This article first appeared in The Edge Financial Daily on June 8, 2017

KUALA LUMPUR: Foreign holdings of Malaysian debt securities and Islamic bonds rose for the second consecutive month in May, according to Bank Negara Malaysia (BNM).

In its monthly data update yesterday, the central bank said total foreign holdings of Malaysian debt securities and sukuk grew by RM10.07 billion to RM195.06 billion in May, from RM184.99 billion in April.

This — along with a smaller increase of RM6.77 billion in April — comes after the huge selldown in March, when foreign investors dumped a whopping RM26.2 billion worth of Malaysian bonds. This was the biggest monthly sell-off since BNM started compiling the data in 2011, leaving foreign holdings to just RM178.22 billion.

Foreign holdings of Malaysian bonds had been on a decline since November last year after BNM’s crackdown on offshore ringgit trading.

United Overseas Bank (M) Bhd economist Julia Goh said the sentiment towards the Malaysian market is currently positive, particularly after the central bank’s latest liberalisation of bond and foreign exchange hedging measures.

“We think the trend going forward would be dependent on how foreigners perceive the risk-reward for Malaysia, bearing in mind speculation that general elections could be around the corner and large amounts of government bonds mature in the second half of the year,” Goh told The Edge Financial Daily.

“For now the sentiment is positive, particularly after BNM’s latest liberalisation of bond and foreign exchange hedging measures, favourable domestic macro conditions, and softer US dollar outlook as the Trump reflation trade losses its lustre,” she added.

Goh said Malaysia’s bonds look compelling because the yield remains fairly attractive and there are expectations of further ringgit gains.

Affin Hwang Investment Bank Bhd chief economist Alan Tan concurred, adding that other than Malaysian Government Securities, the equity market is seeing foreign fund inflow as well.

“The increase in foreign holding of Malaysian bonds is in tandem with the improvement in ringgit,” he said. “This is a reflection of better sentiment or higher confidence with our market, especially when investors are in anticipation of gradual increase in US interest rate.”

“When rate hike is gradual, there are still reasons for foreign investors to invest because our yield here is still attractive,” he added.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew was, however, more cautious. He said that while sentiment may be positive for now, it remains to be seen if foreign investors would stay for long.

“It is a cycle. When the US reported slower GDP (gross domestic product) in the first quarter of this year, foreign funds then saw the attractiveness in emerging markets (EMs), because they wanted yield and growth,” he said.

“But in the past, when one EM was not doing well, just like 2014 when EMs like India were having current account deficits, they painted all EMs with the same brush,” he pointed out.

Pong also said Malaysian economic fundamentals are not entirely positive despite improved GDP and export numbers.

“Yes, the GDP is stronger. It was driven by manufacturing, which was because of weaker ringgit. This is not going to be sustainable. Economic growth should not come with currency depreciation, that is weakening purchasing power as well,” he said.

In terms of external trade, Pong said one should not overly focus on the export figure.

“The growth in imports has outpaced exports, is that good news? I doubt so,” he said.

On Monday, the statistics department reported April external trade numbers, showing that on a year-on-year basis, exports expanded 20.6% to RM74 billion from RM61.3 billion, while imports grew 24.7% to RM65.2 billion from RM52.3 billion.