PETALING JAYA: The escalation of the US-China trade war continued to affect Malaysian equities and debts in May with foreign portfolio outflow totalling RM6.2 billion, according to UOB Global Economics & Markets Research.
This marked the second month of foreign portfolio outflows and was in line with the US$5.7 billion of portfolio outflows from emerging markets during the month.
“The outflows weighed on ringgit sentiment, as the local currency weakened by 1.3% to 4.1900 against the US dollar last month,” it said in a note today.
In May, the renewed risk-off sentiment prompted foreign investors to pare down their Malaysian equities by RM2 billion from the RM1.4 billion outflow in April.
Foreign selling of Malaysian debt securities slid to RM4.2 billion in May from RM9.8 billion in the previous month.
Of the RM4.2 billion bond outflows, Malaysian Government Securities (MGS) made up the biggest portion with an outflow of RM3.8 billion in May, followed by Government Investment Issues (GII) (-RM500 million) and Treasury bills (-RM10 million).
Following that, it trimmed foreign holdings of Malaysian government bonds (MGS & GII) to RM158.0 billion or 20.9% of total outstanding (from RM162.3 billion or 21.9% in April), the lowest since September 2010.
However, overseas investors turned net buyers of private debt securities and private sukuk at RM68.5 million and RM25.8 million respectively in May.
UOB said the sell-off in the equity market continued for the fourth month, bringing the year-to-date outflows to RM4.8 billion.
“As such, foreign shareholdings of Malaysian equities fell to a 17-month low of 23.2% in May (from 23.4% in April).”
The research house said as the outcome of the trade negotiations remains uncertain, some central banks have started to loosen monetary policy.
“We have brought forward our US Fed rate cut expectations to Q3 2019 from Q3 2020 previously. We expect a 25-basis-point (bps) cut in Q3 2019 and another 25 bps in Q4 2019, bringing the upper bound of the Fed funds target rate to 2.0% by end-2019.”
However, UOB expects Bank Negara Malaysia to adopt a wait-and-see stance and keep rates on hold for now, given that is has undertaken a pre-emptive policy rate cut of 25bps to 3% last month.