MIDF Amanah Asset Management Bhd head of investment Mohamed Sany Mohamed Zainudin believes in value investments in stocks, and as such it should not exclude illiquid stocks.
He believes that if one does not invest in illiquid stocks, then one would be missing out in a whole treasure trove of opportunities, although it is not an easy task.
“Do we find deep value in big cap stocks? A lot of value is in the under researched and undiscovered stocks. Many times, a stock is illiquid because it is in the wrong cycle, legacy issues historically or at its nascent stage of its growth cycle. Do we ignore that stock just because trading is thin? What if it had a structural catalyst that could fast track its growth momentum? Or perhaps the stock is illiquid because it is ahead of its time in terms of an undiscovered gem.
“Even the mid- to big-cap space were once in their business lifespan much smaller than they are today. We have to start from somewhere, right? In MIDF, we don’t mind taking a long positon as far as 18 months lead-up period if the company and sector that it is in meets our investment criteria,” says Sany.
The problem is the investment fraternity nowadays is impatient and only appreciates investments that provides quick returns due to the competitive returns demanded by clients or being promised to them.
Sany oversees some 20 funds totalling RM2.5bil in MIDF Amanah. He became head of investment back in 2013, when some of the funds, in particularly the four equity UT funds were ranked “best from the last position”. Almost three years down the road, and the fund ranking has improved tremendously.
Sany has some 25 years experience in the financial industry including 21 years in fund management. He is also a qualified certified financial planner.
While Sany believes in a bottoms up approach and emphasises on value, it is important that the companies are earnings accretive and gives out dividends in a proper manner. However he feels no man is an island, and thus, the macroeconomic trend of the world has to be taken seriously when stock picking.
However numbers alone cannot tell the story.
“Investing is both a science and art. We use both fundamental and technical analysis. The fundamental analysis alone does not tell the psychological/subjective aspect of the stock, whereas the technical analysis does to some extent,” he says. It provides a guiding light in times of market uncertainties as financial liquidity factors are taken into consideration.
“The numbers are one thing, but we place huge importance on the management of the company. We pay a lot of attention to the psyche of management and how forward thinking they are. We try to read their subconscious behaviour and the consistency of their communication,” says Sany. He has a double major degree in Bachelor of Science (Hons) in Economics-Finance and Business Administration/Management from the University of Southern New Hampshire.
To understand what the market favours and to be able to forecast certain trends, a fund manager needs to first understand the macroeconomic trends of the world, i.e. what makes it tick, according to Sany. What happens in the developed markets (for example the cycles that take place as the economy grows) will eventually happen in the developing world.
“For example, how the ‘Internet of everything (IOE)’ that took place since Apple’s first smartphone was launched has revolutionised the world today. I call it the new order of the world. Things like Enablers and of recent times Disruptors that has changed the landscape of how conventional business is being done. Now we don’t need to boot up the PC to read news. It takes less than 5 seconds with our smartphone,” says Sany.
“The late Steve Jobs said his vision was to have everyone using their smartphones and gadgets 24 hours a day. That is already happening, because Apple is now into wearables, and it’s changing the way things are done in education, healthcare, home security, logistics and the auto sector,” he says.
“Education was previously seen as a very boring business. However, education companies like Sasbadi now produce interactive training tools for teachers and students. In the healthcare sector, the emphasis is more on prevention. Prevention, especially in term of “response time” for emergency cases or critical illnesses can determine life and death. There are now wearables which can assist patients who have diabetes and heart diseases. In the automotive sector, the IOE is seen in sensors and self-driving safety functions for cars,” says Sany.
Sany says companies such as Globetronics Technology Bhd, Inari Amerton, Vitrox Corp Bhd, Prestariang Bhd and KESM Industries Bhd are doing well because they had recognised and embrace IOE at its early phase.
Fed rate & the ringgit
Sany opines that there is a high chance that the Fed may raise interest rates in December and likely surprise the investment world. One of the indicators he looks out for is Bloomberg’s China’s Monetary Conditions Index and HSBC’s China Monetary Conditions Indicator. The Bloomberg indicator has tracked the index positively for the last two consecutive months, while the HSBC indicator has increased to a six-month high in August reinforcing the positive signs/impact of China’s 10-month campaign to relax monetary policy.
