● Foreign investors remained net sellers of Malaysia’s debt securities for the second consecutive month;sharpest drop in 16 months (-RM3.6b; Jun: -RM0.5b)

− Total foreign debt holdings continued to decrease in July (RM243.8b; Jun: RM247.4b) with its share to total outstanding debt declining to 14.4% (Jun: 14.6%), a 5- month low.

− Demand continued to be weighed by concerns on the worsening COVID-19 pandemic, both locally and abroad, as well as by Malaysia’s prolonged lockdown measures and ongoing political uncertainty.

● The larger outflow was predominantly driven by a net sell-off of Malaysian Government Securities (MGS), Malaysian Islamic Treasury Bills (MITB) and Malaysian Treasury Bills (MTB); which outweighed an increase in holdings of Government Investment Issues (GII)

− MGS (-RM3.6b; Jun: RM0.4b): foreign holdings share of total outstanding bonds remained at 40.4% (Jun: 40.4%).

− MITB (-RM0.3b; Jun: RM0.9b): foreign holdings share decreased to 19.5% (Jun: 22.5%), a 3-month low.

− MTB (-RM0.2b; Jun: -RM1.1b): foreign holdings share increased to 66.2% (Jun: 55.1%).

− GII (RM0.4b; Jun: RM0.2b): increased but foreign holdings share fell to a 5-month low (7.8%; Jun: 7.9%).

● For the equity market, foreign investors remained net sellers for 25 straight months

− Largest outflow in 10 months (-RM1.3b; Jun: -RM1.2) on the back of higher domestic COVID-19 cases, extended Movement Control Order (MCO) restrictions, and persistent political uncertainty.

● Overall, the capital market registered its heaviest foreign outflow in 16 months (-RM5.0b; Jun: -RM1.7b)

● Debt market to continue experiencing outflows in the near-term, amid ongoing surge in COVID-19 cases

− The US 10-year Treasury average yield decreased by 18 basis points (bps) to 1.31% in July, whilethe 10-year MGS average yield fell by 8 bps to 3.18%, widening the average yield spread to 187 bps in July (Jun: 177 bps).

− Outflows may persist in the near-term due to the surge in global and local COVID-19 cases, and amid theuncertaindomestic political situation. The outlook will also be dependent on Malaysia’s 2Q21 GDP results on Friday and the outcome of the Jackson Hole Economic Symposium later this month; with an increased probability that the Federal Reserve may outline its tapering plans given recent strong US jobs data. With the economy expected to improve in the 2H21, we retain our end-2021 USDMYR forecast at 4.03 (2020: 4.02).

− We expect BNM to maintain the overnight policy rate at 1.75% for rest of the year, on the likelihood that the economy will continue to expand in 2H21,as lockdown measures are relaxed, on high vaccination rates, and the expected decline in COVID19 cases.

Source: Kenanga Research - 12 Aug 2021