• Foreign holdings of MYR debts securities declined to RM269.7bn
   
• Foreigners sold RM0.5bn of MGS and bought RM0.4bn of GII

• Foreign investors remained net buyers in equity market

• Total portfolio outflows of RM3.8bn for equities and debt securities combined

• Foreign flow pattern could turn choppy amid high uncertainty in US rates path

Malaysia’s foreign portfolio flows recorded a second straight month of outflows as foreign investors sold RM4.5bn from Malaysian capital market in September, bringing the accumulated total foreign holdings of Malaysia debt securities to RM269.7bn or 13.6%.

Looking into details, debt outflows in September was mainly due to foreign net selling of MGS (Sep: -RM0.5bn, Aug: -RM5.2bn) and Malaysian Islamic Treasury Bills (Sep: - RM4.3bn, Aug: +RM0.2bn). This was partially offset by foreign net buying of GII (Sep: +RM0.5bn, Aug: -RM0.6bn) and marginal purchases of private debt securities including private Sukuk. Foreign holdings of Malaysian government bonds (MGS & GII) fell by RM0.1bn. This brought foreign holdings of government bonds to a 5-month low of 23.1% of total government bonds outstanding (Aug: 23.4%). Foreign holdings of MGS declined to RMYR201.3bn or 35.4% of total MGS outstanding. For GII, foreign holdings rose to RM50.8bn (9.7% of total GII outstanding).

As at end-Sep 2023, foreign investors sold RM4.5bn of Malaysian bonds (Aug: - RM5.0bn; Jul: +RM11.3bn). Meanwhile, foreign investors remained net buyers on Bursa Malaysia with a higher amount of inflow of RM0.7bn (Aug: +RM0.1bn; Jul: +1.4bn). As a result, Malaysia recorded overall foreign portfolio outflow of RM3.8bn in September (Aug: -RM4.9bn; Jul: +12.7bn; Jun: +RM3.8bn). Cumulatively, YTD, foreign portfolio inflows amounted to RM21.0bn (9M22: +RM4.9bn), purely lifted by inflows into debt securities (9M23: +RM22.9bn, 9M22: -RM1.7bn). Foreign selling of Malaysian equities accumulated to RM1.9bn in 9M23 (9M22: +RM6.6bn). For 3Q23, overall foreign portfolio flows remained positive albeit lesser at RM4.0bn (2Q23: +RM7.4bn, 1Q23: +RM9.6bn), mainly attributed to lower debt inflows (3Q23: +RM1.8bn, 2Q23: +RM9.7bn). Foreign equity inflows recorded the highest quarterly inflows in 18 months at RM2.2bn (2Q23: -RM2.3bn; 1Q23: -RM1.8bn).

Bank Negara Malaysia’s international reserves declined the most in 15 months by USD2.4bn or 2.1% MoM to USD110.1bn as at end-September and marked the smallest foreign reserves position since November 2022. The decline was primarily due to a sharp drop in foreign currency reserves (-USD2.3bn to USD98.0bn) which fell to its lowest level since October 2022 as BNM intervened in the FX market to curb the ringgit’s depreciation. In ringgit terms, the value of BNM reserves declined by RM9.7bn to RM517.7bn. It is sufficient to finance 5.1 months of imports of goods and services and is 1.0 times total short-term external debt.

US federal government avoided a shutdown as Congress passed a temporary funding bill. The Fed’s preferred inflation gauge, core PCE price inflation decelerated to a 0.1% MoM rise in Aug (Jul: 0.2%), its smallest increase since late 2020, although the headline index rose 0.4% MoM amid higher energy costs. The outlook for ‘higher-for-longer’ interest rates by the Fed and further supported by concerns over inflation due to the surge in global crude oil prices lifted UST yields to their highest levels. The UST benchmark 10-year yield closed higher at 4.57%. Expectations of recessions, along with rate cuts in response, had kept longer-end yields pinned down. US 10Y yield declined by a total of 46bps in 1Q23, up 43bps in 2Q23, and up by 74bps in 3Q23. Yields on 10-year German debt are close to 3%, a level not reached since 2011. Mixed performance seen for regional bonds amid month- and quarter-end rebalancing flows. Asian 10Y government bond yields were broadly lower, led by Singapore where the 10-year Singapore Government Securities (SGS) yield closed at 3.40%, followed by Thailand with benchmark ThaiGBs strengthened and closed at 3.14%. Indonesia Government Bonds (IndoGBs) were sold off on the last day of the month reacting to the recent UST performance and yield of the 10Y bond closed at 6.91%.

Local govvies saw MGS mixed whilst GII ended mostly unchanged-to-weaker, unaffected by the August CPI. Malaysian Government Bonds were pressured by strong USD and rise in US Treasury yields reaching two-decade highs. The 3Y and 10Y were up 12 – 14 bps MoM. The 3Y MGS closed at 3.58% is near its highest since last January while the 10Y at 3.98% was near its March 2023 highs.

Throughout September 2023, there were three sovereign papers auctioned with a total of RM14.5bn issuance.

Outlook

In the absence of domestic market-moving event, UST became the main driver to local yields. Supported by BNM-Fed divergence and neutral supply profile, MGS continued to show better resilience with the 10Y yield holding near 4.00% despite the relentless rise in 10Y UST. We think the main cause for the current MGS weakness is mainly the external factor, primarily the ‘higher-for-longer’ US rates vis-a-vis Malaysia’s OPR rate which is likely to be anchored at 3.00% for the rest of year. Malaysia’s inflation has cooled to 2% while growth prospects are dimmed due to the global growth risks. While higher USDMYR spot has not affected foreign demand for Ringgit bonds due to favourable USD-hedged returns, CNY stability serves as an important anchor to regional sentiment, losing which regional risk assets would come under pressures. Despite weaker Ringgit, which lost 6.7% vs. the USD YTD as of 29 Sep and underperformed most EM Asia peers, USD-hedged MGS yields offer attractive enhanced returns due to the negative USDMYR forward points. The favourable FX-hedged returns to foreign funds will continue until either (i) the Fed starts to cut rate thereby narrowing back the MYR-USD rate differential, or (ii) a major risk-off event that disrupts the current market dynamics such as a sharp downturn in China’s economy dampening the appeal of regional risk assets. We maintain our MGS outlook at mildly bullish and a neutral outlook on foreign demand.

Source: BIMB Securities Research - 10 Oct 2023