Annual Report for ABF Malaysia Bond Index Fund. 31 December 2017

Transcription

1 Annual Report for ABF Bond Index Fund 31 December 2017

2 ABF Bond Index Fund Annual Report 31 December 2017 ABF Bond Index Fund

3 TRUST DIRECTORY Manager AmFunds Management Berhad 9 th & 10 th Floor, Bangunan AmBank Group 55 Jalan Raja Chulan Kuala Lumpur Board of Directors Raja Maimunah Raja Abdul Aziz Dato Mustafa Mohd Nor Tai Terk Lin Goh Wee Peng Sum Leng Kuang Investment Committee Sum Leng Kuang Tai Terk Lin Dato Mustafa Mohd Nor Zainal Abidin Mohd Kassim Goh Wee Peng Trustee HSBC () Trustee Berhad Auditors and Reporting Accountants Ernst & Young Taxation Adviser Deloitte Tax Services Sdn Bhd ABF Bond Index Fund

4 CORPORATE DIRECTORY AmFunds Management Berhad Registered Office 22 nd Floor, Bangunan AmBank Group 55, Jalan Raja Chulan, Kuala Lumpur Tel: Fax: Head Office 9 th & 10 th Floor, Bangunan AmBank Group 55, Jalan Raja Chulan, Kuala Lumpur Tel: Fax: Secretaries Chen Bee Ling (MAICSA ) Tan Lai Hong (MAICSA ) Secretaries Office Level 8, Symphony House, Pusat Dagangan Dana 1, Jalan PJU 1A/46, Petaling Jaya, Selangor Darul Ehsan HSBC () Trustee Berhad Business/Registered Office/Head Office Fund Services, Bangunan HSBC, 13 th Floor, South Tower No.2, Leboh Ampang, Kuala Lumpur Tel: Fax: ABF Bond Index Fund

5 CONTENTS 1 Manager s Report 23 Additional Information 33 Independent Auditor s Report to the Unitholders 37 Statement of Financial Position 38 Statement of Comprehensive Income 39 Statement of Changes in Equity 40 Statement of Cash Flows 41 Notes to the Financial Statements 61 Statement by the Manager 62 Trustee s Report 63 Directory ABF Bond Index Fund

6 MANAGER S REPORT Dear Unitholders, We are pleased to present you the Manager s report and the audited accounts of ABF Bond Index Fund ( Fund ) for the financial year ended 31 December Salient Information of the Fund Name Category/ Type Objective ABF Bond Index Fund ( Fund ) Fixed Income ETF/ Income A listed bond fund that is passively managed against the given benchmark and the returns will be expected to correspond closely to the performance of the benchmark index. Note: Any material change to the Fund s investment objective will require the unitholders approval by way of special resolution. Index Component Details of the index component as at 31 December 2017 are as follows: Code Issuer Coupon % Final Maturity Notional Amount (RM) UG VI VI MH GJ VK MS04003H GO Cagamas Berhad February ,120,000,000 Pengurusan Air SPV Berhad February ,000,000,000 Prasarana Bhd March ,500,000,000 Bond March ,177,897,000 Investment Issue April ,000,000,000 Johor Corporation June ,000,000 Bond July ,315,546,000 Investment Issue August ,000,000,000 (Forward) 1

7 Code Issuer Coupon % Final Maturity Notional Amount (RM) GL MJ MO ML VI GH GO GL VG GN MK GJ VI MJ Investment Issue September ,000,000,000 Bond October ,800,000,000 Bond November ,119,000,000 Bond March ,000,000,000 Danga Capital Bhd April ,000,000,000 Investment Issue April ,000,000,000 Investment Issue April ,500,000,000 Investment Issue May ,000,000,000 Pengurusan Air SPV Berhad June ,000,000 Investment Issue June ,500,000,000 Bond July ,973,062,000 Investment Issue August ,000,000,000 Pengurusan Air SPV Berhad September ,000,000 Bond October ,742,134,000 (Forward) 2

8 Code Issuer Coupon % Final Maturity Notional Amount (RM) VK Cagamas Berhad October ,000,000 GN Investment Issue November ,000,000,000 MH Bond February ,500,000,000 VN GovCo Holdings Bhd February ,500,000,000 GL Investment Issue March ,500,000,000 GN Investment Issue April ,500,000,000 MO Bond July ,500,000,000 GJ Investment Issue August ,000,000,000 VK Bank Pembangunan Berhad September ,000,000 ML Bond September ,700,000,000 MJ Bond November ,000,000,000 UI Cagamas Berhad March ,000,000,000 MI Bond March ,000,000,000 GI Investment Issue April ,000,000,000 VI Lembaga Pembiayaan Perumahan Sektor Awam April ,000,000 (Forward) 3

9 Code Issuer Coupon % Final Maturity Notional Amount (RM) VI Pengurusan Air SPV Berhad June ,000,000 VN Johor Corporation June ,800,000,000 VN Perbadanan Tabung Pendidikan Tinggi Nasional June ,500,000,000 GL Investment Issue July ,000,000,000 MO Bond August ,500,000,000 ML Bond September ,000,000,000 VI Cagamas Berhad November ,000,000 GO Investment Issue November ,500,000,000 VN Turus Pesawat Sdn Bhd November ,000,000 VN Turus Pesawat Sdn Bhd February ,000,000 MN Bond March ,420,000,000 GL Investment Issue July ,500,000,000 DS Khazanah Nasional Berhad August ,000,000,000 ML August ,000,000,000 Bond VN Cagamas Berhad October ,000,000 GO Investment Issue October ,000,000,000 VK GovCo Holdings Bhd February ,000,000 (Forward) 4

