● Inflow of foreign funds into the Malaysia’s debt market narrowed in September (RM0.5b; Aug: RM3.0b) to its smallest since April

- Total foreign holdings reached a 30-month high (RM209.5b; Aug: RM209.0b), with its share to total outstanding debt eased slightly to 13.2% (Aug: 13.3%) amid a faster expansion in outstanding debt.

- Favourable yield differential, optimism over additional fiscal stimulus injection and China’s continued recovery were clouded by fears of rising COVID-19 cases and domestic political jitters.

● The narrowed inflow was mainly due to a smaller purchase of Malaysian Government Securities (MGS), as well as a net selling of Malaysian Islamic Treasury Bills (MITB) and Malaysian Government Investment Issues (GII).

- MGS (RM1.4b; Aug: RM3.2b): foreign holdings share of total MGS eased to a two-month low (38.8%; Aug: 39.2%).

- MITB (-RM0.4b; Aug: RM0.2b): foreign holdings fell to a 14-month low (5.9%; Aug: 8.5%).

- GII (-RM0.4b; May: -RM0.2b): foreign holdings decreased to its lowest in four months (5.6%; Aug: 5.8%).

● For the equity market, foreign fund outflows persisted for 15 consecutive months in September

- Investors offloaded funds at a faster pace in September (-RM2.0b; Aug: -RM1.5b) on worries over reinstatement of COVID-19 restriction in major economies, news of delay in vaccine trial and bleak US fiscal stimulus prospect.

● Overall, the capital market charted a negative turnaround, registering its first net outflow of foreign funds in four months (-RM1.4b; Aug: RM1.5b).

● Debt market may endure softer inflow in the near term as risk-off sentiment gains traction

- The US 10-year Treasury average yield inched slightly higher by 3 basis points (bps) to 0.68% in September, while the 10-year MGS average yield rose by 13 bps to 2.64% on domestic political turmoil, widening the average yield spread to 196 bps (Aug: 186 bps).

- Inflows of fund could taper as the US presidential election and virus concerns take the center stage, building up risk aversion among investors. Against this backdrop, we maintain our USDMYR forecast at 4.30 by year-end (2019: 4.09).

- Meanwhile, the BNM is expected to retain the OPR at 1.75% for the remainder of 2020, consistent with its lessdovish monetary policy statement and noting that it has already slashed the OPR by a total of 125 bps this year and that the government is scheduled to disburse additional fiscal stimulus in the 4Q20.

Source: Kenanga Research - 8 Oct 2020