• Foreign holdings of MYR debts securities decreased to RM185.8bn

• Foreigners sold RM6.7bn of MGS and GII in May

• Total portfolio outflow of RM11.6bn for equities and debt securities combined

• Funds outflow likely to slow down

The Malaysian bond market, which saw about RM12.9bn of foreign outflows in May, saw continued selling by foreign funds in June as RM6.7bn worth of Malaysian debt papers was offloaded. Sentiment remains cautious because of the volatility in emerging markets and on the domestic front investors are waiting for policy clarity, such as the future direction in managing public finance, from the new administration.

Foreign holdings of MGS in June decreased by RM6.0bn to RM150.9bn (May: 158.9bn; Apr: RM162.8bn; Mar: RM165.9bn; Feb: RM165.5bn; Jan: RM168.6bn) whilst foreign ownership of GII declined by RM0.7bn to RM14.1bn (May: RM14.8bn; Apr: RM18.7bn; Mar: RM18.8bn; Feb: RM18.4bn; Jan: RM18.9bn). Given the outflow of RM6.7bn to RM165.0bn in foreign ownership of government debt (MGS + GII), total foreign holding in government debt decreased to 24.7% from 25.9% in May.

However, foreign holdings of discount instruments and PDS remained stabled as the selling of both debt papers were almost flat. In combined amounts (inclusive of short-term bills/notes and corporate bonds/sukuk), foreign holding levels in June 2018 were lower by RM6.7bn, bringing total foreign ownership of MYR bonds to RM185.8bn or 13.5%.

As at end-June, there were RM6.7bn outflows (May: 12.9bn; Apr: -RM4.7bn; Mar: +RM2.8bn; Feb: -RM3.9bn; Jan: +RM4.4bn) from total debt securities while foreigners sold RM4.9bn of equities (May: -RM5.8bn; Apr: +RM1.5bn; Mar: - 0.06bn; Feb: -RM1.1bn; Jan: +3.4bn). This means a total portfolio outflow of RM11.6bn for equities and debt securities combined (May: -RM18.7bn; Apr: - RM3.2bn; Mar: +2.74bn; Feb: -RM5.0bn; Jan: +7.8bn). Foreign funds withdrawn a total of RM6.96bn from the local stock market in the first six months of 2018.

Funds outflow likely to slow down

The Malaysian bond market could see continued selling by foreign funds extending into the second half of this year due to further monetary tightening by major central banks, rising trade tensions between the US and its trading partners and the country’s RM1 trillion debt issue, causing yield spread between the 10-year MGS and 10-year US Treasuries to further narrow. The narrowing of the yield spread is also due to the US Fed normalisation policy in the form of Fed rate hikes, while Bank Negara is maintaining its overnight policy rate (OPR) at its current level of 3.25%. Even though yields have come off recent highs, emerging market (EM) bonds including in Malaysia continued to be pressured. Risk aversion amid doubts on global growth was key as trade issues and political risks continued to dominate headlines.

Looking ahead, further portfolio capital outflows from the Malaysian bond market cannot be ruled out in the second half. The pressure on financial markets in EM, Malaysia included, would likely persist in the second half if concerns over rising interest rates, trade-war jitters, possibility of currency devaluations worldwide, and political developments in some European countries persist. These concerns would drive investors towards safe-haven financial assets such as USD and JPY.

We also expect Bursa Malaysia to be affected by heightened regional volatility, due to a possible foreign selling on regional emerging markets, interest rate hikes in the US, as well as the political and economic changes domestically.

However, the outlook remains positive with foreign funds expected to return in the fourth quarter. Malaysia, as a perennial safe haven, should be a top destination for many foreign funds when they eye a return. The prevailing kitchen-sinking in the country is only a shortterm pain. As volatility in the US heightens and interest rate rises, global fund managers will avoid the US and relook at Asia, which is a growth engine.

The market was cagey as players continued to debate policy direction of the new government. Forefront of investors’ concern is the fiscal impact from the implementation of the new government’s proposals such as abolishment of GST and reintroduction SST and fuel subsidies. But our core view is that Malaysia’s continued focus on debt reduction paves the fiscal and debt pathway towards an improved position. We also believed that macro conditions remain supportive for bonds, as GDP growth forecasts remain anticipated above 5% and inflation still benign – which in turn indicates stable interest rate movement in Malaysia well into 2019.

We are positive on some details coming out of the MOF which should aid sentiment in the Malaysian financial market. We expect that sentiment should improve with policy clarity and budget reset. We also expect business confidence to rebound once Budget 2019 and Mid-Term Review of RMK-11 are tabled in parliament. Overall, we expect fixed income investors to remain vigilant in the coming quarters with central bank rhetoric and focus on fiscal consolidation progress as key spaces to watch out for. While awaiting the government’s fiscal reforms, we maintain our 2018 GDP growth forecast of 5.3%.

Source: BIMB Securities Research - 9 Jul 2018