10 Code Issuer Coupon % Final Maturity Notional Amount (RM) VN GO MO GL ML VP VN MY MO VN GO VN MS VN VS MX Perbadanan Tabung Pendidikan Tinggi Nasional March ,800,000,000 Investment Issue May ,500,000,000 Bond July ,020,000,000 Investment Issue August ,000,000,000 Bond September ,000,000,000 Turus Pesawat Sdn Bhd November ,000,000 Jambatan Kedua Sdn Bhd May ,300,000,000 Bond July ,000,000,000 Bond September ,672,200,000 Pengurusan Air SPV Berhad September ,000,000 Investment Issue October ,500,000,000 Danga Capital Bhd February ,500,000,000 Bond April ,574,330,000 Jambatan Kedua Sdn Bhd July ,000,000,000 Prasarana Bhd August ,200,000,000 Bond September ,110,000,000 (Forward) 5

11 Code Issuer Coupon % Final Maturity Notional Amount (RM) GO VN MO VN MS MX GS GO VN MO VS MS GT MX GS VS Investment Issue September ,500,000,000 Bank Pembangunan Berhad November ,000,000 Bond November ,000,000,000 GovCo Holdings Bhd February ,000,000 Bond March ,500,000,000 Bond May ,000,000,000 Investment Issue June ,000,000,000 Investment Issue July ,000,000,000 Danga Capital Bhd September ,500,000,000 Bond November ,000,000,000 Turus Pesawat Sdn Bhd November ,000,000 Bond June ,000,000,000 Investment Issue August ,000,000,000 Bond September ,040,000,000 Investment Issue December ,000,000,000 Bank Pembangunan Berhad September ,000,000 (Forward) 6

12 Code Issuer Coupon % Final Maturity Notional Amount (RM) VX VS VS MX VS GT VS MX VS VS VS VS MX VS VX MX GX (Forward) Prasarana Bhd September ,500,000,000 Danga Capital Bhd January ,500,000,000 Prasarana Bhd March ,100,000,000 Bond April ,770,000,000 Jambatan Kedua Sdn Bhd May ,000,000 Investment Issue September ,000,000,000 GovCo Holdings Bhd June ,000,000 Bond June ,750,000,000 GovCo Holdings Bhd February ,250,000,000 Bank Pembangunan Berhad March ,000,000 Perbadanan Tabung Pendidikan Tinggi Nasional March ,000,000 DanaInfra Nasional Berhad March ,065,000,000 Bond April ,500,000,000 Perbadanan Tabung Pendidikan Tinggi Nasional August ,300,000,000 Turus Pesawat Sdn Bhd November ,650,000,000 Bond April ,500,000,000 Investment Issue August ,000,000,000 7

13 Code Issuer Coupon % Final Maturity Notional Amount (RM) VX MY GX VX MX GX VX VZ VZ VZ VZ VZ MZ MZ VZ VZ (Forward) Bank Pembangunan Berhad September ,000,000 Bond May ,161,000,000 Investment Issue October ,000,000,000 Lembaga Pembiayaan Perumahan Sektor Awam September ,000,000 Bond April ,500,000,000 Investment Issue August ,000,000,000 Lembaga Pembiayaan Perumahan Sektor Awam September ,000,000,000 Prasarana Bhd February ,000,000 DanaInfra Nasional Berhad May ,000,000,000 Perbadanan Tabung Pendidikan Tinggi Nasional July ,500,000,000 Jambatan Kedua Sdn Bhd July ,000,000 DanaInfra Nasional Berhad October ,000,000,000 Bond September ,500,000,000 Bond March ,500,000,000 DanaInfra Nasional Berhad May ,000,000,000 Lembaga Pembiayaan Perumahan Sektor Awam September ,000,000 8

14 Code Issuer Coupon % Final Maturity Notional Amount (RM) VZ GZ VZ DanaInfra Nasional Berhad October ,000,000,000 Investment Issue May ,500,000,000 Lembaga Pembiayaan Perumahan Sektor Awam September ,000,000,000 (Source: Markit Indices Limited) Duration Performance Benchmark Income Distribution Policy Breakdown of Unit Holdings by Size The Fund was established on 12 July 2005 and shall exist for as long as it appears to the Manager and the Trustee that it is in the interests of the unitholders for it to continue. In some circumstances, the unitholders+* can resolve at a meeting to terminate the Fund. Markit iboxx ABF Bond Index Income distribution (if any) will be paid semi-annually. For the financial year under review, the size of the Fund stood at 1,265,421,800 units. Size of holding As at 31 December 2017 As at 31 December 2016 No of units held Number of unitholders No of units held Number of unitholders Less than ,000 13, , ,001-10,000 53, , , , , , ,001 to less than 5 5% of issue units 53,365,330 55,039, % and above of 1,211,907,870 1 issue units 1,265,207,870 1 Fund Performance Data Portfolio Composition Details of portfolio composition of the Fund for the financial years as at 31 December are as follows: (Forward) 9

