• Foreign investors remained net buyers of Malaysia’s debt securities for the tenth straight month, with the inflow widening to RM7.2b in February (Jan: RM3.7b)
  • Total foreign debt holdings continued to rise, remaining at its highest level in four years (RM233.8b; Jan:RM226.7b), as its share to total outstanding debt securities increased to a 34-month high (14.3%; Jan: 14.0%).
     
  • Buoyed by recovery optimism following the gradual relaxation of MCO 2.0 restrictions and the start of Malaysia’s inoculation campaign. Foreign investors were also likely attracted to the high yield spreads of local debt, amid a selloff of U.S. and developed market treasury bonds.
     
• The larger inflow wasmainlydriven by agreaternet increase in holdings of Malaysian Government Securities (MGS) and Government Investment Issues (GII)
  • MGS (RM3.5b; Jan: RM2.3b): foreign holdings share of total MGS increased to a 13-month high (41.2%; Jan: 40.5%).
  • GII (RM2.1b; Jan: RM0.9b): foreign holdings share edged up to 7.2% (Jan: 6.8%), a 40-month high.
     
• For the equity market, foreign investors remained net sellers for the 20th consecutive month
  • Foreign selling on Bursa Malaysia continued at a slightly faster pace in February(-RM0.9b; Jan: -RM0.8b), as investors remained cautious despite an improvement in recovery optimism and the start of Malaysia’s vaccination drive.
     
• Overall, the capital market registered a greater net foreignportfolioinflowin February (RM6.3b; Jan: RM2.8b), markingfive successive months of sustained inflows
   
• Debt market to continue attractingforeign demand in the near-term, amid favourable yield spreads and volatile U.S. bonds
  • The US 10-year Treasury average yield rose by 28 basis points (bps) to 1.34% in February, whilst the 10-year MGS average yield increased by 31 bps to 2.98%, widening the average yield spread to 164 bps (Jan: 162 bps).
     
  • We expect foreign inflows to persist in the near-term as high yield differentials keep local bonds attractive, whilst investors exit from U.S. and other developed bond markets during this period of heightened yield volatility. Furthermore, the wider distribution of vaccines locally and abroad should bolster risk-on sentiment in favour of emerging market bonds. The ringgit may be pressured by rising UST yields in the immediate term, however it will likely be supported by a sustained rise in oil prices in the long-term, as such we maintain our year-end USDMYR forecast at 3.95 (2020: 4.02).
     
  • On the back of improved growth prospects, steady rise in inflation and wider vaccine rollout, we see a higher probability that Bank Negara Malaysia will keep the overnight policy rate (OPR) unchanged at 1.75% for the remainder of the year. Nevertheless, we believe there is still room to cut the OPR by at least 25bps should the economic outlook worsen.

Source: Kenanga Research - 10 Mar 2021