● Foreign investors remained net buyers of Malaysia's debt securities for a third straight month in July, but the inflow of funds tapered (RM7.1b; Jun: RM11.6b)

− Total foreign holdings rose to a six-month high (RM206.0b; Jun: RM198.9b), with its share to total outstanding debt inched up to 13.1% (Jun: 12.8%).

− Attributable to a recovery optimism following the further resumption of economic activities and progress made to manage domestic COVID-19 situation. In addition, it further boosted by a weakening US dollar and a continued rise in the global oil price (USD43.2/barrel; Jun: USD40.3).

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

− MGS (RM7.7b; Jun: RM7.8b): foreign holdings share of total MGS inched up to 38.2% (Jun: 37.3%), a five-month high.

− MTB (RM1.0b; Jun: RM0.5b): foreign holdings rose to a four-month high (29.4%; Jun: 20.1%).

− GII (RM0.1b; Jun: RM2.4b): foreign holdings unchanged (5.8%; Jun: 5.8%).

● For the equity market, foreign fund outflows extended for thirteen straight months in July

− Foreign investors continued as net sellers of local equities but at a reduced value in July (-RM2.6b; Jun: -RM3.0b), mainly attributable to fears over a new wave of COVID-19 infections, rising protectionism, and further weighed by the domestic political uncertainty and geopolitical risks arising from US-China rift.

● Overall, the capital market chartered a positive inflow for the second successive month though it shrunk by almost half compared to the previous month, with the net inflow in foreign funds stood at RM4.5b (Jun: RM8.6b)

● Inflow into debt market to persist in the near term on the positive development of economic reopening across the globe, but would be capped by fears of COVID-19 resurgence and rising political risks premium

− The US 10-year Treasury average yield fell by 12 basis points (bps) to 0.61% in July following Fed’s reassertion of its dovish tone and rising coronavirus cases. Similarly, the 10-year MGS average yield fell by 26 bps to 2.65% in July, partly attributed to heightened domestic political uncertainty. Consequently, the average yield spread narrowed to 203 bps (Jun: 211 bps).

− While the inflow to persist on favourable COVID-19 and economic recovery developments, the fears over the new wave of COVID-19 infections and elevated domestic political and geopolitical risks (e.g. US-CN-HK) is expected to weigh on the sentiment. As such, we maintain our USDMYR forecast at 4.30 by year-end (2019: 4.09).

− On the monetary front, we expect the BNM to embark on further monetary easing in September, bringing the OPR to a record low of 1.50%, as signalled by its dovish monetary policy statement in July's policy meeting: concerns on the pace of recovery amid a broad-based slump in the labour market and hampered confidence level.

Source: Kenanga Research - 10 Aug 2020