Capital outflow set to decline as sentiment improves

KUALA LUMPUR: Foreign capital outflow for the rest of the year is expected to taper despite shares and currencies depreciating across markets, including Malaysia in the second quarter.

Kenanga Investment Bank Bhd (Kenanga IB) said portfolio capital flows had seen a slow decline last month amid United StatesChina trade tensions and the prospect of two more interest rate hikes by the US Federal Reserve by year-end as net foreign equity outflow slowed to RM1.7 billion compared with RM4.9 billion in June.

The investment bank said despite short-term selling pressure in the second quarter, investor sentiment should improve in the second half of the year as the government completed its first 100 days and fulfilled all, if not most, of its 10 pre-election promises.

Kenanga IB believes the ringgit is undervalued as the economic fundamentals remain intact, backed by sustained strong domestic demand, low inflation and unemployment rate, as well as the surplus in Malaysia’s current account. The ringgit depreciated for the third straight month, losing 1.3 per cent month-on-month last month compared with -1.0 per cent in June, while the value of reserves in ringgit terms fell marginally by 0.1 per cent to RM422.8 billion.

On fixed income, Kenanga IB expects the local bond market to stabilise and capital flows to turn positive in the second half of the year. The firm noted the average yield spread between the benchmark 10-year US Treasury yield and the 10-year Malaysian Government Securities bond yield declined to 122 basis points last month from 130 in June.

“Despite the continued outflow of capital and the weak ringgit we expect Bank Negara Malaysia to maintain the Overnight Policy Rate at 3.25 per cent for the year.

“As global trade tensions have escalated, the impact on the capital market and the economy is expected to remain uncertain.

“Hence, the monetary policy is biased towards easing as Bank Negara’s priority would be to support growth and price stability,” said the firm.