OVERVIEW

● Foreign investors turned net buyers of Malaysia’s debt securities in June, as total foreign holdings increased by RM6.6b (May: -RM4.2b) or 3.8% MoM (May: -2.3%) to RM182.6b (May: RM175.9b), recording the largest inflow in eight months, after declining for the past two successive months. Consequently, the share of total foreign holdings of Malaysia’s debt inched higher to 12.3% (May: 11.9%). Similarly, foreign investors shifted to become net buyers in the equity market in June, charting a net inflow of RM0.1b (May: -RM2.1b), after pulling out funds for the previous four straight months. Collectively, the capital market experienced its largest net inflow of foreign funds in 17 months (RM6.8b; May: -RM6.3b), supported by strengthening of the Ringgit, amid growing indication of an imminent rate cut by the US Federal Reserve, as well as hopes of a trade war truce at the G20 summit.

● June’s improvement was largely attributable to a net increase of Malaysian Government Securities (MGS) (RM5.8b; May: -RM3.8b) and short-term notes (ST) (RM0.9b; May: -RM0.01b). Consequently, the foreign holdings share of total MGS and ST tilted up to 36.9% (May: 35.8%) and 54.5% (May: 51.1%), respectively. These have more than offset declines in Malaysian Government Investment Issues (GII) by RM 0.01b (May: -RM0.5b) and Private Debt Securities (PDS) by RM0.1b (May: +RM0.1b), marginally squeezing the foreign holdings share of total GII and PDS to 4.4% (May: 4.5%) and 1.68% (May: 1.69%), respectively.

● While there is a possibility for the trend to reverse into a net-outflow amidst the looming uncertainty surrounding the US-China trade dispute and rising growth moderation in major economies, we foresee that the pull-out of funds by foreign investors would be less compared to the previous year. This is premised on the pivot towards a dovish monetary policy stance by the US Fed and the European Central Bank, leading to highly probable benchmark rate cuts and liquidity injections. Against this development, the US 10-year Treasury note average yield extended its fall, dropping by 31 basis points (bps) to 2.06% in June, while the benchmark Malaysian 10-year MGS average yield decreased by 13 bps to 3.67%, widening the average yield spread in June to 161 bps (May: +143 bps).

● Overall, we expect Bank Negara Malaysia (BNM) to hold the OPR steady at 3.00% in 2019 following a rate cut of 25 bps in May. However, we opine that BNM has scope and space to lower the OPR, in case of a steeper deterioration of the economy and should the Fed decide to cut rates more than once this year. On the Ringgit outlook, we maintain our USDMYR year-end forecast of 4.10 (2018: RM4.13), as we foresee an imminent US Fed rate cut to trigger a “risk on” sentiment, lifting demand for higher yielding emerging market assets.

Source: Kenanga Research - 8 Jul 2019