‘Consider investment switch in 2Q17’
KUCHING: Researchers with Kenanga Investment Bank Bhd (Kenanga Research) called on investors to consider an investment switch following a positive change in flows of portfolio investments.
This came after Malaysia saw its highest foreign bond sell-off ever in March this year, whereby foreign ownership of Malaysia’s government bonds in March fell for the fifth straight month at a record RM27.5 billion.
“Though we may yet know for certain how large was the actual net flow of portfolio investments (equity, bonds and other financial instruments), judging from the current trend, we believe it could have turned positive in the first quarter of 2017 (1Q17),” the firm outlined in its report yesterday.
“This suggests 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 drop in foreign holdings of government issued bonds have been relentless and March have been the worst up till now. Total foreign ownership of government bonds fell sharply by a record RM27.5 billion in March.
This marks the fifth straight month of decline outpacing the previous record slump of RM18.9 billion in November last year following the result of the US Presidential election.
“The outflows was mainly driven by the Malaysian Government Securities (MGS) which plunged by RM23 billion, followed by BNM Bills (RM3.4 billion) and Government Investment Issues (RM0.6 billion).
“As a result, foreign holdings of MGS dipped to 38.5 per cent -- the lowest in almost six years or since April 2012.”
Meanwhile, the drop in foreign ownership of GII, including government sukuks, has gotten bigger, declining by RM0.6 billion from just RM0.1 billion in February. As a result, the share of foreign holdings dipped further to 7.9 per cent from 8.3, its lowest in a year.
“However, it is worth noting that in the last five months the inflows have been relatively better for GIIs than MGS perhaps partly due to investors' preference for short dated government-backed papers in view of heightened external risk and uncertainty,” Kenanga Research opined.
Also notable is that foreigners suddenly appeared to be more averse to hold short tenor securities. This is reflected in a large drop of BNM Bills and Notes in March, losing RM3.4 billion – a large chunk of its total of RM8.9 billion – after five straight months of increase.
As a result, its foreign share drastically shrank to just 57.7 per cent from 92.8 per cent in February, a level last seen in mid2012. In the same period, the stock market was on a bullish trend, the ringgit remained steady at low RM3.00 relative to the US dollar and the forex reserves were near its highs.
Overall, total foreign holdings of government securities fell by RM27.5 billion. Its share of total government bonds has been reduced to 24.9 per cent from 29.3 per cent in February.
“The cumulative outflow from government bonds since November last year has reached a staggering RM61.5b. To put this in perspective, outflows during the taper tantrum episode in June to August 2013 totalled only RM28 billion while the highest annual inflow into government bonds was just RM52.6 billion in 2010.
“But reserves holding up as ringgit stabilises. Meanwhile, despite the record bond sell off by foreigners, Malaysia's foreign reserves inched up US$0.4 billion to US$95.4 billion at end-March.
“This is sufficient to finance 8.3 months of retained imports and 1.1 times of short-term external debt.”