● Inflow of foreign funds into Malaysia’s debt market expanded in October (RM8.0b; Sep: RM0.5b), largest in four months

− Total foreign debt holdings climbed to its highest level since November 2016 (RM217.5b; Sep: RM209.5b),as its share to total outstanding debt inched higher to 13.7% (Sep: 13.2%), a nine-month high.

− Lifted by favourable yield differentials over US bonds, China’s strong economic recovery, and growing optimism for a similarly strong local recovery following additional injection of fiscal stimulus.

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

− MGS (RM3.9b; Sep: RM1.4b): foreign holdings share of total MGS rose to 40.3% (Sep: 38.8%), a nine-month high.

− GII (RM2.4; Sep: -RM0.4b): foreign holdings increased to 6.1% (Sep: 5.6%), similarly a nine-month high.

− MTB (RM1.8b; Sep: RM0.1b): foreign holdings share soared to 65.7% (Sep: 43.0%), highest in almost two years.

● For the equity market, foreign fund outflows continued for 16 straight months in October, albeit at a slower pace

− Outflows eased in October (-RM0.7b; Sep: -RM2.0b), the smallest in nine months. Persistent fears over the rise of COVID-19 cases and uncertainty leading up to the US presidential election have kept investors away from the market.

● Overall, the capital market registered a net inflow of RM7.3b (Sep: -RM1.4b), rebounding from last month’s outflow and reaching a four-month high

● Debt market may continue attracting foreign demand as investors’searchfor higher yields following an expected risk-on turn

− The US 10-year Treasury average yield rose by 10 basis points (bps) to 0.79% in October, on the back of upbeat US economic data. Meanwhile, the 10-year MGS average yield edged lower by 2 bps to 2.62%, which has narrowed the average yield spread to 183 bps (Sep: 196 bps).

− Inflow of foreign funds could climb in November, following the US presidential election, as markets are expecting a rise in risk-on sentiment. However, the ringgit is expected to remain pressured due to persistent domestic political uncertainty, rising COVID-19 cases and volatile oil prices. As such, we maintain our USDMYR forecast at 4.30 (2019: 4.09) by year-end.

− After maintaining the policy rate at 1.75% at last week’s Monetary Policy Committee meeting, we anticipate a 50% probability that BNM will cut the OPR by 25 bps at the next meeting in January, depending on the severity of the local COVID-19 situation.

Source: Kenanga Research - 9 Nov 2020