Kenanga Research & Investment

Malaysia Bond Flows Update - Foreign funds pulled out of debt market in October

kiasutrader
Publish date: Mon, 11 Nov 2019, 09:18 AM

● Foreign investors turned net sellers of Malaysia’s debt securities in October

- Debt market: foreign holdings fell by RM0.5b (Sep: +RM0.9b) or -0.3% MoM (Sep: +0.5%) to RM188.6b (Sep: RM189.1b). Share to total Malaysia’s debt sustained at 12.7% for the third successive month, as Malaysia’s total outstanding debt increased by RM 0.2b.

- Equity market: foreign investors remained as net sellers for four straight months, but with a marginally smaller outflow in October (-RM0.5b; Sep: -RM0.6b)

- Overall capital market: net outflow of foreign funds (- RM1.0b), after a short-lived inflow in the preceding month (+RM0.3b), amid heightened concerns on emerging economies’ growth, a weaker Ringgit, prolonged US-China trade war uncertainty.

Outflow in debt market driven by a net decrease in holdings of Malaysian Government Securities (MGS) and Malaysian Treasury Bills (MTB)

- MGS (-RM0.4b; Sep: +RM0.5b): foreign holdings share of total MGS inched up to 37.9% (Sep: 37.5%) as outstanding MGS decreased to RM405.6b (Sep: RM410.9b).

- MTB (-RM0.4b; Sep: +RM0.04b): foreign holdings share of total MTB tilted down to 28.1% (Sep: 28.2%).

- These offset increases in holdings of Malaysian Islamic Treasure Bills (MITB) by RM0.1b, Private Debt Securities (PDS) by RM0.2b and Malaysian Government Investment Issues (GII) by RM0.05b.

Thus far, total capital outflow stood at RM4.8b versus RM24.8b in the same period of last year

- Net-outflow may persist in the near term: concerns on China’s economy following the release of a 27-year low 3Q19 GDP growth and delays in the signing of Phase-1 US-China trade deal to lead to risk-off mode.

- Total net outflow is expected to be less compared to last year (-RM33.6b): major central banks have pivoted towards monetary easing, with the Fed embarked on a third rate cut in October.

- Against this development, the US 10-year Treasury note average yield recorded a drop of 1 basis point (bps) to 1.70% in October, while the benchmark Malaysian 10-year MGS average yield edged down by 3 bps to 3.39%, widening the average yield spread to 169 bps (Aug: 165 bps).

BNM left the OPR at 3.0% for the rest of the year, but may lean towards further easing (up to 50 basis points) in 2020 to uplift growth

- Headwinds emanating from the external sector including slowdown in major markets, declining global trade, and continued uncertainty on the final resolution of the US-China trade spat may still weigh on domestic growth.

- This would exert downward pressure on the Ringgit, which we project to depreciate to RM4.20 against the greenback (2018: RM4.13) by year-end.

Source: Kenanga Research - 11 Nov 2019

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