Financial Market to remain volatile amid higher COVID-19 cases - BNM

This, it said, could result in cautious investor sentiment on weaker-than-expected corporate earnings and an escalation of trade tensions.

“As at end-August 2020, the non-resident (NR) outflows in the domestic equity market have persisted, amounting to RM20.3 billion (US$1 = RM4.15) on heightened investor concerns over the economic impact of the pandemic,” the central bank said in its Financial Stability Review -- First Half 2020 (1H2020), released today.

The impact on equity prices was, however, offset by a higher participation of domestic retail investors in the equity market and a strong rally in healthcare and technology stocks.

Of note, retail investors drove trading value and volume on the local bourse, overtaking domestic institutional investors, although more recent profit-taking activity since August has led to some price correction.

While market volatility has subsided from the peak observed in March, it remained above levels observed prior to the crisis as markets remain sensitive to newsflow around the COVID-19 pandemic, the escalation of trade tensions and domestic political developments.

As for the domestic bond market, it has experienced a temporary spike in bond yields with 10-year Malaysian Government Securities and 10-year AAA corporate bond yields, rising by 84 basis points (bps) and 59 bps, respectively, amid significant NR outflows (RM22.4 billion or US$5.2 billion) between February and April.

Cumulative NR outflows, which peaked in April 2020, have since reversed to record a RM4.3 billion net inflow until end-August 2020, amid the gradual improvement in global investor sentiment and a continued stable base of NR investors, such as governments and central banks, in the domestic bond market.

BNM said sustained demand by domestic investors for Malaysian government bonds was supported by the bank’s measures to ease liquidity conditions, reflected in the bid-to-cover ratio which averaged at 2.4 times in the first seven months of 2020.

However, auctions for long-term bonds since August saw a slight tapering in demand amid excess supply concerns post-tabling of the COVID-19 stimulus bill.

Among NR investors, demand for Malaysian government bonds began recovering since May, supported by improved market sentiment and the positive yield pickup over US Treasuries.

“As in previous episodes of market stress, the sustained demand from domestic institutional investors, such as banks, non-bank financial institutions, and insurers and takaful operators, continues to play an important role in preserving orderly conditions and providing continued access to credit markets throughout 1H2020.

“Malaysia’s deep and liquid bond market, with support from this diverse investor base, will also lend continued support to orderly market conditions,” BNM said.