● Foreign investors remained net buyers of Malaysia’s debt securities for thirteen straight months. However, inflows narrowed to RM1.9b in May (Apr: RM6.4b), a 6-month low

• Total foreign debt holdings continued to climb in May, reaching its highest level since October 2014 (RM247.9b; Apr: RM246.0b), while its share to total outstanding debt securities remained at 14.8% (Apr: 14.8%), a 3-year high.
• High yield differentials continued to drive demand for Malaysia’s debt securities. However, investors’ sentiment was tempered by concerns regarding rising local COVID-19 cases, the implementation of Movement Control Order 3.0 (MCO 3.0), and a higher inflation reading in April (4.7%; Mar: 1.7%).

● The narrowedinflowwasmainly due to a smaller net increase in holdings ofMalaysian Government Securities (MGS), as well as net decreases in holdings of Government Investment Issues (GII) and Malaysian Treasury Bills (MTB)

• MGS (RM2.4b; Apr: RM4.7b): foreign holdings share of total MGS increased marginally (41.1%; Apr: 41.0%).
• GII (-RM0.6b; Apr: RM0.4b): foreign holdings share decreased to 7.9% (Apr: 8.2%).
• MTB (-RM0.1b; Apr: RM0.5b): foreign holdings share edged lower (66.4%; Apr: 67.3%), a 4-month low.

● For the equity market, outflows continued for 23 consecutive months

• Foreign selling in Bursa Malaysia persisted in May (-RM0.2b;Apr: -RM1.1b), albeit at a slower pace, on concerns regarding elevated domestic COVID-19 cases and the impact of MCO 3.0.

● Overall, the capital market registered a smaller net foreign portfolio inflow in May (RM1.7b; Apr: RM5.2b), a 6-month low

● Debt market may continue to experience softer inflow in the near term, on the back of the full-scale MCO

• The US 10-year Treasury average yield fell by 2 basis points (bps) to 1.61% in May, whilst the 10-year MGS average yield increased by 7 bps to 3.16%, widening the average yield spread to 155 bps in May (Apr: 146 bps).
• We expect foreign inflows to sustain in the medium-term, supported by Malaysian bonds’ consistently high yield differentials and Moody’s recent affirmation of Malaysia’s credit profile at A3 stable. Nevertheless, the ongoing full-scale lockdown may continue to temper foreign demand in the near-term. Furthermore, inflows will likely be dependent on the outcome of Malaysia’s upcoming sovereign credit review by S&P Global Ratings. Considering this,and the worsening COVID-19 situation throughout Asia, we have revised our end-2021 USDMYR forecast to 4.03 (2020: 4.02) from 3.95 earlier.
• Despite the full-scale MCO, growth recovery will likely be sustained given the additional fiscal stimulus measures (PEMERKASA+), ongoing vaccinationprogress, andstrong external demand. As such, we expect BNM to keep the policy rate at 1.75% for the remainder of the year.

Source: Kenanga Research - 11 Jun 2021