Foreign fund outflows to persist but likely to lessen

14 Feb 2019 / 11:40 H.

PETALING JAYA: Foreign fund outflows are expected to persist but likely lesser, despite ringgit’s appreciation and ample foreign reserves, as external uncertainties continue to pose risk to domestic financial market and economic growth, according to Kenanga Research.

“On the trade war front, tensions persist, though we remain cautiously optimistic on the outcome of the US and China trade negotiations which would be due by March 1,” the research house said in a note yesterday.

Kenanga Research highlighted that China economic slowdown appears to be more concerning, fears over eurozone economic slump becoming increasingly evident with Italy falling into another recession while Germany’s economy is weakening as the global trade slowdown is affecting its exports.

Additionally, it said the US Federal Reserve is taking a less hawkish stance this year, with fewer or no rate hike expected.

“Against this backdrop, we do not discount a trend reversal to happen but due to uncertainties, we still expect outflow of hot money to persist but likely lesser,” it noted.

As at Jan 31, 2019, Bank Negara Malaysia (BNM) foreign international reserves increased by US$ 0.7 billion or 0.7% month-on-month (m-o-m) to US$102.1 billion, after it fell by US$0.6 billion in December last year.

In ringgit terms, the value of forex reserves increased by 0.7% m-o-m, adding RM2.8 billion to RM422.3 billion as at end January from RM419.5 billion in December.

In January, the ringgit was traded at an average of RM4.12 against the US dollar versus RM4.17 in the preceding month, appreciating as much as 1.3% m-o-m, marking its second month of appreciation primarily due to weakening of US dollar.

On the ringgit outlook, Kenanga Research expects its recent pick-up may have legs and test the 4.05 level against the US dollar in the near term.

“However, we still maintain our USDMYR year-end forecast of 4.10 on the back of weaker global economic growth and the natural tendency for global capital to flee to safe haven assets mainly US Treasuries,” it added.

The ringgit appreciated 0.26% to 4.0680 against the greenback as at 5pm yesterday.

Meanwhile, Kenanga Research maintains its view that BNM would hold the overnight policy rate (OPR) at 3.25% this year as domestic indicators are pointing towards growth moderation and inflation is expected to remain subdued on the back of weaker global oil prices and demand.

However, it anticipates that the central bank would gradually turn dovish and may not hesitate to cut interest rates if there are signs that external factors increasingly threaten domestic growth.

“The probability for that to happen is low for now as overall domestic fundamentals remain intact underpinned by low unemployment rate (Dec: 3.3%), decent current account surplus, a benign inflation, along with ample liquidity in the financial market. “

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