● Foreign investors retained as net buyers of Malaysia’s debt securities for the eighth successive month, with the inflow widening to RM3.6b in December (Nov: RM1.9b)

- Total foreign debt holdings rose to its highest level in over four years (RM223.0b; Nov: RM219.4b), as its share to total outstanding debt securities increased to an 11-month high (13.9%; Nov: 13.7%).

- Demand was driven by the dollar bear trend, with the ringgit reaching a 30-month high in December. Additionally, the successful passing of Budget 2021 sat well with investors, whilst the impact of the Fitch Ratings sovereign downgrade was relatively muted.

● The larger inflow was mainly due to a greater net increase in holdings of Malaysian Government Securities (MGS) and Government Investment Issues (GII)

- MGS (RM2.4b; Nov: RM1.8b): foreign holdings share of total MGS rose to an 11-month high (40.6%; Nov: 40.1%)

- GII (RM1.4b; Oct: RM0.9b): foreign holdings share edged up to 6.6% (Nov: 6.3%), a 33-month high.

● Conversely, for the equity market, foreign investors remained net sellers for 18 consecutive months

- However, investors offloaded funds at a slower pace in December (-RM0.6b; Sep: -RM1.0b) amid recovery optimism following progress in COVID-19 vaccine distribution.

● Overall, the capital market registered the largest net foreign inflow in two months (RM3.0b; Nov: RM0.9b).

- However, for the whole of 2020 it registered a total net outflow of RM6.8b (2019: +RM8.7b), with bonds marking a net inflow of RM18.3b (2019: RM19.9b) while equity registered a net outflow of RM25.1b (2019: -RM11.2b)

● The debt market is expected to continue experiencing a net foreign inflow in 2021, on the back of favourable yield differentials and sustained risk-on sentiment

- The US 10-year Treasury average yield rose by 9 basis points (bps) to 0.93% in December, whilst the 10-year MGS average yield increased by 5 bps to 2.71%, narrowing the average yield spread to 178 bps (Nov: 182 bps).

- Foreign inflows will sustain in 2021 as demand for higher yielding bonds is expected to remain strong and COVID19 vaccine optimism is likely to encourage global risk-on sentiment. Furthermore, the current ringgit upside is projected to continue due to the persistently weak USD and a possible improvement in commodity prices. As such, we forecast USDMYR year-end to settle at 3.95 (2020: 4.02).

- As economic conditions improve and the distribution of vaccines become imminent, we see a higher probability that Bank Negara Malaysia would keep the overnight policy rate unchanged at 1.75% in the near term.

Source: Kenanga Research - 11 Jan 2021