OVERVIEW

● Foreign investors turned net buyers of Malaysia’s debt securities in February, as total foreign holdings increased by RM4.5b (Jan: -RM2.4b) or 2.5% MoM (Jan: -1.3%) to RM187.0b (Jan: RM182.5b), after declining for the pass three successive months. Consequently, the share of total foreign holdings of Malaysia’s debt inched higher to 13.1% (Jan: 12.9%). Meanwhile, foreign funds were pulled out from the equity market in February,

charting a net outflow of RM0.8b, after a brief net inflow of RM1.0b recorded in the preceding month. Collectively, the capital market experienced its first net inflow of foreign funds since the last four months (RM3.7b; Jan: -RM1.3b), supported by strengthening of the Ringgit, triggered by recovery in commodity prices as well as Fitch’s affirmation of Malaysia’s sovereign rating at “A-“ with a stable outlook.

● February’s improvement was largely attributable to a net increase of Malaysian Government Securities (MGS) by RM4.9b (Jan: -RM1.7b), pushing up foreign holdings share of total MGS to 38.3%, as well as a net increase of Malaysian Government Investment Issues (GII) by RM0.8b (Jan: +RM0.7b), tilting the foreign holdings share of total GII up to a 10-month high of 5.5%. These have more than offset declines in Malaysian Islamic Treasury Bills (MITB) by RM 0.7b (Jan: -RM0.1b), squeezing the foreign holdings share of total MITB to an 18-month low of 10.7%. Private Debt Securities (PDS) also trended down, falling by RM0.4b (Jan: -RM0.2b), with the share of foreign holdings softened to 2.0%.

● While there is still a possibility for the trend to reverse back into a net-outflow amidst the continued uncertainty surrounding the outcome of the US-China trade negotiation and degree of growth moderation in major economies, as well as an expected maturity of RM70.0b in federal government debt, out of which 25.0% will be redeemed in the first half of the year, we foresee that the pull-out of funds by foreign investors would be less compared to the previous year. This is premised upon increasingly dovish stance adopted by the US Federal Reserve and the European Central Bank, with fewer or no rate hike expected and larger monetary injections by the latter. Against this development, the average yield spread of the US 10-year Treasury note and the 10-year MGS in the near term could extend the narrowing observed in February to 130 basis points (bps) from January’s 133 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. However, we expect BNM would gradually turn dovish and may not hesitate to cut interest rates should there be signs that external factors are increasingly threatening domestic growth. 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 natural tendency for global capital to flee to safe haven as the investment environment turns into a “risk-off” – investors turning away from high-yielding assets.

Source: Kenanga Research - 11 Mar 2019