KUALA LUMPUR (Nov 8): Malaysia reported a net foreign outflow of RM4.9 billion in bonds and equities in October 2023, marking the third consecutive month of continuous foreign fund outflow from the country, according to UOB Global Economics & Markets Research.
Larger foreign portfolio outflows in October exacerbated the ringgit weakness, which fell 1.6% against the US dollar to 4.766 as at end-October, it said in a research note on Wednesday.
Net foreign selling of Malaysian debt securities and equities amounted to RM2.6 billion and RM2.3 billion respectively.
“Foreign net selling of debt securities sustained for a third month, albeit narrower at RM2.6 billion. This was mainly across government bonds (Malaysian Government Securities, or MGS; and Government Investment Issues, or GII) of RM1.8 billion.
“Meanwhile, foreign holdings of government bonds came down to RM250.3 billion, or 22.6% of total bonds outstanding,” said UOB.
Net outflow was RM3.8 billion in September 2023 and RM4.9 billion in August 2023.
However, year to date, cumulative foreign funds remain at a net inflow of RM16.1 billion, mainly in Malaysian debt securities (RM20.4 billion) which was offset by equities (RM4.2 billion). For the January-October 2022 period, a net outflow of RM1.9 billion was recorded.
On the equities front, foreigners turned net sellers of Malaysian equities at RM2.3 billion in October, following three months of net buying worth RM2.2 billion in July to September.
UOB highlighted that geopolitical and macro risks kept investors on edge, as Asia foreign exchange (Asia FX) currencies, including the ringgit, retreated against the US dollar (USD).
“We continue to expect a prolonged bottoming process for Asia FX, alongside the CNY (Chinese yuan), reiterating our view for broader USD weakness in 2024.
“This is supported by a peak in [the US] Fed (Federal Reserve) rates, followed by expected rate cuts from June 2024 [onwards], and as China’s sentiment and macro data stabilises further,” it shared.
Meanwhile, Bank Negara Malaysia’s foreign reserves also fell to a 12-month low after it dropped US$1.6 billion (RM7.49 billion) month on month to US$108.5 billion as at end-October 2023. This was the third straight month of decline in foreign reserves.
Following the dovish Fed pause in early November and softer US jobs report, UOB said bonds staged a brief rally though it was interrupted by recent Fed official comments that leaned towards a more hawkish tilt.
“Geopolitics, uncertainties from the Middle-East crisis, and global macro risks have whipsawed yields and FX. Brent oil prices have come back down to US$81/bbl. Another risk event is the expiry of the US government funding bill (on Nov 17) though we expect a probable extension.”
The next Federal Open Market Committee (FOMC) meeting on Dec 12-13 will come with an updated summary of Fed economic projections and dot-plot, which could provide clues on the Fed’s stance in 2024.
"We expect the Fed to keep its current Fed Funds Target Range (FFTR) unchanged at 5.25%-5.50% in December 2023 FOMC and maintain this terminal FFTR level until mid-2024 when we forecast 75 bps of rate cuts for 2024,” it added.