● Foreign investors turned net sellers of Malaysia’s debt securities in April, as total foreign holdings dropped by RM9.8b (Mar: +RM2.9b) or -5.2% MoM (Mar: +1.6%) to RM180.1b (Mar: RM190.0b), marking its largest outflow in 11 months. Consequently, the share of total foreign holdings of Malaysia’s debt inched down to 12.5% (Mar: 13.3%), its lowest share in more than nine years. Similarly, foreign funds were net sellers in the equity market in April, totalling RM1.4b, less than March’s outflow of RM1.6b. Collectively, the capital market experienced its largest net outflow of foreign funds in the last ten months totalling RM11.2b (Mar: +RM1.4b), reflecting the weakened Ringgit, triggered by Norwegian sovereign wealth fund’s omission of Malaysia’s securities from its index, potential exclusion of Malaysia’s debt from the FTSE World Government Bond Index and elevated concerns over the ongoing USChina trade war.

● The bulk of April’s decline was accounted by a net sell-off of Malaysian Government Securities (MGS) (- RM3.5b; Mar: +RM1.4b), Malaysian Government Investment Issues (GII) (-RM3.5b; Mar: +RM1.3b) and Malaysian Treasury Bills (MTB) (-RM1.1b; Mar: +RM0.2b). Consequently, the foreign holdings share of total MGS, GII and MTB dropped to 37.1% (Mar: 38.7%), 4.8% (Mar: 5.8%) and 22.4% (42.7%), respectively. Private Debt Securities (PDS) also trended down, extending its decline by RM1.5b (Mar: -RM0.01b), with the share of foreign holdings softened to 1.7% (Mar: 2.0%).

● The reversal of trend into a net outflow was mainly reflecting the knee-jerk reaction following the announcement by FTSE Russell on potential exclusion of Malaysian debt from the FTSE World Government Bond Index, placing Malaysian debt under a watch list for a 6-month period, with another cycle of review slated in September. However, damage to sentiments was contained by FTSE Russel’s emphasis that “inclusion on our Watch List is not a guarantee of future action”, whilst suggesting enhanced engagement with the government in addressing investors’ concerns in the interim period. On the trade war front, uncertainty surrounding the final outcome of the negotiation has been amplified by Trump’s threat of tariff hikes on USD200b of Chinese goods to 25% from the current level of 10%, with China expected to impose retaliatory measures. Against this development, we suspect the risk of capital outflow will persist, although the outflow will be partially weathered by dovish stance adopted by the US Fed, European Central Bank, and other regional central banks, as manifested through the sustained average yield spread of the US 10-year Treasury note and the 10-year MGS in April (127 basis points).

● After its decision to cut the overnight policy rate (OPR) by 25 basis points on Tuesday, BNM is expected to retain its accommodative monetary policy, with the OPR to remain at 3.00% for the rest of this year, amid subdued inflation. On the ringgit outlook, we maintain our USDMYR year-end forecast at 4.10 as economic fundamentals remain strong, in spite of prospects of softer economic growth and the tendency for foreign funds to flee to safehaven assets.

Source: Kenanga Research - 10 May 2019