KUCHING: Foreign investors reduced their holdings of Malaysian bonds by 0.6 per cent in June, following 2 consecutive months of strong net foreign fund inflows, RAM Ratings (RAM) says.
According to RAM, foreign holdings declined RM1.3 billion after the June rate hike and more concrete plans to pare down the US Federal Reserve’s (Fed) balance sheet, despite inflation remaining below expectations.
“As a result, the ringgit weakened against the US dollar in the second half of June, against expectations of strengthening US Treasury yields and some risk aversion amid ongoing geopolitical tension,” the ratings firm said.
RAM noted that the more hawkish stance of major central banks such as the Fed and the European Central Bank (ECB) will be key to investors in the second half of 2017 (2H17) in terms of portfolio allocations.
That said, RAM pointed out that some inertia in tightening monetary policy may be apparent after years of “easy money”.
It further noted that this uncertainty over the timing of policy changes may lead to continued market volatility.
“Even as economic conditions in the US appear to be staging a more steady recovery, Fed officials still have mixed opinions vis-a-vis the start of balance-sheet normalisation and the pace of rate hikes.
“As another round of Brexit talks commences in mid-July, the ECB will also have to grapple with the risk of weakening investment momentum amid intentions to end quantitative easing,” the ratings firm said.
“That said, Malaysia is experiencing stronger-than-expected growth and greater inflationary pressure, thereby giving BNM more impetus to raise the OPR this year,” it noted.
RAM has revised its gross domestic product (GDP) growth projection to 5.2 per cent for 2017, with an inflation rate of 3.8 per cent; this incorporates a potential 25 basis point (bp) OPR hike towards the end of the year.