• Foreign investors turned net buyers of Malaysia’s debt securities in November (RM5.4b; Oct: -RM2.6b), for the first time in four months
  
  − Consequently, the total foreign debt holdings increased to RM272.6b in November (Oct: RM267.2b), with its share to the total outstanding debt rising to a three-month high of 13.8% (Oct: 13.5%).
  
  − The growing risk appetite among investors for emerging market assets, driven by the underperformance in the US macroeconomic indicators and signals of dovishness from the Fed, has led to increased demand for Malaysian bonds. Additionally, the BNM's decision to maintain the overnight policy rate (OPR) at 3.00%, along with the narrowing of the MY-US 10-year bond yield differential, has intensified foreign interest.

• November’s inflow was driven by an influx of investment in Malaysian Government Securities (MGS), Government Investment Issues (GII) and Malaysian Treasury Bills (MTB)
  
  − MGS (RM3.3b; Oct: -RM1.7b): returned to an inflow due a sharp drop in US bond yields, increasing the foreign holdings share to a two-month high of 35.0% (Oct: 34.4%)
  
  − GII (RM2.2b; Oct: -RM0.2b): highest inflow in five months; foreign holdings share increased to 10.0% (Oct: 9.7%).
  
  − MTB (RM0.6b; Oct: RM0.1b): continued demand by foreign investors, with the foreign holdings share soaring to 34.4% (Oct: 27.8%).

• Foreign investors returned as net buyers (RM1.6b) of FBM KLCI stocks after last month’s outflows (-RM2.2b)
  
  − Foreign investors transitioned from being net sellers in October to becoming net buyers of Malaysian equities in November, with a total of RM1.6b, its largest figure in 15 months. Bursa Malaysia saw substantial inflows from the utilities and healthcare sectors, which outweighed the consecutive outflows from the consumer products and services sector. This shift can be primarily attributed to the market's strong conviction that the Fed has reached the peak of its hiking cycle.

• Overall, the capital market recorded its firs net foreign inflow in four months (RM6.9b; Oct: -RM4.7b)

• Foreign buying momentum in domestic debt market to persist amid a resurgence in risk appetite
  
  − The CME's FedWatch Tool currently indicates more than 50.0% probability of a rate cut as early as March 2024, signalling a growing market belief that the Fed has taken adequate measures to curb inflation in the US. This shift is likely to encourage bond investors to progressively divert their investments away from the US debt market and towards high-yielding emerging market assets. With its robust fundamentals, positive growth outlook, and the absence of rate cuts on the central bank's agenda, Malaysia is well- positioned to attract significant capital inflows.
  
  − Investors may continue to increase their portfolio exposure to Malaysian debt in the near to medium term to capitalise on carry returns and potential capital appreciation. This strategy is particularly attractive given our bullish outlook for the ringgit and the expectation that the BNM may keep the OPR unchanged for the next 12-15 months.

Source: Kenanga Research - 8 Dec 2023