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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.
PETALING JAYA: Analysts remain cautious on Malaysia’s Industrial Production Index (IPI) and manufacturing outlook despite the improved performance in April, due to jittery trade conditions caused by the US-China trade tension.
“Although April’s factory gate performance moved in line with our exports which grew 1.1% year-on-year in April after two straight months of decline, we remain cautious over the looming global economic slowdown from ongoing trade tensions.
“The ongoing trade tensions between the US and China, two of Malaysia’s major trading partners, will dampen the prospect of stronger growth in the coming quarters,” AmBank Research said in its report today.
It noted that the Nikkei Manufacturing Purchasing Managers’ Index (PMI) fell to 48.8 in May from 49.4 in April. A reading above 50 signals expansion of the manufacturing sector, while a print below 50 represents a contraction, suggesting that there are some signs of fatigue in the economy.
In addition, in May when Bank Negara Malaysia cut its overnight policy rate (OPR) by 25bps to 3%, it also cautioned that potential downside risk still lingered even after the rate cut. The central bank reduced the OPR for the first time in nearly three years in a bid to perk up growth amid a slowing economy.
AmBank Research expects 2019 gross domestic product (GDP) to fall to between 4-4.7%, with 4.5% being its base case projection.
“We will seek more evidence of activity strength persisting in the coming months before adjusting our growth outlook for 2019. For instance, the downside to our potential growth will be negated with the revival of major infrastructure projects like the East Coast Rail Link (ECRL) and also the 121 construction projects,” it said.
Meanwhile, PublicInvest Research is more optimistic, with expectations of the US and China reaching a piece-meal solution at the G20 meeting in Osaka, Japan, later this month.
The research house said the year-to-date IPI average of 3% is considered sluggish by historical standards, but has the potential to rebound if the trade war ends favourably, sooner than later.
The rebound in manufacturing, which grew 4.3% in April, was led by electrical and electronic (E&E), which is “cautiously” anticipated to be sustained, despite the yet-to-be-concluded trade negotiations.
“The sustained E&E activity is in consonance with E&E export momentum (3.9%) and remains our best bet to push IPI higher given ample capacity on hand,” it said.
Year-to-date, E&E performance has been sluggish at 3.4% compared with 6% a year ago, in line with tepid global PMI manufacturing indices, suggesting that manufacturers have been cautious due to trade uncertainties and therefore, are avoiding making large orders.
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