Foreigners snapping up Malaysian bonds but remain net sellers in equity market

MALAYSIA continued to record higher foreign portfolio inflows at the start of 2021 mainly into domestic bonds.

Overall net foreign inflows totalled RM2.8 bil in January (December 2020: +RM3.0 bil) with bond inflow of RM3.7 bil (December 2020: +RM3.6 bil) while equities saw net outflow of RM800 mil (December 2020: -RM600 mil).

“This mirrored the trend of higher portfolio flows entering emerging market bonds,” UOB Global Economics & Markets Research pointed out in its latest macro note.

“Foreigners bought Malaysian Government Securities (MGS) worth RM2.3 bil (or about 61% of total RM3.7 bil debt inflows) last month (December 2020: +RM2.4 bil),”

This was followed by Government Investment Issues (GII) amounting to RM900 mil (December 2020: +RM1.4 bil); Malaysian Treasury Bills at RM400 mil (December 2020: -RM100 mil); and Private Debt Securities including private sukuk (Islamic bond) at RM200 mil (December 2020 -RM60 mil).

“Foreign holdings of Malaysian government bonds (MGS & GII) remained at the highest level in more than four years at RM205.3 bil or 24.2% of total government bond outstanding as of January (December 2020: RM202.1 bil or 24.2%),” observed UOB.

For MGS alone, foreign investors’ holdings was RM179.6 bil which is equivalent to 40.5% of total MGS outstanding (December 2020: RM177.3 bil or 40.6%).”

For GII, overseas investors owned RM25.7 bil which is equivalent to 6.8% of total GII outstanding in January (December 2020: RM24.8 bil or 6.6%).

However, foreigners remained net sellers of Malaysian equities, leaving their ownership of Malaysian equities at a record low of 20.7% of total market capitalisation in January (December 2020: 20.7%; Jan 2020: 22.4%).

Foreign reserve

Also on the bright side, Bank Negara Malaysia’s (BNM) foreign reserves edged up for the third straight month by US$1.0 bil month-on-month (mom) to a 33-month high of US$108.6 bil as of end-January (end-December 2020: +RM2.3 bil mom to US$107.6 bil).

The latest reserves position is sufficient to finance 8.6 months of retained imports and is 1.2 times total short-term external debt.

“Foreign reserves were supported by portfolio flows into bonds as well as strong current account position thanks to healthy merchandise trade surplus,” noted UOB.

While BNM has yet to publish its January 2021 FX swaps data, the central bank’s net short position in FX swaps narrowed for the eighth consecutive month by US$600 mil mom to US$5.8 bil as of end-December 2020 (end-November 2020: -US$500 mil to US$6.4 bil).

This is equivalent to 5.4% of total foreign reserves (November 2020: 6.1%), the lowest level since November 2016.

“Despite domestic challenges, we think the Malaysian government bonds remain attractive as capital flows into emerging markets remain strong given low global interest rates and high market liquidity that boosts positive carry-trades,” justified UOB.

Data to watch out for are the release of Malaysia’s 4Q and 2020 gross domestic product (GDP) (Feb 11), BNM monetary policy meeting (March 4), release of BNM’s Annual Report 2020 (end-March), and the FTSE Russell’s March World Government Bond Index (WGBI) review. – Feb 9, 2021

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