Door opening in emerging markets

Anthony Ho, Chief Investment Officer Asia ex-Japan Equities and Deputy Chief Executive Officer of Amundi Hong Kong Limited.

AS THERE are many signs pointing to a recovery in the market, maybe it is time to look for investment opportunities in the emerging markets.

Although nobody can predict how low the market can go, historical data shows that the market will work its way up between one and two quarters every time it touches below its historical average, according to Anthony Ho (pic), chief investment officer, Asia ex-Japan equities, and deputy chief executive officer of Amundi Hong Kong Ltd.

He says that in the past 15 years, there have been four occasions when the market hit below the mean or when the market was oversold. They were in 2000, 2002/03, 2004 and 2008/09.

During the global financial crisis of 2008/09, the FTSE Bursa Malaysia KL Composite Index or FBM KLCI fell almost 40% to trade below 1,000 points.

“Currently, since January, we are on the fifth occasion trading at that low valuation environment in Asia,” Ho tells StarBizWeek.

“In those four past occasions, the duration of the low valuation only lasted for one to two quarters.

“At that point in time, people saw a huge market inefficiency, so it was priced in at a very distressed level because everyone was panicky and everything was oversold. We are almost at that level,” he adds.

While Ho believes that the market will continue to remain volatile in the next one to two years, he feels that at the current market valuation of Asia-ex Japan, there are pockets of opportunity.

For a start, he says the market of Asia-ex Japan is trading at between 10 and 11 times the price-earning (PE) multiple valuation, and that the market has already pricing in about 80%-90% of negative assumption.

“If you are a long-term investor, whenever there is this kind of correction, you would start looking at the market,” he says.

Secondly, although the huge decline in the currencies of the emerging markets in Asia has been a painful period, Ho says equities and other asset classes in the emerging market have become more attractive due to the currency weakness.

At the current market, more investors are seeking for dividend-yield types of assets in this part of the world instead of being driven by PE due to volatility in capital inflows and outflows.

“There is a relative attractiveness in this region. One is a dividend yield play and the second is potential capital appreciation,” he says.

Nonetheless, he says investors’ approach in the emerging market would still be dependent on currency and commodity volatility.

However, he does not expect the emerging market currencies to go through another massive decline this year.

For this year, Ho says the theme for the emerging market currencies in Asia is stabilisation.

“Last year, there was a big correction in the ringgit and some other South-East Asian currencies, and this year is the year of stabilisation for currecies

“If there is an adjustment on currencies, it’s going to be single digit this year compared to last year,” he says.

For Malaysia, like the rest of the other emerging markets in Asia, Ho says that the massive ringgit depreciation previously has made the country more attractive as an investment destination.

However, he points out that being a net commodity exporter is one of the main headwinds for Malaysia compared to other countries in the region.

Notably, Malaysia and Indonesia are net commodity exporters, while the rest of the region are net importers of commodities, who are benefitting from lower commodity prices.

“The low commodity prices have already been priced in at this current level. However, there is also a probability that commodity prices could go even lower from the current level, which has not yet been priced in at the current valuation,” Ho says.

While Malaysia’s market is trading at 13-14 times the PE multiple valuation, the average bull market for Malaysia is about 19-20 times PE.

“Currently, the Malaysian market is trading at the lower range valuation. While, no one will know when there will be a peak in the bull market, there is a lot of upside from here,” Ho says.

Ho has a more positive view on the equities market compared to fixed income for this year due to the low interest rate environment in several developed economies around the world.

“Most people would agree that fixed-income instruments as an asset class are not cheap because of low yields. But why do people still buy it? This is because it is perceived as a low-volatility instrument and chances of losing capital are low.

“That is what is driving the fixed-income market at the current low rates,” he says.

Ho says that the low interest rate environment will stay between one and three years, and would drive investors to look at the equities market.

“We are definitely almost at the peak of the cycle for fixed income, because fixed income has done so well, yields are already at historical lows.

“Whereas for equities, after a sharp correction, we would probably see stabilisation in 2016 and hopefully the beginning of an upcycle for equities,” he says.

“We may see the kind of expensive or close-to-peak cycle for fixed-income instruments staying a little bit longer. It is not going to correct anytime soon,” he says.

“That is why from the investment perspective, there will be money-shifting opportunities from fixed income to equities due to negative or low real interest rates. Long-term investors would start looking at the stock market.”