15 FY 2017 % FY 2016 % FY 2015 % Corporate bonds n Securities Quasi- bonds Cash and others Total Note: The abovementioned percentages are calculated based on total net asset value. Performance Details Performance details of the Fund for the financial years ended 31 December are as follows: FY 2017 FY 2016 FY 2015 Net asset value (RM) 1,450,591,084 1,442,324,912 1,341,876,193* Units in circulation 1,265,421,800 1,320,421,800 1,265,421,800* Net asset value per unit (RM) * Highest net asset value per unit (RM) * Lowest net asset value per unit (RM) * Closing quoted price (RM/unit) * Highest quoted price (RM/unit) * Lowest quoted price (RM/unit) Benchmark performance (%) Total return (%) (1) Capital growth (%) Income distribution (%) Gross distribution (sen per unit) Net distribution (sen per unit) Distribution yield (%) (2) Management expense ratio (%) (3) Portfolio turnover ratio (times) (4) * Above price and net asset value per unit are shown as ex-distribution. Note: (1) Total return is the annualised return of the Fund for the respective financial years computed based on the net asset value per unit and net of all fees. (2) Distribution yield is calculated based on the total distribution for the respective financial years divided by the closing quoted price. (3) Management expense ratio ( MER ) is calculated based on the total fees and expenses incurred by the Fund divided by the average fund size calculated on a daily basis. The MER decreased by 0.01% as compared to 0.18% per annum for the financial year ended 31 December 2016 mainly due to decrease in expense. (4) Portfolio turnover ratio ( PTR ) is calculated based on the average of the total acquisitions and total disposals of investment securities of the Fund divided by the average fund size calculated on a daily basis. The PTR decreased by 0.24 times 10

16 (51.1%) as compared to 0.47 times for the financial year ended 31 December 2016 mainly due to decrease in investing activties. Average Total Return (as at 31 December 2017) ABFMY1 (a) % iboxx Index (b) % One year Three years Five years Ten years Annual Total Return Financial Years Ended (31 December) ABFMY1 (a) % iboxx Index (b) % (a) Source: Novagni Analytics and Advisory Sdn Bhd. (b) iboxx ABF Index ( iboxx Index ) (Obtainable from The Fund performance is calculated based on the net asset value per unit of the Fund. Average total return of the Fund and its benchmark for a period is computed based on the absolute return for that period annualised over one year. Note: Past performance is not necessarily indicative of future performance and that unit prices and investment returns may go down, as well as up. Fund Performance For the financial year under review, the Fund registered a return of 4.94% which was entirely capital growth in nature. Thus, the Fund s return of 4.94% has underperformed the benchmark s return of 5.06% by 0.12%. As compared with the financial year ended 31 December 2016, the net asset value ( NAV ) per unit of the Fund increased by 4.94% from RM to RM1.1463, while units in circulation while units in circulations decreased by 4.17% from 1,320,421,800 units to 1,265,421,800 units. The closing price quoted at Bursa of the Fund increased by 2.70% from RM to RM The line chart below shows the comparison between the annual performance of ABFMY1 and its benchmark, iboxx Index, for the financial years ended 31 December. 11

17 Note: Past performance is not necessarily indicative of future performance and that unit prices and investment returns may go down, as well as up. Has the Fund achieved its objective? Strategies and Policies Employed Portfolio Structure For the financial year under review, the Fund has met its objective i.e. passively managed against the given benchmark. For the financial year under review, the Fund used a passive strategy whereby the Manager aims, by way of representative sampling, to achieve a return on the Fund Assets that closely tracks the returns of the benchmark index. This table below is the asset allocation of the Fund for the financial years under review. As at % As at % Changes % n Securities Quasi- bonds Cash and others Total There has been no significant change to the asset allocation since the last reporting period. Distribution/ unit splits State of Affairs of the Fund There was no income distribution and unit split declared for the financial year under review. There has been neither significant change to the state of affairs of the Fund nor any circumstances that materially affect any interests of the unit holders during the financial year under review. 12

18 Rebates and Soft Commission It is our policy to pay all rebates to the Fund. Soft commission received from brokers/dealers are retained by the Manager only if the goods and services provided are of demonstrable benefit to unitholders of the Fund. During the financial year under review, the Manager had received on behalf of the Fund, soft commissions in the form of fundamental database, financial wire services, technical analysis software and stock quotation system incidental to investment management of the Fund. These soft commissions received by the Manager are deem to be beneficial to the unitholders of the Fund. Market Review After increasing by USD 0.2b and USD 0.5b in October 2017 and November 2017respectively, s foreign reserves fell by USD3.7b to USD 94.6b in December. This was the lowest reserve level the start of the year and the decline was spurred by considerable foreign outflows. The current level of reserves is sufficient to cover 1.2 times of short-term external debt and 8.3 months of retained imports. In comparison s foreign reserves stood at USD 95.3bn at end-december On the trade front exports & imports rebounded 11.2% year-on-year (YoY). Bank Negara ( BNM ) left the policy rate unchanged at 3.00% in its latest meeting, with a more upbeat statement on the external sector and higher inflation expectation for The general expectation is that BNM will leave the rate unchanged in 2017, against the backdrop of expected Fed rate hike(s) during the year. Industrial Production Index for Nov 2016 jumped 6.2% YoY (expectation 5.5% YoY, Oct 4.2% YoY) led by Manufacturing 6.5% (4.2%), Electricity 9.7% (6.9% YoY) and mining also showed improvement at 4.7% (3.5% YoY). 3 to 15 year MGS yields closed lower whilst year MGS yields increased. The short to medium MGS yields shifted lower on the back of returned foreign demand. Foreign buying was seen in the day before the yield curve rallied across the 3-15 year tenures. January 2017 saw the reopening of 3 year GII (issuance size RM 3.5b, BTC 1.789) 15 year MGS (issuance size RM4.0b, BTC 2.503x) and a new issuance of 10.5 year GII (issuance size RM 4b, BTC 3.41x). Overall, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.38%, 3.61%, 3.97%, 4.15%, 4.55%, 4.70% and 4.72% respectively. s 4Q16 GDP growth was printed at 4.5% vs consensus of 4.4%, in line with BNM forecasts of %. The growth came on the back of moderate rebound in exports/imports and resilient domestic demand in the 4th quarter budget deficits met the 3.1% of Gross Domestic Product ( GDP ) target allaying concerns on the sovereign s ratings. Further, despite the persistent weakness in the MYR, external reserves remained resilient; it stood unchanged from end-january 2017 at US$95b in mid-february The January Consumer Price Index ( CPI ) print came in much higher than expected today at 3.2%, vs consensus estimate of 2.7%. The upside surprise was driven by 2 factors: 1) domestic fuel price increases, and 2) food prices due to bad weather and also lagged impact of cooking oil subsidy removals. Regardless of the tick in the CPI print, the BNM is likely to maintain the Overnight Policy Rate ( OPR ) rate at 3.0% in 2017 as the BNM is reckoned to tolerate the costpush inflationary pressure without having to tighten its monetary policy. Meanwhile, MYR currency weakness would constraint BNM from further easing. During the early part of the month, the Securities ( MGS ) curve bull-steepened with yields on the short-end coming off more than the long-end. However, toward the mid to later part of January 2017, the MGS bull-flattened tracing the movement in the US treasuries curve. USD strength retreats and market regains confidence toward Emerging Market (EM) bonds on Trump s endorsement of One China Policy. This trigger partial reversal of Trump s reflationary bets. The rally in the government bond market is contributed by both the foreigners and local market players. Strong buying 13

