Risk Disclosure Statement before deciding to borrow to purchase units. Past performance of the Funds are not an indicative of their future performance. The price of units and distributions payable, if any, may go down as well as up. Investors should also consider the fees, charges and investment risks involved before investing. Units are issued upon receipt of a duly completed application form referred to in and accompanying the Master Prospectus (including any supplemental prospectuses). Product Highlights Sheet (PHS) of the Fund is available and investors have the right to request for it. The PHS should be read and understood before making any investment decision. Investors should rely on their own evaluation to assess the merits and risks of the investment. If investors are unable to make their own evaluation, they are advised to consult professional advisers.
You must make your own assessment of any such transaction and the risks and benefits associated with it and of all the matters referred to above. You should enter transactions only after having considered, with the assistance of external advisors, the specific risks of any such transaction.
