• Foreign investors returned to the Malaysian bond market in July, recording their highest net purchases in a year at RM7.8b (June: -RM0.6b). This surge was largely fuelled by increased investments in Malaysian Government Securities (MGS)
  
  − Total foreign debt holdings rose to RM 279.1b in July (June: 271.3b), with the share of total outstanding debt rising to 13.5% (June: 13.2%).
  
  − Strong economic indicators, including a 5.8% 2Q24 advance GDP estimate growth, stable inflation rate and a strengthening ringgit, have increased the appeal of Malaysian bonds to investors. The Prime Minister’s recent announcement of Malaysia's bid to join BRICS has drawn RM2.9b in inflows on July 30 and 31. This, coupled with expectations of a US rate cut in September due to a cooling labour market and subdued inflation, has significantly lowered US bond yields and narrowed the 10-year MGS-UST negative yield gap, benefitting the domestic debt market.

• The substantial inflow was attributable to a sizeable turnaround in MGS and corporate bond & sukuk (CBS), along with consistent inflows into Government Investment Issues (GII)
  
  − MGS (RM5.1b: June: -RM2.6b): the biggest inflow in a year, driven by downward trend of 10-year US Treasury yield, resulting in the foreign holdings share of MGS rising to 34.2% (June: 33.3%), a seven-month high.
  
  − GII (RM1.4b; June: RM1.4b): the amount of inflows was about the same as in the preceding month, while its foreign holdings share bumped up slightly to 9.3% (June: 9.2%).
  
  − CBS (RM0.8b; June: -RM0.6b): showed a reversal from June, tipping up its total foreign holdings share to 1.6% (June: 1.5%).

• Foreign investors became net buyers of local stocks, registering RM1.3b in inflows (June: -RM0.1b)
  
  − Positive economic developments bolstered the equity market, leading to three consecutive weeks of net buying onthe FBM KLCI, with the products & services and technology sectors as the main driver of this influx.

• In total, the capital market registered net foreign inflows of RM9.1b, reversing June’s outflows (-RM0.6b)
   
• Malaysian debt market is poised to attract investors due to a strengthening ringgit and the prospect of upcoming US rate cuts
  
  − The Fed's dovish stance, influenced by a cooling labour market and progress in easing inflation, has raised expectations for September rate cuts. This shift could lead to foreign investors reallocating funds from the US to high-yielding emerging markets, invariably benefitting local bonds.
  
  − Given its undervalued currency and strong growth fundamentals, Malaysia is becoming an attractive destination for foreign investment. The country's stable inflation, a steady growth recovery, an accommodative monetary policy, and favourable ‘stable’ outlook ratings from Fitch and S&P contribute to this positive investment environment. Furthermore, expanding trade relationships, including its growing ties with China and the potential benefits of joining BRICS, further enhance Malaysia’s appeal, likely attracting significant inflows into its debt market and potentially lowering local yields. Hence, the 10-year MGS yield is projected to hover around 3.70% in the near term, reaching 3.56% by year-end.

Source: Kenanga Research - 8 Aug 2024