19 was particularly seen in the 7y to 15y part of the MGS curve while the new 7y GII 8/24 and 10y GII 7/27 continued to be well-bid, strengthening significantly up to 10 bps. February 2017 saw the issuance of new 7y GII 8/24 (issuance size RM4.0b, BTC 3.123) and reopening of 30y MGS 3/46 (issuance size RM2.0b, BTC 2.562). Both the tenders garnered strong support from local market players and have been trading very well in the secondary market. Overall, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.35%, 3.735%, 3.93%, 4.07%, 4.475%, 4.645% and 4.71% respectively. During the month of March, BNM released the 2016 Annual Report where the central bank projected s GDP to grow at 4.3% - 4.8% for The higher growth projection is based on a rebound in exports as well as resilient domestic demand. Inflation, however, is expected to spike upwards to 3% - 4% (2016: 2.1%) due mainly to cost-driven factors i.e. pass-through impact from an elevated retail oil prices. In the same report, BNM also projects s current account surplus to remain positive at RM17.4b (2016: RM25.2b). s CPI accelerated to 4.5% in February (January: 3.2%) driven primarily by higher food prices (4.3%) and transportation (17.9%) which combined, contributed 3.6% to overall CPI gain. Although the CPI came in significantly higher than market expectations of 3.9%, it was expected as the current average petrol price has surged 39% YoY. Amidst the continued outflow from the Bond market, BNM reported that s foreign reserves held steady at USD95b as at end February. The current level of reserves is equivalent to 8.5 months of retained imports and 1.1 times of short-term external debt. Meanwhile, as at end 2016, the top five Foreign Direct Investments ( FDI ) contributor was Singapore (RM115b), Japan (RM70b), China & HK (RM53b), Netherlands (RM48b) and United States (RM36b). In 2016, out of the RM207.9b approved investments, the Services sector command 68% while the Manufacturing sector command a lower share of 28%. The bulk of investments in the Manufacturing sector came from Petroleum Products, E&E Products, Basic Metal Products and Transport Equipment while the usual Real Estate, Financial Services, Utilities and Distributive Trade dominate the Services Sector. Finally, the banking sector s loan growth for February slipped slightly to 5.3% YoY from 5.6% YoY in the previous month. The moderation in February s loan growth was caused by a slower Household loan growth of +5.1% whilst business loan was unchanged at 5.4%. Trading volume in the MGS market spiked to RM86.5b from RM59.2b in the previous month. The MGS market went through a period of volatility both pre and post FOMC s decision to hike the US Federal Fund Rate by 25bps. Overall, the MGS yield curve shifted higher especially at the short-end as market priced in two further rate hikes by the FOMC for As at end March, 3-year, 5- year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.63%, 3.82%, 4.01%, 4.17%, 4.54%, 4.65% and 4.78% respectively. In the primary market, there were three government bond auctions as follows: RM4.0b New 5-year MGS 3/22 which garnered BTC ratio of times at average yield of 3.882%. RM4.0b 15-year Re-opening of the GII 8/33 which drew a BTC ratio of times at average yield of 4.696%. RM4.0b New 7-year MGS 9/24 which drew a BTC of times at average yield of 4.059%. n CPI crossed 5% in March 2017 at 5.1% YoY (Feb 4.5%). While February 2017 numbers were tempered by the base effect from Chinese New Year, March numbers finally show the impact of the two 20 sen price hikes on RON95 hike in January and February, which brings inflation up from 1.8% YoY in December

