• Foreign investors retained as net buyers of Malaysia’s debt securities for the ninth consecutive month, with the inflow marginally rising to RM3.7b in January (Dec: RM3.6b)
  • Total foreign debt holdings increased, remaining at its highest level in over four years (RM226.7b; Dec: RM223.0b), as its share to total outstanding debt securities rose to a 27-month high (14.0%; Dec: 13.9%).
  • Dollar weakness and favourable yield differentials, despite narrowing in January, continued to drive demand for Malaysia’s debt securities. 
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• Inflow wasdriven by a net increase in holdings of Malaysian Government Securities (MGS), Government Investment Issues (GII), and Malaysian Treasury Bills (MTB)
  • MGS (RM2.3b; Dec: RM2.4b): foreign holdings share of total MGS decreased slightly (40.5%; Dec: 40.6%).
  • GII (RM0.9b; Dec: RM1.4b): foreign holdings share edged up to 6.8% (Dec: 6.6%), a 36-month high.
  • MTB (RM1.0b; Dec: RM0.1b): foreign holdings share decreased to 65.7% (Dec: 71.1%).
     
• Meanwhile, for the equity market, foreign investors remained net sellers for 19 successive months
  • Investors continued to offload funds, at a faster pace in January (-RM0.8b; Dec: -RM0.6b). This is amid an elevated number of local COVID-19 cases, and to a certain extent the on-going domestic political squabble, which led to the reinstatement and subsequent extension of the Movement Control Order (MCO 2.0) and an Emergency Decree.
     
• Overall, the capital market registered a smallernet foreign inflowin January(RM2.8b; Dec: RM3.0b), marking four consecutive months of sustained inflows
   
• The debt market shouldmaintain a net foreigninflow in 2021, amid favourable yield differentials and growing risk-on sentiment
  • The US 10-year Treasury average yield rose by 12 basis points (bps) to 1.05% in January, whilst the 10-year MGS average yield fell by 4 bps to 2.67%, narrowing the average yield spread to 162 bps (Dec: 178 bps).
  • We expect foreign inflows to persist in2021 amid alikely pause in monetary easing andsustained demand for higher yielding bonds. However, inflows may decelerate in the short-term due to the further narrowing of the MGS-UST yield spread as a result of improving U.S. economic conditions. The ringgit will continue to benefit from the persistent dollar weakness and the sustained rise in crude oil prices, as such we maintain our USDMYR forecast at 3.95 (2020: 4.02).
  • On the back of additional fiscal stimulus and the start of COVID-19 vaccinations expected end of February, we see a higher probability that Bank Negara Malaysia will keep the overnight policy rate unchanged at 1.75% in the near term. However, the recent extension of MCO 2.0 has moderately raised the probability of another 25bps rate cut.

Source: Kenanga Research - 10 Feb 2021