• Foreign holdings of MYR debts securities declined to RM267.2bn

• Foreigners sold RM1.6bn of MGS and RM0.2bn of GII

• Foreign investors turned net sellers in equity market

• Total portfolio outflows of RM4.5bn for equities and debt securities combined

• Foreign flow could continue to trend positively

Malaysia’s foreign portfolio flows recorded a third straight month of outflows as foreign investors extended their selling streak albeit narrower at RM2.5bn from Malaysian capital market in October, bringing the accumulated total foreign holdings of Malaysia debt securities to RM267.2bn or 13.3%.

Looking into details, the outflow in October was propelled by a net selling in MGS, Malaysian Islamic Treasury Bills (MITB) and Private Debt Securities (PDS). Foreigners sold MGS (Oct: -RM1.6bn; Sep: -RM0.5bn, Aug: -RM5.2bn) and Malaysian Islamic Treasury Bills (Oct: -RM0.4bn; Sep: -RM4.3bn, Aug: +RM0.2bn). Foreigners also sold GII (Oct: -RM0.2bn; Sep: +RM0.5bn, Aug: -RM0.6bn) and Private Debt securities (PDS) (Oct: -RM0.4bn; Sep: +RM0.1bn; Aug: +RM0.1bn). This resulted in foreign holdings of MGS to decline to RM199.7bn or 34.4% of total MGS outstanding, while for GII, foreign investors held RM50.6bn or 9.7% of total GII outstanding. Following this, nonresident holdings of Malaysian government bonds (MGS + GII) decreased by RM1.8bn to RM250.3bn or 22.7% of total outstanding (Sep: RM252.1bn or 23.1%).

As at end-Oct 2023, foreign investors sold RM2.5bn of Malaysian bonds (Sep: - RM4.5bn; Aug: -RM5.0bn). Meanwhile, foreign investors turned net sellers on Bursa Malaysia after three consecutive months of net buying. October saw net outflows of RM2.0bn, (Sep: +RM0.7bn; Aug: +RM0.1bn; Jul: +1.4bn). which were sizeable compared to net inflows in September. As a result, Malaysia recorded overall foreign portfolio outflow of RM4.5bn in October (Sep: -RM3.8bn; Aug: -RM4.9bn; Jul: +12.7bn). Cumulatively, YTD, foreign portfolio inflows amounted to RM16.5bn (10M22: +RM1.9bn), purely lifted by inflows into debt securities (10M23: +RM20.4bn, 10M22: -RM7.9bn). Foreign selling of Malaysian equities accumulated to RM3.9bn in 10M23 (10M22: +RM6.0bn).

Bank Negara Malaysia’s international reserves declined for the third consecutive month, falling by USD1.6bn or -1.5% MoM to a one-year low of USD108.5bn as of end-October. The decline was mainly attributable to a continued drop in foreign currency reserves (-USD1.6bn to USD96.5bn) which shrank to its lowest level since October 2022 due to continued central bank interventions. In ringgit terms, the value of BNM reserves declined further by RM7.8bn to RM509.4bn. It is sufficient to finance 5.1 months of imports of goods and services and is 1.0 times total short-term external debt.

UST curve bear steepened after data showed employment cost index grew faster than what market was expecting. The index rose 1.1% QoQ in 3Q23, compared to 1.0% in the previous quarter. US Treasuries posted another month of heavy losses. After the 10Y UST rose 46 bps in September, the month of October saw it rising another 36 bps. It closed the month at 4.93%, but it backed down from 5.00% mid-month high, which was its highest point since 2007. Meanwhile, the Bank of Japan (BoJ) left its short-term interest rate at - 0.1% and the 10-year bond yield at around 0% in its October meeting and decided to redefine its 1.0% buying commitment on 10Y JGB yield which it set just three months ago as a loose reference rather than rigid cap. While still maintaining the negative interest rates policy, the central bank is allowing long-term borrowing costs to rise more. The 10Y JGB closed October at 0.95%, moving from 0.77% at the start of the month. Regional bonds mostly rallied amid month-end offshore rebalancing. IndoGB yields generally shifted higher and yield of the 10Y bond closed at 7.11%. ThaiGB mostly rallied and the 10Y yield closed at 3.21%. The 10-year Singapore Government Securities (SGS) yield closed slightly lower at 3.38%

MGS rallied with demand seen in the long end of the curve. Similar to their moves in September, the yields followed the Fed’s tight policy narrative and potential for BNM to follow with a hike in rates, especially with the recent weakness in MYR. The 3Y MGS closed at 3.66%, while the 10Y end the month at 4.07% and both was at its highest since December 2022.

Throughout October 2023, there were three sovereign papers auctioned with a total of RM16.0bn issuance.

Outlook

Global financial markets rallied on rate pause decisions. First from FOMC then followed by the BOE and BNM meetings, and rates are more likely to be on hold for an extended period although both the Fed and BOE have not closed the door for more hikes going forward. USTs underwent a strong rally from a flurry of mixed data readings and safe-haven bids arising due to the Middle East conflict with the largest boost for bonds came from the “dovish-like pause” by the Fed in its FOMC meeting. Meanwhile, local govvies outperformed, following the subsequent accommodative monetary policy tone set by BNM in its MPC meeting which saw OPR stay pat at 3.0%. The sentiment in the MGS market in October was mainly a continuation of the trend in September, in that yields remain elevated. However, we continue to think the cause was slanted towards the cautious sentiment brought on by the surge in UST yields. Meanwhile, risk aversion brought on by the Middle East crisis, as well as continued concerns over growth in other parts of the global economy especially in China, added to the pressure. We think current elevated MGS yield levels could sustain in the short term. However, the post November FOMC and MPC, where we think both central banks will not alter policy, could provide buying opportunities and we expect bond investors may progressively pivot away from the US and rebuild their positions in emerging markets. We expect investors to potentially increasing their acquisition of Malaysian assets in pursuit of carry returns and capital appreciation.

Source: BIMB Securities Research - 10 Nov 2023