Although there are still weaknesses in the US economy, if the indicators continue to be positive for another month, Sany says there is a high chance the economy has built enough momentum to sustain its recovery, and thus the likelihood of the Fed raising interest rates is high. More so now that China has become a prominent bell-weather indicator for US as it is now not only the second-largest importer and exporter, but also the second largest holder of US Treasuries. As such, China’s well-being is good for US, says Sany.
“Contrary to what people think, I don’t think we will see further massive outflow of funds as a result of further strengthening of US dollar. If you look at US history on the past three rate-rise cycles (1994, 1999 and 2004), on average whenever the Fed raises interest rates, the dollar actually weakened in the post-hike period for six months averaging about 6%. In today’s scenario, the dollar is already very strong and its pace of appreciation was very fast. This is hurting its corporate earnings as according to the law of physics, the faster something goes up at an incremental incline, the likelihood of it coming down faster is also probably higher,” he says.
On that note, Sany feels there is a high chance that the ringgit will break below the RM4 level.
“This is because there was a huge gap, when the ringgit did the freefall from RM3.80 to the RM4.20 level. Taking a short position at an incremental level is very costly for speculators and the risk-reward proposition is not in their favour. Hence, we see the volatile trades as short-positions are covered very quickly,” he says.
Earlier this year, China has changed its emphasis from being an export driven country to one that is growing its domestic demand.
China has its own “quantitative easing” but the stimulus is more inward. The stimulus is addressing China’s own issues, for example their property sector and domestic consumption. The results are starting to show, as seen in the improving property prices.
“People are used to hearing China growing at double digit growth rates. First at 12%, then at 10% gross domestic product. So when suddenly we hear they are growing at 7%, we think they are slowing down and that its very bad,”
“Look at the US, They’ve always registered growth of below 5% simply because their economy is huge and the base is big. So if China can register 6%-6.5%, it is still very good growth. The world economy is not going to topple because China is growing at a slower pace,” he says.
Sany says the world today is relatively better off than it was a year ago. As a “reality check”, now the world has the US, which is the one bright spot for the world. Last year we had nothing. Europe was in shambles in particular Greece. Europe is recovering, and now nobody talks about Greece anymore. China’s slowdown is also gradually being priced into the market.
While it’s true that the Dow Jones is toppish, the US presidential race may see equity markets stay buoyant, especially corporate earnings and the Fed rate policy being aligned.
Similarly in Malaysia, there is now an “invisible floor” on the market’s downside thanks in part to the perception that Valuecap will move into the market when values are relatively cheaper.
Sany says he is comfortable with the country’s expected growth of 4% to 5%. It is still a decent growth given the current global economic conditions. He is positive on the market and sees pockets of opportunities, especially among the small to mid-cap space.
He believes that when people are too close to the noises, sometimes they cannot assess a situation objectively and their judgements are clouded.
He says Malaysia is undergoing a structural change. It is transforming to a services-centric nation, whereby the GDP contribution will eventually far exceeds the rest.
The IOE is changing the way we do things and assisting us to reach this goal. He says that for those that do not embrace this new change, they will be left behind.
“Malaysia has a lot of good things going on. We have the infrastructure, policies and stability. Foreigners like what we are doing, for example, the removal of subsidies and the increase in toll rates. The increase of minimum wages is another good move which will improve productivity of the country. Once upon a time Malaysia had cheap labour. Now with the minimum wage requirement, companies have to pay their labour higher. Apart from increasing the productivity of the worker, they are now force to invest in automation to improve efficiencies and in turn bottom line, if they want to survive and compete successfully in their business,” he says.
“From a fund manager’s perspective, I am definitely optimistic. Although a much challenging proposition, we will continue to emphasise on the small to mid caps as part of our investment strategy to enhance value and returns to our investors because that is where the growth is,” he says. “Value is value regardless of its market capitalisation size.