PETALING JAYA: Foreign funds may continue to flow out from Malaysian government securities (MGS) in the coming months due to the US Fed’s stance of increasing interest rates, according to Kenanga Research. This follows the RM2.3 billion outflows in July, which could have been triggered by investors’ concern of 1Malaysia Development Bhd’s (1MDB) inability to meet its large debt repayment obligation to its creditor, after smaller outflows of RM300 million in June due to the US Fed rate hike. The worst outflows were recorded in March at RM26.2 billion. “The market is watching closely if 1MDB would be able to meet the Aug 31 extension deadline, in which a default would likely erode investor’s confidence towards Malaysian government securities and exacerbate the risks of capital outflow from Malaysia,” it said in a note yesterday. However, Kenanga Research opined that foreign fund flows are likely to remain stable and manageable, premised on 1MDB’s ability to fully settle its debt obligation to its major creditors. “Only then, we believe that foreign investors will return to focus on Malaysia’s strong fundamentals.” The research house said although for now there seemed to be no imminent threat to major foreign funds outflow given that 1MDB had managed partial settlement of the debt, the market would be extra vigilant and sensitive to any domestic developments related to 1MDB. Nonetheless, it noted that foreign reserves and the ringgit seemed to remain unfazed by bond outflows due to the market reaction on the 1MDB debt repayment issue. As at end-July, Malaysia’s foreign reserves rose US$500 million (RM2.1 billion) to US$99.4 billion (RM426.7 billion). The ringgit has been relatively stable with the US dollar/ringgit trading within a narrow range of 4.26 to 4.30 since end-May. Year-to-date, the ringgit has appreciated 4.3% against the greenback. “This is indicative of the resilience of the financial market despite some concerns of risks of capital outflows. We believe the ringgit strength is increasingly leaning on improving fundamentals. Going forward, this would help support the ringgit to gradually appreciate,” it said, noting that the year-end target for US dollar/ringgit is 4.15. Kenanga Research also pointed out that the recent capital outflows from Malaysian government securities may turn out to be a blessing in disguise, as a high proportion of foreign holdings can pose a threat to the market in the event of a major reversal of foreign funds. However, Bank Negara had said it does not expect much outflows for the rest of the year, with a more sustainable level for foreign shareholding in MGS at between 15% and 20%. Foreign holdings stood at 40.1% as at July 2017. “Thus we believe the mild capital outflows in the past two months (or in the near term) would actually lead to a more balanced composition of holders for Malaysian government securities with more local institutions’ participation,” it added.