Analysts see increased foreign fund inflows

KUALA LUMPUR: There could be greater flow of foreign funds into Malaysian debt securities after the United States Federal Reserve (Fed) appears to be less committed to raising interest rates anytime soon.

The Fed’s dovish tone was amid growing signs of a weak economy and a dissipating President Donald Trump reflation trade, said Kenanga Investment Bank Bhd (Kenanga IB).

The market was somewhat surprised when the Fed’s tone was more dovish than what it had expected, said Kenanga IB.

The Fed acknowledged that inflation had been on a mod- erating trend and expected to remain below its two per cent target.

“The markets have started to factor in a higher possibility of a delay in Fed’s rate normalisation schedule. Due to this, one of the most notable impacts would be another major shift of funds towards higher-yielding assets, mainly in the emerging debt markets. This could raise the flow of foreign funds into Malaysian debt securities in the short to medium term,” said Kenanga IB.

Given the lingering risk in the global economy, the firm expects foreign portfolio inflows to be inclined towards shorter government bond tenures.

The long-term government securities are expected to still attract some interest, mainly from institutional investors, i.e. central banks as well as pension and insurance funds.

Foreign holdings of Malaysia’s government debt securities (MGS) experienced a mild outflow in June, following two consecutive months of capital inflows, said Kenanga IB.

Foreign net selling of government debt securities was just RM400 million for the month following a net inflow of RM9.9 billion in May. The year-todate (end-June) capital outflows still stood at RM21.9 billion.

MGS turned out to be the only government securities that saw net selling by foreign funds in June. Total foreign ownership of MGS declined by RM900 million in June (May: up RM8.9 billion). As a result, share of foreign holdings of MGS moderated slightly to 41.2 per cent from 41.8 per cent in May.

In contrast, foreign holdings of all other government debt instruments saw a stable and positive net increase: Government Investment Issues (RM90 million); Malaysia treasury bills (RM300 million); Bank Negara Malaysia bills (RM30 million).

The markets have started to factor in a higher possibility of a delay in Fed’s rate normalisation schedule. KENANGA IB