OVERVIEW

• Foreign reserves expanded for the 16th consecutive month in April, rising by USD1.7b or 1.6% to USD109.5b. The month’s reserves position remains sufficient to finance 7.5 months of retained imports and is 1.1 times the short-term external debt. Reserves sustained its uptrend on higher foreign buying into the local equity market and higher exports repatriation following higher trade surplus. The higher reserves level also suggests the possibility of foreign direct investments streaming into the economy. Higher global oil prices could have also renewed investors’ confidence in the fundamentals of the local economy, diminishing the effect of ongoing uncertainties on global trade and monetary policies.
• Ringgit value of reserves rose by the highest in 11 months, as it edged up by RM6.7b to RM423.1b. This could be partially due to a weaker Ringgit during the month which depreciated by 1.5% against the USD in April after appreciating by 4.9% in the first three months of the year.
• Contrary to the higher reserves level during the month, foreign equity inflows surged to the highest in three months to RM1.3b. The local equity market sustained its strength in April. The FBMKLCI index surged to a record high of 1,895.18 points on April 19 even as higher US bond yields and solid US employment data raised expectations for a faster pace of US Federal Reserve’s rate hike. The sustained interest in the local equity market also points to low political risk premium at home as foreign investors appear to remain confident and perceives little political stability risk arising from the dissolution of the Parliament and the upcoming election.
• However, the local bond market may not have been spared from rising global uncertainties. The average local benchmark 10-year MGS bond yields surged higher to 4.04% in April (March: 3.95%), suggesting limited inflow into the local bond market. This is in line with rising US bond yields which touched the 3.0% psychological level during the month, averaging 2.88% in April (March: 2.83%). On a bright note, the yield gap between the US Treasury 10-year yield and the local 10-year MGS bond yields has widened to an average 115 basis points in April (March: 112 basis points), retaining the lucrativeness of the local debt market. However, we are beginning to see the yield gap narrowing at the beginning of May, suggesting muted foreign inflows into the local bond market.
• While the reserves level remains at a healthy level, we are more convinced that foreign interest could be capped in the coming months. We see many uncertainties namely the much-awaited outcome of the 14th General Election, rising US bond yields and trade war risk tempering market sentiments. Recent exports figures and manufacturing indicators further point to a moderating growth trend ahead. Hence, we expect the interplay of these various dampeners to cap the level of foreign inflows in spite of the expectation that the reserves level would remain on a marginal uptrend backed by the fundamentals of the economy.

Source: Kenanga Research - 8 May 2018