OVERVIEW

● Foreign investors remained a net buyer of Malaysia’s debt securities in March, with total foreign holdings up by RM2.9b (Feb: RM4.5b) or 1.6% MoM (Feb: +2.5%) to RM190.0b (Feb: RM187.0b). Consequently, the share of total foreign holdings of Malaysia’s debt expanded to 13.3% (Feb: 13.1%). Meanwhile, foreign funds were net sellers on the equity market in March with a net outflow of RM1.6b (Feb: -RM0.8b). Collectively, the capital market registered two straight months of net inflow of foreign funds with a net gain of RM3.8b in 1Q19 (4Q18: -RM2.4b), which have supported the Ringgit in spite of concern on growth slowdown.

● March’s improvement was primarily attributable to a net increase of Malaysian Government Securities (MGS) (+RM1.4b, Feb: +RM4.9b) and Malaysian Government Investment Issues (GII) (+RM1.3b, Feb: +RM0.8b), reflecting a robust demand and appetite on government papers. Consequently, the foreign holdings share of total MGS and GII rose to 38.7% (Feb: 38.3%) and 5.8% (5.5%) respectively. Meanwhile, foreign holdings of Private Debt Securities (PDS) declined marginally by 0.1% MoM to RM13.5b while its share of total PDS unchanged at 2.0%.

● Uncertainties in the external environment continue to weigh on the capital market. We expect the risk of capital outflow to persist on heightened uncertainty surrounding the on going US-China trade talks, US Fed dovish signal, Brexit and the growth moderation in major economies particularly the Eurozone. However, an expected maturity of RM70.0b in the federal government debt, out of which 25.0% will be redeemed in the first half of the year, would pose a lesser risk on the bond market compared to last year. This is because the market is supported by the robust demand for government bond especially the 10-year MGS yield which is currently trending below 4.0% level. Against these developments, the average yield spread of the US 10-year Treasury note and the 10-year MGS narrowed in March to 127 basis points (bps) from February’s 130 bps.

● With the market already factoring in that Bank Negara Malaysia (BNM) is leaning on a rate cut there is a risk of further outflow of capital going forward. However, our view is that BNM will hold rates steady as long as it could as the risk to the downside is still manageable. The probability that BNM would raise the overnight policy rate at its next meeting in May is still 50-50 and data dependent.

Source: Kenanga Research - 8 Apr 2019