20 (Jan: 3.2%, Feb: 4.5%) to well past 5% on primary effects alone. Incidentally petrol prices remained unchanged in Mar 2017 with RON95 at RM2.30/litre and RON97 at RM2.60/litre, but Diesel price was hiked 5 sen to RM2.20/litre. Exports continued to pick up to 26.5% YoY in February, its quickest pace in almost seven years, partly on the back of a recovery in global demand and partly a low base effect. We envisage exports growth to normalise in subsequent months and rise at a more robust pace of 6% in 2017, from +1.1% in 2016 on account of: 1. Recovery in demand for commodity products, aided by higher prices; 2. Pick-up in global semiconductor sales since late-2016, translating to higher electrical & electronics (E&E) exports; 3. Improving global trade outlook on the back of stronger global growth prospects. Regulated short-selling of government bonds will be liberalised by widening the access to all domestic investors. This aims to boost liquidity and facilitate effective hedging of interest rate risks. BNM also announced the relaxation of onshore hedging by allowing registered non-bank entities fully and actively hedging their FX exposures. This is a big step up from a dynamic hedge ratio of 25% previously.trading volume in the MGS market fell to RM 64.5b from RM91.0b in the previous month. Over the month BNM announced new initiatives which increased hedging flexibility for foreign currency exposure and expanded the scope for short selling, applicable to both government and corporate bonds. Overall, the MGS yield curve shifted lower especially at the short-end as the market reacted favorably to the new BNM regulations and the strong MYR in April. As at end April, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.40%, 3.70%, 3.86%, 4.07%, 4.37%, 4.70% and 4.76% respectively. In the primary market, there were three government bond auctions as follows: RM2.0b New 20-year MGS 4/37 which garnered BTC ratio of 1.59 times at average yield of 4.76%. RM4.0b New 5-year GII 4/22 which drew a BTC ratio of 2.71 times at average yield of 3.95%. RM2.5b 15-year reopening of the MGS 4/33 which drew a BTC of 2.06 times at average yield of 4.50%. s real GDP growth recorded a stronger growth of 5.6% YoY in 1Q17, up from +4.5% in 4Q16, on the back of stronger external activities and domestic demand. Going forward, it is expected that the strong growth of the external sector to continue spilling over to the domestic side in the quarters ahead. However, real GDP growth may moderate in 2Q and 2H 2017, as the strong export growth tapers off. Meanwhile, the headline inflation rate slowed to 4.4% YOY in April 2017, from +5.1% in March This is mainly due to a slowdown in transportation costs amid lower fuel prices in April. The current account surplus in the balance of payments narrowed to MYR5.3bn in 1Q17, due to a smaller surplus in the merchandise trade balance. It is expected to narrow further in 2017 amid strong import outlook. The external reserves increased to a 5-month high of USD96.1b as at end April (end March: USD95.4b). Foreigners were net buyers of local equities for a 4th consecutive month in April and that foreign holding to total local debt rose by RM6.77b to RM185.0b which makes up 15.4% of total debt outstanding. The MGS curve bull-flattened along the 5y/10y/20y and lowered by 9 19 bps as compared to the prior month, on continued strong buying interests from both the local and foreign market players. The buying interest was mainly spurred by the appreciation of MYR against the USD as the USD/MYR dropped from 4.43 levels to below 4.30 levels. The optimism for our local bond market is also driven by high 1Qtr 2017 GDP print at 5.6% YOY (4Q2016: 4.5%) on the back 15

21 of the pick-up on domestic demand and export growth. This prompted some economists to revise 2017 growth forecasts to above 5.0%. Regardless, BNM still forecasted our 2017 GDP growth numbers to fall within %. As at end May, 3- year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.31%, 3.57%, 3.82%, 3.88%, 4.33%, 4.57% and 4.77% respectively. In the primary market, there were three government bond auctions as follows: RM2.5b New 30y GII 5/47 which garnered a BTC ratio of 2.393x at an average yield of 4.895%. RM3.0b New 10y MGS 11/27 which garnered a BTC ratio of 3.340x at an average yield of 3.899%. RM3.0b New 7y GII 8/24 which garnered a BTC ratio of 2.481x at an average yield of 3.926%. In May, s CPI moderated to 3.9% YoY (April: 4.4%), the third consecutive month of decline. The biggest driver of the lower May inflation print was transport which contributed 1.6% to overall inflation (versus 2.0% in April). Year-to-date, inflation averaged 4.3%. Meanwhile, BNM added another USD1.9b to its foreign reserves which totals USD98.7b as at mid-june. The reserves are equivalent to 8.1 months of retained imports and provide a 1.1 times coverage of short-term external debt. The increase in reserves was aided by a reversal of foreign flows in s bond market as foreign funds bought +RM10.1b in May and +RM6.8b in April respectively. This followed the huge sell off which started in November 2016 and lasted till March 2017 totalling -RM62.7b. The reversal in sentiment came after BNM s latest liberalisation of bond and foreign exchange hedging measures, impressive 1Q2017 GDP figures, and a softer US dollar outlook. In the same month, confirmation of s better outlook came from S&P which reaffirmed at A-/Sta on expectations of continued prudence by the in undertaking s economic and budgetary policies. Nevertheless, S&P did raise concerns on the country s high household debt as well as uncertainty in refinancing cost amidst negative news flow from 1MDB. Finally, the banking sector s loan growth for May slipped to 5.5% YoY from 6.1% YoY in the previous month. The moderation in May s loan growth was caused by a slower non-household loan growth of +6.1% YoY (Apr: 7.5%) whilst household loan maintained its pace at 5.1% YoY. Trading volume in the MGS market dropped to RM45.0b from RM63.7b in the previous month. The MGS market bearish steepened towards the end of the month post FOMC s decision to hike the US Federal Fund Rate by another 25bps and amidst hawkish central bank talk in the US and Europe. As at end June, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.48%, 3.68%, 3.89%, 3.92%, 4.35%, 4.58% and 4.79% respectively. In the primary market, there were three government bond auctions as follows: RM4.0b 7-year Re-opening of the GII 8/24 which garnered BTC ratio of 2.48 times at average yield of 3.926%. RM2.5b 20-year Re-opening of the MGS 4/37 which drew a BTC ratio of 1.70 times at average yield of 4.560%. RM3.0b 10-year Re-opening of the GII 7/27 which drew a BTC of 2.54 times at average yield of 4.013%. In June, CPI moderated to 3.6% YoY (May: 3.9%, consensus estimate: 3.9%), the third consecutive month of decline. Core inflation for June came in at 2.6% YoY, slightly below May s reading of 2.6% and within BNM s comfort range of 2.3% -2.5%. Transport costs were once again a key driver of CPI, accounting for over 20% of the rise. Meanwhile, BNM added USD 0.2b to its foreign reserves which totals USD99.1b 16

