● Foreign investors turned net buyers of Malaysia’s debt securities in May (RM1.5b; Apr: -RM1.8b), after threemonths of net selling.

• Total foreign holdings reached a 2-month high (RM187.3b; Apr: RM185.8b) but its share to total national debt remained at 12.2%.
• Following the gradual re-opening of economic activities, risk-on factor and vaccine hopes, Malaysia debt securities markets benefitted as the appeal for carry trade strategy increases, luring global funds back into higher-yielding bonds.

● The month's inflow was driven by a net rise in purchase of Malaysian Government Securities (MGS), offsetting thefallin Malaysian Government Investment Issues (GII) and Private Debt Securities (PDS)

• MGS (RM1.9b; Apr: -RM0.4b): foreign holdings share of total MGS edged up slightly to 35.9% (Apr: 35.8%), a 2-month high.
• GII: (-RM0.5b; Apr: -RM1.9b): foreign holding share decreased to 5.2% (Apr: 5.3%), a 7-month low.
• PDS (-RM0.03b; Apr: +RM0.2b): foreign holdings share sustained at 1.8% for seven straight months.

● For the equity market, foreign investors remained as net sellers for eleventh straight months

• Foreign selling on Bursa increased in May (-RM3.5b; Apr: -RM2.7b), the biggest outflow in twomonths as investors remained cautious despite Malaysia’s progressive development in managing the COVID-19 pandemic. Year-to-date (Jan-May) net foreign equity outflow stood at RM13.8b (Jan-May 2019: -RM4.8b).

● Overall, total outflow of foreign funds from the capital market ebbed (-RM2.0b; Apr: -4.4b) in May

● Debt sales could make a comeback amid economic reopening optimism

• The US 10-year Treasury average yield inched slightly higher by 2 basis points (bps) to 0.66% in May, lifted by investors’ optimism as economies begin to reopen. On the other hand, the 10-year MGS average yield fell sharply by 31 bps to 2.82% in April, narrowing the average yield spread to 216 bps (Apr: 249 bps).
• The implementation of Recovery Movement Control Order from 10th June to 31st August, coupled with Malaysia’s RM295.0b total fiscal package is expected to gradually help to revive the domestic economy and restore investors’ confidence, attracting more foreign funds into the economy. However, the ringgit is expected to remain under pressure due to worsening US-China relations, fears of a second COVID-19 wave, oil price volatility and domestic political issues.On that account, we maintain our USDMYR forecast at 4.30 by year-end (2019: 4.09).
• Despite BNM’s consecutive rate cuts and further fiscal stimulus package announcement, the house expects BNM to embark on another 25 bps cut to 1.75% in its July Monetary Policy Committee meeting as the economic and market disruptions caused by the COVID-19 pandemic are likely to linger even as Malaysia gradually recovers.

Source: Kenanga Research - 15 Jun 2020