● Foreign investors remained net buyers of Malaysia’s debt securities for the fourth straight month in April (RM1.5b; Mar: RM6.6b), although net inflows moderated to a three-month low

− Total foreign debt holdings increased (RM259.7b; Mar: RM258.2b), with its share to total outstanding debt remaining unchanged at 13.5%.

− Foreign demand for domestic bonds eased in April as global risk sentiment waned. There were renewed concerns over global inflationary pressures, leading to the BoE hiking rates on March 22 and a decrease in the market indicated probability of strong Fed rate cuts this year. Likewise, global risk aversion intensified as the US banking crisis took a turn for the worst with the failure of First Republic Bank and other regional banks remaining under duress.

● The softer inflow was mainly attributable to a decrease in holdings of Malaysian Government Securities (MGS) and a smaller inflow of Government Investment Issues (GII)

− MGS (-RM1.7b; Mar: RM4.4b): foreign holdings share of total outstanding bonds edged lower (35.9%; Mar: 36.0%).

− GII (RM1.6b; Mar: RM2.2b): foreign holdings share increased to a ten-month high (9.2%; Mar: 9.0%).

− MITB (RM1.2b; Mar: RM1.2b): foreign holdings share rose to 11.5% (Mar: 9.1%).

● For the equity market, foreign investors remained net sellers for the eighth consecutive month in April

− Outflows eased (-RM0.3b; Mar: -RM1.3b), with most of the selling pressure observed towards the end of the month.

● Overall, the capital market recorded its smallest net inflow in three months (RM1.3b; Mar: RM5.3b)

● Bond inflows expected to remain subdued in the near-term but may rebound in 2H23

− The 10-year US Treasury average yield fell by 11 bps to 3.47% in April, whilst the 10-year MGS average yield fell 13 bps to 3.81%, marginally narrowing the average yield spread (34 bps; Mar: 36 bps).

− Foreign demand for domestic bonds may remain subdued in the near-term due to risk aversion following the Fed’s recent rate hike and the ongoing US banking crisis. However, we still expect foreign inflows to strengthen in 2H23 if the Fed completes its tightening cycle soon and hints at rate cuts towards the end of the year, particularly if the US experiences a deeper-than-expected recession. Likewise, local bonds remain relatively attractive with positive spreads against developed market bonds and should receive some support from BNM’s recent rate hike.

− Following BNM’s surprise 25 bps rate hike at its last meeting, we believe the central bank has completed its monetary policy normalisation and will likely keep the overnight policy rate unchanged at the neutral level of 3.00% for the rest of the year, barring any shocks to growth or inflation. The 125 bps worth of rate hikes over the past year should be sufficient to temper inflationary pressures whilst remaining conducive to sustainable economic growth.

Source: Kenanga Research - 11 May 2023