OVERVIEW

● Foreign investors remained as net sellers of Malaysia’s debt securities in January, as total foreign holdings fell by RM2.4b or 1.3% MoM to RM182.5b, a tad higher than the RM2.2b or 1.2% MoM decline observed in the preceding month. Consequently, the share of total foreign holdings of Malaysia’s debt inched lower to 12.9% (Dec: 13.3%), marking its lowest share since February 2010 or a 107-month record low. Meanwhile, foreign funds returned to the equity market in January registering a net inflow of RM1.0b, reversing the sustained outflow of portfolio equity funds since the unprecedented 14th General Election result in May last year primarily driven by a “risk-on” investment mode triggered by the US Fed’s policy stance to be “patient” on future rate decisions.

● Foreign holdings of Malaysian Government Securities (MGS) continue to decline. It fell by 1.2% or RM1.7b (Dec: -RM1.5b) to RM144.4b, dragging down foreign holdings share of total MGS to 37.6%, the lowest since December 2011. Similarly, foreign holdings of Malaysian Treasury Bills (MTB) declined sharply by 34.2% or RM0.9b (Dec: -RM1.2b), dragging its share of total MTB down to 39.7% (Dec: 60.4%). Meanwhile, foreign holdings in Government Investment Issues (GII) increased by RM0.6b (Dec: +RM1.0b), bringing its share of total GII higher to 5.3% (Dec: 5.2%). For private bonds, foreign holdings of Private Debt Securities (PDS) fell for the third straight month, down 1.5% or RM0.2b to RM13.8b (Dec: RM14.0b) while its share remains at 2.1%. Nevertheless, we expect the sell-off of emerging market’s debt would subside in the near term given the US Fed’s decision to pause on rate decision and dimmer growth outlook of the US economy.

● Meanwhile, according to Ministry of Finance (MOF), a total of RM70.0b in federal government debt is expected to mature in 2019, out of which 25.0% is to be redeemed in the first half of the year, reflecting a lower refinancing risk. As the risk-on environment gains traction and the Fed decides to pause, the US 10-year US Treasury note average yield continue to fall, dropping by 8 basis points (bps) to 2.73% in January, while the benchmark Malaysian 10-year MGS average yield fell by 2 bps to 4.06%, widening the average yield spread in January to 133 bps (Dec: 127 bps).

● In spite of the Fed’s decision to pause on rate hikes, we maintain our view that Bank Negara Malaysia (BNM) would continue to hold the OPR steady at 3.25% in 2019. Our view holds so long as there is no sharp deterioration in domestic and external demand due to weaker global growth outlook for this year. The probability for a rate cut to happen is low for now as the economic growth is expected to moderate slightly this year (4.7% Vs. 2018E: 4.8%) and domestic economic fundamentals remains intact underpinned by low unemployment rate, a decent current account surplus, a benign inflation, as well as ample liquidity in the financial market. On the ringgit outlook, the current weak US dollar trend would help the Ringgit to remain below 4.10 against the USD in the near term. However, we maintain our USDMYR year-end forecast of 4.10 due to slower domestic economy and the tendency for global capital to flee to safe haven as the investment environment turns into “risk-off” – investors turn away from high-yielding emerging market

Source: Kenanga Research - 14 Feb 2019