● Foreign investors remained net buyers of Malaysia’s debt securities for the third successive month

- Jan 2020 (+RM3.6b; Dec 19: +RM8.1b): Total reached a 22-month high (RM208.2b; Dec: RM204.7b) and its share to total Malaysia’s debt inched up to 13.9%, a 15-month high.

- Attributable to continued risk on mode following a slew of policy rate cuts by the central banks in the advanced economies along with positive developments from the US-China phase one trade deal.

● Inflow was driven by a net increase in holdings of Malaysian Government Securities (MGS), offsetting the decline in Malaysian Government Investment Issues (GII) and Private Debt Securities (PDS)

- MGS (+RM3.3b; Dec: +RM5.5b): foreign holdings share of total MGS edged up to 41.7% (Dec: 41.6%), a 20-month high.

- GII (-RM0.1b; Dec: +RM2.7b): foreign holdings share decreased to 6.1% (Dec: 6.2%).

- PDS (-RM0.1b; Dec: +RM0.6b): foreign holdings share sustained at 1.8% for three consecutive months.

● Meanwhile, foreign investors remained as net sellers of Malaysian equities for seven straight months

- Jan (-RM0.1b; Dec 20: -RM1.2b; Jan 19: +RM1.0b): marginally smaller outflow.

● The overall capital market registered a sustained inflow of foreign funds (+RM3.4b; Dec 20: RM6.9b) in January thanks to the large inflows into the bond market

- We expect inflows to sustain particularly in the 1H20 amid a low interest rate environment brought about by the global accommodative monetary stance and a risk-on mode following the US-China trade truce. Besides, fiscal measures by the federal government and the revival of mega infrastructure projects to further support the debt capital market. These factors might lift the Ringgit to near the 4.00 against the USD, but we expect it to settle at 4.10 by end-2020 (2019: RM4.09). Against this development, the US 10-year Treasury note average yield dropped to 1.72% in January, a 14 basis point (bps) declined. On a similar trend, the benchmark Malaysian 10- year MGS average yield edged down by 17 bps to 3.23%, expanding the average yield spread to 162 bps (Dec: 150 bps).

● BNM has scope for further rate cuts to support growth amid lingering uncertainties going forward

- Cautious growth outlook remained, in spite of ease in US-China trade tension, as downside risk from the external front persists, especially with regards to the impact of coronavirus outbreak, slower global trade momentum, and rising geopolitical tensions. Along with further weakness in domestic demand, we reckon that the BNM may embark on another overnight policy rate cut of 25 basis points to 2.50% in March or May Monetary Policy Committee meeting.

Source: Kenanga Research - 10 Feb 2020