KUALA LUMPUR: UOB Global Economics & Markets Research today said it continues to expect a bumpy path for capital flows into Malaysia after it saw a reversal of flows in June, and posted a net outflow of capital of RM700 million.
UOB expects it to continue to be an uneven ride for capital flows given uncertainties surrounding the US Fed rate path, geopolitical tensions in the Middle East and China's economic recovery pace.
Uncertainties in industrial policies also persist, particularly when the US presidential election is getting closer.
In June, Malaysia saw a reversal of flows, posting a net outflow of RM700 million, compared with a net inflow of RM700 million in May.
UOB senior economist Julia Goh and economist Loke Siew Ting said their base case remains that gradual softening of inflation will provide the US Fed enough confidence to start its gradual rate cuts from September 2024 and into 2025.
The Chinese authorities have introduced various stimulus measures to strengthen the economy while investors are also looking forward to more targeted stimulus and concrete plans to stabilise growth and the economy at the upcoming Third Plenum in mid-Jul.
They said ongoing wars point to persistent Red Sea Crisis and disruption to shipping across the world's key maritime choke points, which will keep shipping costs high and complicate the fight against inflation.
For Malaysia, Goh and Loke said capital flows in June were weighed by selling pressures across both Malaysian debt securities and equity markets.
Debt securities registered a net ouflow of RM600 million for June, compared with a RM5.5 billion net inflow in May, while the equity market saw net outflows of RM100 million, compared with a net inflow of RM1.5 billion in May.
However, UOB said foreign portfolio flows continued to record a cumulative inflow of RM5.5 billion in the second quarter of 2024 compared with a net outflow of RM5.5 billion in the first quarter of 2024.
It was underpinned by positive momentum in both debt securities, inflow of RM5.5 billion, and equity, inflow of RM13 million, markets during the quarter.
This resulted in a marginal foreign portfolio inflow of RM10 million in the first six months of 2024 (January-June 2023: +RM17 billion) with debt inflows (+RM87 million) cushioning the equity outflows (-RM86 milion).
Meanwhile, foreign ownership of Malaysian equities stood at 19.5 per centof total market capitalisation in June, a tad lower than the 19.6 per cent recorded in May.
UOB said notwithstanding a reversal in foreign portfolio flows last month, Bank Negara Malaysia (BNM)'s foreign reserves rose for the second straight month by US$200 milion month-on-month to US$113.8 billion as of end-June (end-May: US$80 million month-on-month to US$113.6 billion).
"This reflects persistent trade surplus and investments inflows in the month. It also resulted in a cumulative increase of US$300 million in foreign reserves for the past six months of 2024 (January-June 2023: -US$3.2 billion)," UOB said.
Goh and Loke expect ringgit to recover at a measured pace to the dollar to 4.65 in the third quarter of 2024 (3Q24) and 4.60 in 4Q24, from last Friday's closing of 4.7087 (end-June: 4.7175, end-2023: 4.5940).
Key data/events to watch for Malaysia in the coming month include the outcome of the fourth monetary policy committee meeting (July 11), Jun external trade numbers (July 18), advance estimate of 2Q24 GDP (July 19) and Jun inflation readings (July 24).