KUALA LUMPUR: The recent risk off market sentiment in China associated with regulatory tightening in specific sectors, slowdown in credit growth, and downside surprises of macro data, is positive for capital flows to the Malaysian equity market in the near-term, RHB Global Economics and Market Strategy said.

       “The recent domestic political developments in Malaysia do not significantly impact these capital flow dynamics since we expect Malaysia 5YR CDS to temporarily hit around 52-53 and then retrace quickly as the new administration forms the government.

       “In Malaysia, we expect broad policy continuity, the sound institutional framework within the various government ministries to remain, and social unrest to be limited as the new administration takes over,” it said.

       RHB Global Economics and Market Strategy issued the strategy report following news of further fiscal stimulus in China potentially being announced in the near-term.

       “We anticipate further external risks impacting risk sentiment in China’s financial markets in 2H21. Risk sentiment will remain weak in China’s financial markets in the next few months.

       “These external risks include the US and potentially other developed markets orating a larger set of Chinese companies not being able to list in their domestic stock markets, further trade frictions related to technology imports from China, and potential frictions between the US, China, and Russia on a resolution of political instability in Afghanistan,” it said.

       On average, risk off sentiment in China leads to the switch trade from the mainland to Indian equity market. Hong Kong, South Korea and Taiwan suffer negatively from this switch trade via net capital outflows from the equity market.

       RHB Global Economics and Market Strategy said the next level of impact is capital outflows from Singapore and inflows to Malaysia along with some other Southeast Asian equity markets, with varying degrees of intensity.

       It believes international investor sentiment towards Malaysia, from a tactical perspective, is turning towards allocating capital to the equity market and away from the local currency government bond market.

       It explained deteriorating risk sentiment in China’s financial market along with much of the bad news priced into sentiment in the domestic equity market seems to be driving net capital inflows to equities and out of bonds in Malaysia.

       It said there seems to be a rebalancing of portfolios among international investors.

       The Malaysian bond market is also being impacted by outflows from emerging market (EM) bonds and higher local currency bond issuance risks.

       As for the US$-ringgit, RHB Global Economics and Market Strategy said there should be some short-term stability around 4.20 to 4.25 before retracing upwards to its 1Q22 target of 4.30.

       “Should we go short on the US$-ringgit soon on a tactical basis? Perhaps, but we await the dust to settle on the political and DXY index front, for example, patience is a virtue,” it said.