● Foreign investors retained as net buyers of Malaysia’s debt securities in June, with the inflow of fund rising at the fastest pace in over four years (RM11.6b; May: RM1.5b)

- Total foreign holdings reached a four-month high (RM198.9b; May: RM187.3b), with its share to total outstanding debt increasing to 12.8% (May: 12.2%).

- Buoyed by a recovery optimism following the implementation of the Recovery Movement Control Order (RMCO) on 10 June, unveiling of a RM35.0b ShortTerm Economic Recovery Plan (PENJANA) and a rebound in global oil price (USD40.8/barrel; May: USD32.4).

● The month's inflow was mainly driven by a net increase in holdings of Malaysian Government Securities (MGS), Malaysian Government Investment Issues (GII) andMalaysian Islamic Treasury Bills (MITB)

- MGS (RM7.8b; May: RM1.9b): foreign holdings share of total MGS picked up to 37.3% (May: 35.9%), a four-month high.

- GII (RM2.4b; May: -RM0.5b): foreign holdings rose to match a five-month high (5.8%; May: 5.2%).

- MITB (RM1.1b; May: RM0.1b): foreign holdings edged up to its highest in two months (12.3%; May: 7.1%).

● For the equity market, foreign fund outflows extended for twelve consecutive months in June

- Investors continued to offload funds, albeit at a softer pace in June (-RM3.0b; May: -RM3.5b), on fears over a second wave of COVID-19 infections and following the Fed’s sombre economic outlook.

● Overall, the capital market charted a positive turnaround,with the net inflow in foreign funds (RM8.6b; May:-RM2.0b)matching the largest scale observed in the past 34 months.

● Debt market to absorb further inflow in the near term as economic reopening progresses across the globe

- The US 10-year Treasury average yield inched up by 8 basis points (bps) to 0.73% in June on economic recovery optimism, while the 10-year MGS average yield edged up by 7 bps to 2.91% on domestic political uncertainty, resulting in a narrowed average yield spread of 217 bps (May: 219 bps).

- The inflow, induced by favourable COVID-19 developments domestically and smooth implementation of the RMCO, will however be limited by oil price volatility, elevated geopolitical tension between major economies (e.g. US-CN-HK), fears over a second wave of COVID-19 infections, and worsening domestic political tussle. As such, we maintain our USDMYR forecast at 4.30 by year-end (2019: 4.09).

- After slashing the policy rate by 25 bps yesterday, we expect the BNM to embark on further monetary easing, bringing the OPR to a fresh record low of 1.50% in September, as signalled by its dovish monetary policy statement, which highlighted concerns on the pace of recovery amid a broad-based slump in the labour market and hampered confidence level

Source: Kenanga Research - 8 Jul 2020