Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 11 Jun 2021, 10:45 AM


Malaysia Bond Flows - Foreign fund inflow accelerated in April amid recovery optimism

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● Foreign investors remained net buyers of Malaysia’s debt securities for the twelfth consecutive month, with inflows widening to RM6.4b in April (Mar: RM5.8b)

- Total foreign debt holdings continued to climb, reaching its highest level since August 2016 (RM246.0b; Mar: RM239.6), as its share to total outstanding debt securities increased to 14.8% (Mar: 14.5%), a 3-year high.

- Demand was driven by improving recovery optimism, FTSE Russell’s decision to keep Malaysian bonds in the World Government Bond Index, and Bank Negara Malaysia’s (BNM) assurance that monetary policy would remain accommodative through 2021.

● The larger inflow was driven by a greater net increase in holdings of Malaysian Government Securities (MGS), outweighing a smaller increase in Government Investment Issues (GII) and Malaysia Islamic Treasury Bills (MITB)

- MGS (RM4.7b; Mar: RM1.5b): foreign holdings share of total MGS increased slightly (41.0%; Mar: 40.8%).

- GII (RM0.4b; Mar: RM2.9b): foreign holdings share edged higher (8.2%; Mar: 8.0%), a 50-month high.

- MITB (RM1.0b; Mar: RM1.6b): foreign holdings share increased to 19.1% (Mar: 18.2%), a 15-month high.

● For the equity market, outflows continued for 22 straight months

- Foreign selling in Bursa Malaysia accelerated in April (-RM1.1b; Mar: -RM0.03b), a 22-straight month decline, reaching a 5- month high, likely due to renewed concerns regarding rising local COVID-19 cases.

● Overall, the capital market registered a smaller net foreign portfolio inflow in April (RM5.2b; Mar: RM5.8b)

● Debt market may experience moderately softer inflow in the near term, on the back of MCO 3.0

- The US 10-year Treasury average yield fell by 2 basis points (bps) to 1.63% in April, whilst the 10-year MGS average yield decreased by 26 bps to 3.09%, narrowing the average yield spread to 146 bps in April (Mar: 170 bps), a nearly 2-year low.

- Foreign inflows will likely continue, driven by FTSE Russell’s positive decision on Malaysian bonds and a strong rebound in 2021 GDP growth (KIBB forecast: 6.5% YoY; 2020: -5.6%). Nevertheless, inflows may moderate in the near-term amid the return of the Movement Control Order (MCO 3.0). The ringgit could remain volatile in the near-term due to the new restriction measures, but potentially strong 2Q21 GDP data onwards will likely provide substantial support. In the long-term, we expect the ringgit to regain strength as Malaysia’s vaccine drive continues and as recovery outlook improves; we retain our year-end USDMYR forecast at 3.95 (2020: 4.02).

- Despite the reinstatement of MCO 3.0, domestic growth recovery remains solid, supported by strong external demand. As such, the overnight policy rate (OPR) is expected to remain at 1.75% for the remainder of the year.

Source: Kenanga Research - 11 May 2021

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