This article first appeared in The Edge Financial Daily on July 11, 2018

KUALA LUMPUR: Foreign selling of Malaysia’s bonds and equities narrowed in the first week of July, following heavy sell-offs in May and June. This suggests the net selling is abating, UOB Global Economics & Markets Research senior economist Julia Goh said.

“Given that foreign holdings are at multi-year lows, we think the bulk of the sell-offs may be over, and the next course of flows will be determined by the US-China trade and investment policy decisions, as well as domestic policy clarity, particularly, the country’s fiscal and debt positions,” said Goh in a report yesterday.

According to Goh, foreigners sold RM6.7 billion worth of bonds in June, down from RM12.9 billion in May. On a cumulative basis, total foreign selling of bonds was RM20.9 billion from January to June, which was below the recent peak of RM37.4 billion from January to March last year.

In June, foreigners sold mainly Malaysian Government Securities (RM6 billion), Government Investment Issues (RM700 million), Treasury bills (RM400 million) and Private Debt Securities (RM100 million). Meanwhile, there was a net purchase of RM500 million Bank Negara Malaysia notes last month.

In terms of equities, foreigners remained net sellers in June, albeit lower at RM4.9 billion compared with RM5.6 billion in May. Year to date, foreigners have sold a total of RM6.8 billion of domestic equities.

“The sell-offs were offset by local institutions which bought RM8.2 billion worth of stocks in the January to June period. Based on the latest data from the Institute of International Finance, net selling of bonds and equities ebbed in the first week of July,” she said.

Goh was also of the view that the US-China trade developments will continue to evolve through the summer.

“Risk of a trade war is rising, but not dominant at this juncture. We still think an eventual compromise is possible, given that both sides appear to be leaving some room for negotiations and China has been restrained in its responses. The US is also making concessions to limit downside risks to the economy by allowing products that meet a set of criteria to be exempted from the tariffs,” she said.

“Having said that, the trade risks will certainly take on a new dimension, and the impact will have to be reassessed if the tariffs on Chinese goods involved were to be increased beyond the US$50 billion (RM200.5 billion) in the current phase,” she added.

In the event that the trade dispute escalates, Goh said, the fallout from an all-out trade war scenario would be unpredictable.

“The Asian region, including, Malaysia would be more vulnerable due to higher export dependence. Even if other Asian exports are not targeted directly by the tariffs, there will be a significant hit from a slowdown in global demand and broad spillover into the industries due to the complexity of the global supply chain,” she added.

Goh said UOB Global Economics & Markets Research is reiterating its existing range trading outlook for the ringgit at 3.95 against the US dollar over the coming four quarters, until the end of the second quarter of 2019.

“The ringgit remains undervalued on a nominal effective exchange rate basis and supported by positive fundamental factors that will buffer it from the elevated volatility in the emerging market space.

“Risks to our neutral outlook include a deterioration in current account balance, weaker foreign exchange reserves or lack of fiscal consolidation. That may put the ringgit on renewed risk of weakness,” she said. The ringgit closed 0.15% higher at 4.022 against the US dollar yesterday.