PETALING JAYA – Foreign ownership of Malaysian government bonds in March fell for the fifth straight month at a record RM27.5 billion, outpacing the previous record slump of RM18.9 billion in November last year which followed the US presidential election results, said Kenanga Research.
However, it opined that total net portfolio flow could have turned positive in Q1 2017, suggesting the possibility that some foreign funds may have switched their investment preference in favour of equities over bonds, instead of fully repatriating their funds.
The research house noted that the net inflows of foreign funds into domestic equities reached RM5.7 billion in Q1 2017, the highest since Q1 2013 (+RM9 billion). In March, foreigners bought RM4.4 billion of domestic equities, versus net inflows of RM1.0 billion and RM400 million in February and January, respectively.
Based on the capital account of the balance of payments, net portfolio investment registered a deficit of RM22.3 billion and RM10.6 billion in Q4 and Q3 2016 respectively.
Kenanga Research said a slightly positive gain in external reserves in Q1 is indicative that the capital account in the balance of payments would turn out positive, which often times is attributed to a net gain in portfolio investments.
The highest ever bond sell-off by foreigners in March was driven by the Malaysian Government Securities (MGS) (-RM23.0 billion), followed by Bank Negara Malaysia Bills (-RM3.4 billion) and Government Investment Issues (-RM600 million).
As a result, foreign holdings of MGS shrank to 38.5%, the lowest in almost six years or since April 2012, while foreign holdings of GII dipped further to 7.9% from 8.3%, its lowest in a year. Overall, the share of foreign holdings in government bonds was reduced to 24.9% from 29.3% in February.
The cumulative outflow from government bonds since November last year reached a staggering RM61.5 billion.
However, Kenanga Research said it is worth noting that in the last five months the inflows have been relatively better for GIIs than MGS, partly due to investors’ preference for short dated government-backed papers in view of heightened external risk and uncertainty.
While the ringgit continued to see some upside against the US dollar, Kenanga Research remains cautious on its relative weakness. “With at least two more indicative rate hikes by the US Fed, it could weigh down on the ringgit strength and heighten the vulnerability of foreign holdings of domestic financial assets,” it said.
However, the research house noted that there are signs that the US Fed is gradually toning down its hawkish slant, which may help taper risk of large capital outflows from the emerging economies. It maintains the view that the US dollar/ringgit will be range-bound in the short to medium term between 4.40 and 4.50, while the year-end forecast is 4.35.
While the current sell-down of portfolio capital in the bond category is expected to continue given the prospect of two more rate increases by the Fed, on top of the remaining bond maturities amounting to about RM67 billion, Kenanga Research expects the worst is over and the sell-off to subside. This will largely be supported by the buying strength of local institutional funds led by the Employees Provident Fund, as it raises its holdings of government securities.