22 as at mid-july, up from USD 98.9b at end July. The reserves are equivalent to 7.9 months of retained imports and provide a 1.1 times coverage of short-term external debt. June saw a slight outflow of foreign funds to the tune of MYR 400m after significant foreign inflows of RM10.1b in May and RM6.8b in April respectively. s May exports figures remain strong, growing more than 30% YoY. Trade surplus continue to be positive albeit lower. Finally, the banking sector s loan growth for June increased to 5.7% YoY from 5.5% YoY in the previous month, the pick-up in loans growth was attributed to faster growth in business loans. The banking system s asset quality continued to be strong with system-wide net NPL ratio at 1.2%. Trading volume in the MGS/GII market dropped to RM41.7b in July from RM50.0b in the previous month. Yield movements were unevenly distributed across the yield curve, with the 5 and 7 year MGS yields climbing up 5 bps whilst the rest of the curve was broadly unchanged. As at end July, 3-year, 5-year, 7-year, 10-year, 15-year, 20- year and 30-year close at 3.48%, 3.73%, 3.90%, 3.98%, 4.36%, 4.58% and 4.79% respectively. In the primary market, there were three government bond auctions as follows: RM3.0b 7-year Re-opening of the MGS 9/24 which garnered BTC ratio of times at average yield of 3.919%. RM2.0b 30-year Re-opening of the GII 5/47 which drew a BTC ratio of times at average yield of 4.926%. RM3.0b 10-year Re-opening of the MGS 11/27 which drew a BTC of 1.68 times at average yield of 3.978%. Export growth slowed in June to 10% YoY, mainly on the back of base effects and a distortive festive period. Shipments of both E&E and non-e&e categories saw growth easing in June. On a quarterly basis, exports remain robust at 20.6% YoY in 2Q17, sustaining its pace from the previous quarter. s foreign reserves climbed past the USD100bn mark for the first time since 2015, edging higher to USD100.4bn (+USD1bn m-o-m) which is sufficient to finance 7.9 months of retained imports and 1.1x of short-term external debt. Furthermore, s real GDP recorded a stronger growth of 5.8% YoY in 2Q17, up from +5.6% in 1Q, on the back of stronger external activities and private consumption. s real GDP growth is expected to grow at a stronger pace moving forward as compared to the prior year. Meanwhile, the current account surplus in s balance of payments widened to MYR9.6bn in 2Q17, due to a larger surplus in the merchandise trade balance. However, this surplus is expected to narrow amid a stronger import growth outlook that would likely outpace the increase in exports and a higher deficit in the services and income accounts. On the other hand, headline inflation rate slowed further to 3.2% YoY in July, from +3.6% in June. This was mainly due to a slowdown in transportation costs amid lower fuel prices, and a fading low base effect during the month. On rating actions, Fitch affirmed s A- rating with a stable outlook on the back of strong GDP growth, sustained current account surpluses, mitigated by higher government debt compared to its A-rated peers and sizeable contingent liabilities. Trading activities for the govvies were lackluster in the beginning of the month, however it picked up substantially toward the end of the month as MYR strengthened. Most of the trades were centered on the shorter end < 3 years and on the belly of the curve. There was also an expectation that the 10y MGS 11/27 will be included into JP Morgan Global Bond EM Index, further spurring some rallies in the govvies. Also, tracing the downward yield movement of US treasuries, the demand for our local govvies increased mainly due to the heightened geopolitical tensions between North Korea and the US. The trading flows were driven by both foreigners and local market players. They have been 17

23 lengthening the portfolio duration by disposing the short-end and buying into the longend. Foreigners have been selling the shorter tenured MGS and buying into longer tenured MGS specifically the 10-year. On net basis, government debt saw an outflow of MYR1.46b where the foreign ownership declined from 41.2% to 40.1%. Total foreign holding in government debt is 26.5% as opposed to 27.2% in the prior month. As at end Aug, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.365%, 3.58%, 3.855%, 3.90%, 4.315%, 4.54% and 4.74% respectively. In the primary market, there were three government bond auctions as follows: RM2.5b 20-year New GII 8/37 which garnered BTC ratio of times at average yield of 4.755%. RM3.5b 3-year New MGS 2/21 which drew a BTC ratio of times at average yield of 3.441%. RM3.5b 7-year Re-opening of the GII 8/24 which drew a BTC of times at average yield of 3.975%. s August CPI increased to 3.7% YoY versus market expectation of 3.4% and 3.2% in the previous month. The primary driver for the increase was transportation cost from higher fuel prices and food & non-alcoholic beverages ( F&B ) prices. On the trade front, 's export growth in July exceeded expectations, rising 30.9% from a year earlier, owing to higher shipments of manufactured products and mining goods. The pace of expansion beat the 23.1% rise forecasted by consensus and tripled the 10% growth posted in June. Shipments of manufactured goods, which accounted for more than four-fifths of 's total exports, were up 32.6% from a year earlier in July. Most of the manufactured goods were electrical and electronic products. In September, BNM seventh MPC meeting yielded no change in the OPR which remains at 3.00%. BNM s decision to hold rates came widely expected. In the accompanying MPC statement, BNM remains upbeat on the improving global economy while emphasizing that the domestic economy continued to be underpinned by private spending and exports. BNM also guided that GDP growth in 2017 will be stronger than earlier expected and while inflation has remained elevated, repeated that underlying inflation pressures is expected to remain contained. Lastly, BNM reiterate that its current stance of monetary policy remains accommodative. Meanwhile, BNM added another USD0.3b to its foreign reserves which totals USD100.8b as at mid-september. The reserves are equivalent to 7.7 months of retained imports and provide a 1.1 times coverage of short-term external debt. Finally, the banking sector s loan growth for August increased to 5.8% YoY from 5.6% YoY in the previous month. The marginally stronger growth was attributed to business loans which increased by 6.8% while household loan growth remained steady at 5.0%. Trading volume in the MGS market increased to RM64.7b from RM56.8b in the previous month. At month end, the MGS market bearish steepened especially at the longer end of the curve. The cautious sentiment came about post the FOMC s decision to implement the Balance Sheet Reduction ( BSR ) program starting October 2017 and an unchanged Dot Plot chart which indicated one more rate hike for As at end September, 3-year, 5-year, 7- year, 10-year, 15-year, 20-year and 30-year close at 3.33%, 3.65%, 3.84%, 3.91%, 4.31%, 4.60% and 4.89% respectively. In the primary market, there were two government bond auctions as follows: RM4.0b 5-year Re-opening of the MGS 3/22 which garnered BTC ratio of 1.90 times at average yield of 3.501%. RM4.0b 15-year Re-opening of the GII 8/33 which drew a BTC ratio of 1.73 times at average yield of 4.579%. 18

