OVERVIEW

Foreigners return as net buyers of Malaysian debt securities in March. Foreign holdings of Malaysian debt securities totalled RM3.2b (Feb: -RM4.6b). Short-dated securities underpinned inflows during the month amid expectations of Fed rate hikes in the coming months and lingering global risks.

Fundamentals still attract funds and caps potential outflows. March’s capital market saw smaller foreign equity fund outflows of RM62.0m (Feb: -RM1.1b) amid rising volatility in advanced market. We reckon strong macro picture still draws foreign funds to Malaysia or at least limits outflow. However, we expect potential fund inflows into the capital market to be capped in 2Q18 due to a less attractive valuation of FBMKLCI relative to its regional peers coupled with the rising global uncertainty.

Investors’ confidence remains intact. We expect muted yield movements on the back of the 14th General Election and a shift in focus to short term instruments amid lingering global risks. However, we see the stable increase in foreign reserves during the month as a sign of continued investors’ confidence in the local capital market. Hence, we expect fund flows into the local debt market to remain healthy and do not foresee significant capital flight. We retain our view for the Ringgit to end the year at 3.90 against the USD.

Foreign bond funds return in March. Foreign holdings of Malaysian debt securities saw a solid increase in March after February’s selloff. Net foreign purchase of Malaysian debt securities totalled RM3.2b (Feb: -RM4.6b) amid stalling appreciation of the Ringgit. Consequently, total share of foreign holdings in Malaysian debt securities bounced back to 15.8% (Feb: 15.7%). However, on a quarterly basis, Malaysian debt securities registered lower net foreign inflows of RM3.1b from the highs seen in the preceding quarter (4Q17: +RM6.6b).

Short-dated securities underpinned inflow. Foreigners appeared to place their preference on short-dated securities, possibly fuelled by expectations of further Fed rate hikes in the coming months and lingering global risks. March’s inflows were attributable to RM2.3b surge in inflows to short-dated securities (Feb: -RM1.0b). Foreign buying of Malaysian Treasury Bills (MTB) rose to 67.9% of total outstanding to RM1.3b from February’s moderate purchase of mere RM33m (Feb: 55.6%). Along with the surge in foreign buying of Bank Negara Bills/Bank Negara Monetary Notes and Malaysian Islamic Treasury Bills, total foreign holdings of short-term notes rose to 62.6% of total share outstanding (Feb: +54.2%).

Source: Kenanga Research - 10 Apr 2018