● Foreign investors remained net buyers of Malaysia’s debt securities for the third consecutive month in March (RM6.6b; Feb: RM4.3b), posting its largest inflow since August 2021

- Total foreign debt holdings increased (RM258.2b; Feb: RM251.5b), with its share to total outstanding debt rising (13.5%; Feb: 13.2%) to a six-month high.

- The domestic bond market may have benefitted from foreign investors seeking to diversify portfolios away from the US and Europe, amid financial troubles, and into Emerging Market assets to secure higher yields. Despite the banking crises, global risk-sentiment appears to have improved, likely due to expectations that the US Fed will soon complete its tightening cycle and may even cut rates later this year.

● The greater inflow was driven by a larger increase in holdings of Malaysian Government Securities (MGS) and Government Investment Issues (GII), as well as returning inflows for Malaysian Islamic Treasury Bills (MITB)

- MGS (RM4.4b; Feb: RM4.0b): foreign holdings share rose to a seven-month high (36.0%; Feb: 34.5%).

- GII (RM2.2b; Feb: RM1.0b): foreign holdings share edged higher (9.0%; Feb: 8.7%).

- MITB (RM1.2b; Feb: -RM0.4b): foreign holdings share increased to 9.1% (Feb: 6.6%).

● For the equity market, foreign investors remained net sellers for the seventh straight month in March

- Foreign outflows rose to a three-month high (-RM1.3b; Feb: -RM0.2b), but eased towards the end of the month.

● Overall, the capital market recorded its largest net inflow in seven months (RM5.3b; Feb: RM4.1b)

● Bond inflows to sustain in 2Q23 as the Fed approaches the end of its hiking cycle

- Foreign demand for domestic bonds may sustain in April and 2Q23, as investors seek higher yields in Emerging Market bonds, and markets price in the end of Fed hikes with potential rate cuts in 2H23. The US banking crisis has led to tighter financial conditions, the Non-Farm Payrolls print for March (236.0k; Feb: 472.0k) suggests a cooling labour market, and this week’s CPI report (Apr 12) is expected to show further easing (Consensus: 5.1%; Feb: 6.0%); giving the Fed less motive to raise rates and potentially leading to rate cuts, especially if the US enters a recession in 2H23. Malaysian sovereigns are well positioned to benefit from a return of global risk-on sentiment, owing to their higher yields compared to most regional market bonds and positive spreads against Treasuries.

- We reckon BNM has completed its tightening cycle and will maintain the OPR at 2.75% for the rest of the year, amid easing inflationary pressures and a looming global economic slowdown; we do not foresee rate cuts in 2023 or 2024. However, we do think there is room for BNM to raise rates by another 25 bps, should an unexpected shock to global commodity prices or changes to local subsidy policy, lead to a resurgence in domestic inflation.

Source: Kenanga Research - 11 Apr 2023