OVERVIEW

● Foreign investors remained as net sellers of Malaysia's debt securities in May, as total foreign holdings fell by RM4.2b (Apr: -RM9.8b) or 2.3% MoM to RM175.9b. Consequently, the share of total foreign holdings of Malaysia’s debt was reduced to 11.9% (Apr: 12.5%), marking its lowest since February 2010 or a 112-month low. Similarly, foreign funds remained as net sellers in the equity market in May, totalling RM2.1b higher than RM1.4b of net outflow recorded in the preceding month. Collectively, net outflow of foreign funds in May were lower at RM6.3b compared to RM11.2b in April as investors remained concerned of heightened risk over the US-China protracted trade negotiations.

● The month's decline in foreign holdings was attributable to a net sell-off of Malaysian Government Securities (MGS) (-RM3.8b; Apr: -RM3.5b), Malaysian Government Investment Issues (GII) (-RM0.5b; Apr: -RM3.5b) and short term notes (ST) (-RM0.01b; Apr: -RM1.2b).

Consequently, the foreign holdings share of total MGS, GII and ST dropped to 35.8% (Apr: 37.1%), 4.5% (Apr: 4.8%) and 51.1% (Apr: 53.6%), respectively. Meanwhile, foreign investors turned net buyers of Private Debt Securities (PDS), it nudged up by RM0.1b in May (Apr: -RM1.5b), with the share of foreign holdings unchanged at 1.7%.

● Recall that the Ministry of Finance (MOF) late last year stated that 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 or equivalent to RM17.5b. So far, total net outflow of foreign holdings of MGS totalled RM6.9b (Jan-May 2018: -RM12.4b). We expect the outflow to persist in the near term but would remain in check given an increasingly dovish stance adopted by the US Fed, European Central Bank (ECB), and other regional central banks on the back of dimmer growth outlook and heightened risk from the US initiated trade war. Meanwhile, the US 10-year Treasury note average yield continued to fall, dropping by 16 basis points (bps) to 2.37% in May, while the benchmark Malaysian 10-year MGS average yield was unchanged at 3.80%, widening the average yield spread in May to 143 bps (Apr: 127 bps).

● Overall, we expect Bank Negara Malaysia (BNM) to hold the OPR steady at 3.00% in 2019 following a rate cut of 25 basis point in May. Though it still has room to lower the OPR in view of the lingering external risk and weak domestic growth outlook we expect BNM to maintain its accommodative monetary policy stance amid subdued inflation and the prospect of slower growth going forward. On the Ringgit outlook, we foresee a possibility of two rate cuts by the US Fed starting as early as July which may trigger a “risk on” mode boosting demand for higher yielding emerging market assets. Hence, we maintain our USDMYR year-end forecast of 4.10 (2018: RM4.13).

Source: Kenanga Research - 13 Jun 2019