KUALA LUMPUR: Foreign investors have reversed the trend and became net buyers of Malaysia’s debt in March after three months of outflows.
Kenanga Investment Bank Bhd said that total foreign debt holdings increased to RM265.8 billion in March from RM264.1 billion in February.
However, its share of the total outstanding debt dropped to a 44-month low of 13.10 per cent in March (Feb: 13.11 per cent) due to new issuance and reopening of the government investment issue (GII) amounting to RM10.0 billion and reopening of the Malaysian Government Securities (MGS) amounting to RM5.0 billion.
The research firm said initially, during March 13-15, foreign investors divested RM1.0 billion worth of Malaysian government bonds, a move attributed to the unexpectedly robust core inflation reading in the United States (US).
However, subsequent actions taken by the government and Bank Negara Malaysia (BNM) to facilitate the repatriation and conversion of foreign investment income of government link investment companies contributed to a strengthening of the ringgit, thereby enticing investors to redirect their funds into the Malaysian debt market.
Kenanga said that, as expected, the allure of a potentially strengthening ringgit and expectations of a possible Fed rate cut in June may have revived some interest in Malaysian debt securities.
Foreign investors loaded up on long-term bonds, GII and MGS but reduced their exposure to Malaysia Treasury Bills (MTB).
The GII, which stood at RM1.4 billion in March, is the largest inflow in four months. It increased the foreign holdings share to 8.9 per cent, which is the second lowest point in a year, partly due to an increase in the total outstanding.
The MGS, which stood at RM0.8 billion in March, is the second consecutive month of net foreign buying.
However, the foreign holdings share declined to 33.2 per cent in March from 33.3 per cent in February.
Kenanga said the domestic equity market experienced its first net foreign outflow in five months, marking the largest net selling since the first wave of the pandemic in June 2020.
The offloading of financial services stocks primarily drove this decline.
The diminished foreign demand for domestic stocks is partly attributed to subdued sentiment in regional markets, profit-taking activities, and investors’ inclination towards small-cap stocks.
Despite reduced hard landing risks for the US economy, the Fed is expected to cut rates this year, likely starting in June, Kenanga noted.
This expectation stems from the ongoing disinflationary trend, which is expected to persist as the lag impact of the 525 basis points (bps) cumulative rate hikes take effect.
However, the resilient US economy suggests the Fed may now only reduce rates by 75-100 bps, down from as high as 100-125 bps previously.
Kenanga said that as such, investors may seek current attractive yields and shift towards high-quality emerging markets with currency appreciation potential once signs of a cooling US economy emerge.
“Malaysia stands to gain from this shift, as potential subsidy rationalisation in the second half of 2024 is expected to boost fiscal resilience and credit outlook.
“Additionally, BNM’s policy stability and measures for repatriating foreign earnings could support a stable ringgit with an upward bias,” Kenanga said.
