Foreign investors returned to Malaysia’s bond market in June, recording RM4.9 billion in net inflows after a month of outflows, as easing geopolitical tensions and confidence in the country’s economic fundamentals boosted investor sentiment, according to Kenanga Research.
The research house said the inflows reversed the RM4.3 billion net outflows recorded in May, with foreign holdings of Malaysian debt securities rising to RM309.8 billion from RM304.9 billion previously.
Foreign ownership of Malaysia’s outstanding debt securities also edged up to 13.2% from 13.1% in May.
Kenanga Research said the recovery in foreign demand was driven primarily by Malaysian Government Securities (MGS), Malaysian Treasury Bills (MTB) and corporate bonds and sukuk.
The strongest inflows occurred between June 10 and June 16, when more than RM8.0 billion flowed into government bonds following the easing of tensions between the United States and Iran and the reopening of the Strait of Hormuz.
However, the overall monthly inflows were moderated by RM3.7 billion in government bond outflows recorded on June 30.
The research house said stronger domestic economic data and Malaysia’s resilient macroeconomic fundamentals continued to support investor confidence, although expectations that the US Federal Reserve would keep interest rates higher for longer remained a headwind for emerging market debt.
Among the various debt instruments, MGS recorded RM3.4 billion in net inflows, reversing May’s RM2.0 billion outflows, while foreign ownership remained unchanged at 33.6%.
Malaysian Treasury Bills attracted RM1.0 billion in inflows — the highest level in 19 months — lifting foreign ownership to 27.7% from 5.6% previously.
Corporate bonds and sukuk also remained in demand, with RM900 million in net inflows, although this was lower than the RM2.5 billion recorded in May. Foreign ownership of the segment rose to 3.0%.
Government Investment Issues (GII), however, continued to experience net outflows, albeit at a slower pace of RM800 million, compared with RM5.0 billion in May, reducing foreign ownership to 6.4%.
Despite renewed interest in the bond market, foreign institutional investors remained net sellers of Malaysian equities during June.
Net foreign equity outflows amounted to RM2.4 billion, an improvement from RM3.6 billion recorded in May.
Kenanga Research said investor sentiment remained cautious amid uncertainty surrounding US-Iran tensions, volatility in oil prices and expectations that the Federal Reserve would maintain elevated interest rates for an extended period.
Selling was concentrated in the financial services and consumer products and services sectors, although market sentiment improved during the middle of the month.
Overall, Malaysia’s capital market recorded RM2.5 billion in net inflows during June, reversing RM7.8 billion in net outflows registered in May.
Looking ahead, Kenanga Research expects geopolitical developments and the US interest rate outlook to remain the primary drivers of regional capital flows.
While easing tensions in the Middle East have reduced immediate risks to global energy supplies, expectations of prolonged higher US interest rates may continue to limit demand for emerging market bonds.
Nevertheless, the research house remains constructive on Malaysia’s local debt market, citing the country’s resilient economic growth, contained inflation, stable sovereign credit ratings, predictable monetary policy framework and deep domestic liquidity.
Kenanga Research believes improving prospects for the ringgit and Malaysia’s sound macroeconomic fundamentals should continue to support foreign investor interest in the country’s bond market despite intermittent market volatility.