24 In October 2017, the n government announced its 2018 budget, following are the highlights: 2017 GDP is revised up to % (from %), on the back of better performance in the agriculture, manufacturing and services sectors GDP is forecast to expand by %, driven by the manufacturing, construction and services sectors. The government remains committed to a gradual fiscal consolidation, with the deficit target moderating to 2.8% in 2018 (3.0% in 2017). Exports growth expected to jump 16.6% to RM917.5b for 2017, supported by strong demand in manufactured goods and commodities. This would normalize to 3.4% in Current account surplus estimated to be sustained at RM32.3b or 2.5% of GNI for 2017 and forecast to be marginally higher at RM32.9b or 2.3% of GNI for Revenue growth of 6.5% (6.1% in 2017) balanced by a 6.5% increase in operating expenditure, while development expenditure remains unchanged. The 2018 Budget is based on an oil price assumption of USD52 per barrel (USD50 in 2017 and current price of USD59). GST collection is projected to increase to RM43.8b (RM41.5b in 2017). Inflation is expected to be benign at % in 2018 ( % in 2017). 2% point reduction in RM20,000-70,000 personal income tax band, translating to about RM1.5b of foregone revenue. In September, CPI increased to 4.3% YoY in line with market expectation of 4.3% and higher than 3.7% in the previous month. The primary drivers for the increase were transportation costs (up 15.8% YoY) and food & non-alcoholic beverage prices (up 4.6% YoY. Core inflation remained stable at 2.4% YoY September. On the trade front, 's export growth in August exceeded expectations, rising 21.5% YoY to MYR 82.3b vesus forecast growth of 19.2% Yoy. Export grew due to higher shipments of manufactured products and LNG exports. The trade surplus in August widened to MYR 9.9b from July's MYR 8.0b. Meanwhile, BNM added another USD0.2b to its foreign reserves which totals USD101.4b as at mid-october. The reserves are equivalent to 7.5 months of retained imports and provide a 1.1 times coverage of shortterm external debt. Overall trading volume in the MGS market declined to RM38.6b from RM64.7b in the previous month. MGS yields rose across all tenures following the softer weaker MYR and the rise in US Treasury yields as market odds for a year end rate hike in the US intensified. The sell-off in MGS occurred primarily in the last week of October with yields rising as much as 15bps as the yield curve steepened on the long end. As at end October, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.40%, 3.74%, 3.95%, 3.91%, 4.44%, 4.73% and 5.02% respectively. In the primary market, there were three government bond auctions as follows: RM3.0b 7-year Re-opening of the MGS 7/24 which garnered BTC ratio of 1.60 times at average yield of 3.879%. RM1.5b 20-year Re-opening of the GII 8/37 which garnered a BTC ratio of 2.15 times at average yield of 4.785% RM4.0b 30-year Re-opening of the MGS 3/46 which drew a BTC ratio of 1.60 times at average yield of 4.957%. s forex reserves rose by USD0.3b to USD101.5b as at 31 October, from USD101.2b at end-september. They are sufficient to finance 7.6 months of retained imports and cover 1.1x the short-term external debt. s real GDP grew by a 19

