OVERVIEW

● Foreign investors returned as net sellers of Malaysia’s debt securities in November as total foreign holdings dropped by RM5.2b, after a short-lived increase of RM7.8b in the previous month. The figure marked a decline of 2.7% MoM, the fastest since June 2018. Consequently, the share of total foreign holdings of Malaysia’s debt inched lower to 13.5% (Oct: 14.0%). The sell-off occurred against a backdrop of financial market turmoil amid looming trade war jitters, tumbling global oil prices and Fed rate hikes, albeit likely to happen at a more gradual pace and less frequent going forward.

● The bulk of November’s decline was accounted by a net decline of Malaysian Government Securities (MGS) by RM5.4b (Oct: +RM4.7b), pulling down foreign holdings share of total MGS to 38.8% (Oct: 40.7%), as well as by a net decline of private debt securities (PDS) by RM0.3b (Oct: +RM1.4b), slightly tilting the foreign holdings share of total PDS down to 2.1% (Oct: 2.2%).

● Based on our observation, the bond portfolio flow trend largely correlates with the Fedspeak or the language of the US Federal Reserve. Apart from economic indicators, namely the less convincing job creation numbers in November, dovish statements of Key Fed officials, including Chairman Jerome Powell’s remark that the current benchmark interest rate is "just below" neutral, suggests less aggressive rate hikes by the Fed for next year. This puts into question the three indicative rate hikes for 2019 and one in 2020. Nevertheless, a rate hike in December remained within our expectation. Meanwhile, the US 10-year Treasury note average yield was seen dropping by 7 basis points (bps) to 3.10% in October (Oct: +15 bps), while the benchmark 10-year MGS average yield decreased by 3 bps to 4.11% (Oct: +4 bps). Consequently, the MGS-US Treasury average yield spread widened to 102 bps (Oct: 98 bps).

● We expect the outflow of portfolio funds to persist going into next year as there is a total of USD11.1b debt maturity in 4Q18 compared to USD6.4b in 3Q18, and as risk-averse sentiments remain in relation to trade war uncertainties, despite the announcement of 90-day new tariff halt by President Trump, as investors await further concrete resolutions to be put forward. Year-to-date, total net foreign bond holdings fell by RM19.6b (YTD 2017: - RM10.6b). The Ringgit is expected to be under pressure for the rest of the year, but OPEC’s decision to cut oil production by 1.2m barrels per day for the first six months of 2019 may provide some support to the currency. Hence, we maintain our USDMYR end of year forecast at RM4.15. As domestic economic growth is expected to taper off and inflation is expected to remain subdued, we believe BNM will hold the OPR unchanged at 3.25% till year end and potentially next year, in ensuring price stability and to remain supportive of growth.

Source: Kenanga Research - 10 Dec 2018