• Foreign investors become net sellers of Malaysian debt securities in October, resulting in outflows of RM 11.4b (Sep: +RM1.0b) and ending a three-month inflow streak. Heightened global uncertainty drove reduced exposure to long term Malaysian securities
• Foreign debt holdings: dropped sharply to RM277.7b in October (Sep: 289.1b), with foreign ownership of total outstanding debt down to 13.3% (Sep: 13.9%).
• Local bond market: experienced the largest outflows since the first COVID-19 lockdown in March 2020. This was driven by robust US economic data, election uncertainty, Middle East tensions, and disappointment in Chinese stimulus. Strong US job data and the Fed's cautious tone on rate cuts prompted investors to adjust their rate expectations, aligning with the Fed's dot plot. Defensive positioning ahead the US election, with the bond market anticipating a Trump victory, boosted demand for safe-haven assets, led to local bond sell-offs. Modest inflows of RM0.8b in the third week, supported by Malaysia's stable inflation, a positive 2025 budget and strong GDP growth, offered some relief.
• Significant outflows were seen in Malaysian Government Securities (MGS), Government Investment Issues (GII) and Malaysian Treasury Bills (MTB)
• MGS (-RM6.9b; Sep: -RM0.7b): this marked the largest outflow in 55 months, pushing MGS holdings to a five-month low of 33.2% (Sep: 34.8%)
• GII (-RM3.7b; Sep: RM0.3b): reverted to outflows after seven consecutive months of inflows, with its total foreign holdings share decreasing to 8.9% from 9.4% in September.
• MTB (-RM0.8b; Sep: RM0.7b): reversed all of September inflows, with foreign ownership falling sharply to 19.6% (Sep: 33.4%).
• Foreign investors also turned net sellers in the equity market, with outflows of RM1.8b (Sep: RM0.5b)
• Uncertainty around the US economy, election anxiousness and the Fed's less dovish tone led investors to offload domestic equities, particularly in financial services and utilities sectors.
• October marked the third double-digit net foreign outflow in Malaysia's capital markets in five years (-RM 13.2b; Sep: RM1.6b)
• Softening demand expected in the near term amid rising macro uncertainties
• In early November, RM2.6b in foreign funds flowed into Malaysian debt, driven by softer US non-farm payroll data, election clarity, and BNM's steady policy stance. However, Trump's recent victory introduces fresh macroeconomic uncertainties, likely tempering the Fed's rate-cutting outlook for 2025 and weakening demand for risk assets. Rising US-China tensions and broader geopolitical risks compound these pressures.
• Nevertheless, BNM's expected hold on the overnight policy rate at 3.00% through 2025, balancing growth with inflation, could help moderate outflows. Malaysia's recent entry into BRICS may also bolster its appeal to foreign investors, potentially easing upward pressure on local yields.

Source: Kenanga Research - 13 Nov 2024