25 stronger 6.2% YoY in 3Q17, vs 5.8% in 2Q17, on the back of stronger export growth and overall domestic demand/private investment. This is the key driver for the strengthening of MYR as it reinforced rate hike expectations. Similarly, the current account surplus increased to MYR12.5b in 3Q17, mainly due to a larger surplus in the merchandise trade balance. The external outlook continues to be supported by improving global growth prospects, strong and stable global demand for E&E and commodity products. On the other hand, headline inflation eased to 3.7% YoY in October, from 4.3% in September. This was mainly due to a slower increase in transportation costs amid lower fuel prices, while prices of F&B also eased. The easing of headline inflation has limited impact on the market. The month started with selling pressure in the bond market due to the hawkish shift in the November MPC statement. The central bank hinted that it may consider reviewing the current degree of monetary accommodation given the strength of global and domestic macroeconomic conditions. The above came as a surprise to the market. As a result, the MGS/IRS curve steepened across all tenors particularly on the long-end. However, the sell-off was immediately countered by the local traders/investors who bought them in the dip. This implies ample market liquidity among the local market players who are willing to extend their portfolio duration amid the sell-off. Overall, the MGS market was supported somewhat. Market has been taking cues from the MPC statement that rate hike is around the corner. This results in rapid strengthening of MYR throughout the month. MYR strengthened from around 4.20 level to 4.09 against USD during the month, i.e. an appreciation of 2.6%. The stronger than expected Q3 GDP growth numbers reinforced rate hike prospects. Meanwhile, foreigners have been buying the short-end MGS/GII for MYR play, as well as the selective benchmark MGS, especially the 7y and the 10y. The 7y and 10y curve is now inverted, signaling more demand by the foreigners on the 10y. As at end Nov, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.41%, 3.63%, 3.93%, 3.88%, 4.44%, 4.61% and 4.90% respectively.in the primary market, there were three government bond auctions as follows: RM3.0b 10-year Re-opening of the GII 7/27 which garnered BTC ratio of 1.83 times at average yield of 4.347%. RM2b 15-year Re-opening of the MGS 4/33 which garnered a BTC ratio of 3.81 times at average yield of 4.55% RM3.0b 5-year Re-opening of the GII 4/22 which drew a BTC ratio of 1.72 times at average yield of 3.872%. s CPI for November 2017 came in at 3.4%, a slight drop from the 3.7% increase in the previous month. Year-to-date, average inflation rate for 2017 stands at 3.9% YoY which is well within market expectations. The slight slowdown in inflation mirrors the transport inflation trend which has enjoyed stable crude oil prices in recent months. Meanwhile, core inflation remains low at 2.2% YoY in November. On the trade front, 's export growth in October remains strong, rising 18.9% from a year earlier. This is the eleventh consecutive months of double-digit expansion in exports since December 2016, a feat that is likely not going to be repeated in In line with exports, imports growth also surged 20.9% YoY during the same month. Consequently, trade surplus reached a 19-month high of RM10.6b. Strong demands from developed markets and rising global commodity prices continue to underpin s robust trade performance. On the employment front, s labour force grew by 2.2% YoY to 15.1m in October while unemployment rate remains at a healthy level 3.4%. Due to the strong economic performance in the past year, jobs creation has been steadily gaining momentum and thus outpacing unemployment growth since March Finally, the announced that it has agreed to provide RM929.4m for the subsidy and rebate of 1.80sen/kWh for the period of Jan 1 20

26 to June 30, 2018, hence sparing consumers the potential of an electricity rate hike for the next six months. As the year 2017 comes to a close, trading volume in the MGS market dwindled to RM27.6b from RM58.5b in the previous month. There was a slight flattening on the MGS yield curve but the market was generally directionless and liquidity was thin. There were no surprises whether it be domestic or external and the only major event is that of the third FOMC rate hike which has been well communicated in advance. As at end December, 3-year, 5-year, 7-year, 10-year, 15- year, 20-year and 30-year close at 3.31%, 3.64%, 3.90%, 3.91%, 4.37%, 4.61% and 4.90% respectively. In the primary market, there were two government bond auctions as follows: RM2.5b 10-year Re-opening of the MGS 11/27 which garnered BTC ratio of 1.53 times at average yield of 3.946%. RM2.5b 15-year Re-opening of the GII 6/33 which drew a BTC ratio of times at average yield of 4.724%. BNM also announced the 2017 government bonds auction calendar which consist of a total of 33 offerings (2017: 32) made up of 15 MGS (2017: 16) and 18 GII (2017: 16) auctions. Market Outlook Just like the year before, post the US Federal Open Market Committee ( FOMC or Fed ) December rate hike, investors are still digesting the evolution of US monetary policy. Unlike last year however, there is greater clarity on the impact of President Trump s policies and in particular his success in pushing through the tax reforms. The USD1.5 trillion tax bill, which includes permanent tax breaks for corporations (tax cut from 35% to 21%) and temporary tax cuts for individual (a cut in top individual tax rate from 39.6% to 37%) has been signed into law by the President and is projected to provide a boost to US GDP of up to 1.7% over the long run. With the fiscal stimulus expected to work its way into the economy in the next year or two, the Fed s long term 2.0% inflation target remains on track and hence also the Fed s guidance of three rate hikes in The continuation of this rising interest rate trajectory is expected to prod similar action(s) from other central banks globally and in particular the emerging markets. South Korea was the first country in Asia to move and looks likely to follow suit. Nevertheless, in s case, the BNM Governor has clarified that any hike in the OPR is a step towards normalization and not tightening and that the country s economic growth remains healthy with inflation under control. As such, investors will likely continue to be guided by external economic developments in the medium term whilst the perceived undervalued nature of the Ringgit will likely continue to attract fund flows in the near future. Since the MPC meeting on 9 November, the MGS curve which has initially bear steepened has regain some grounds as foreign fund bet on further appreciation of the Ringgit. This is most apparent in the MGS 1y5y spread which widened from 65bps to close to 100bps while trade volumes on the front-end of the curve has surged and yields for MGS 2018s has dropped by around 50-60bps, way below OPR. The six months record outflow of close to RM60b from August 2016 February 2017 is now a distant memory. While only half of the outflows has returned onshore, BNM takes comfort that confidence in our bond market and the Ringgit has been restored. 21

27 The Ringgit ended 2017 at 4.05 to the USD, an appreciation of around 10% YoY. The momentum moving forward however remains positive and this is reflected in the latest data from BNM which showed that foreign holdings in MGS has risen to RM160.3b or 44.4% out of outstanding, which is a huge recovery from the low of 38.5% in March Finally, from the recently released 2018 government bond auction calendar, we surmised the following: The 33 offerings for 2018 (one more than 2017) is now evenly more distributed across the tenors, which should alleviate some pressure at the longer end of the curve which was well supplied in Similar to 2017, there will be heavy maturities in the month of February and March in the 1H2018 (RM16.5b) and another RM32.9b maturing in August- November These are the months where there will likely be more opportunities to trade. Except for the current 15Y, 20Y and 30Y GII, all the existing Benchmark for MGS and GII will be replace with new Benchmarks either through new issuances or re-openings from existing off-the-runs. Finally, gross supply for 2018 is expected to be around RM103b (2017: RM107.5b). Kuala Lumpur, AmFunds Management Berhad 7 February