TEE LIN SAY of StarBizWeek caught up with RHB Asset MAnagement Sdn Bhd managing director Eliza Ong who gave her views on the market, the economy and how RHB Asset Management does its stockpicking.
What are the main trends or changes you foresee happening in the world economy over the next 5 to 10 years.
Eliza: Economy wise, the world will enter a phase of moderate growth as economies go through structural rebalancing. Supported by loose monetary condition, we are likely to see further attempts by the central banks and governments to stimulate growth especially in Asia. China’s big plans in One Belt One Road and establishment of Asian Infrastructure Investment Bank are not just critical for the country’s long-term plan of economic reform, but also crucial for the structural growth in the region as well.
Technology advancement and Internet connectivity would be another major trend that is changing the overall market landscape in a very swift manner. Most sectors would trend towards two distinct directions – one would be those who are able to scale up with technology but command low margins, and the other one would be those with the ability to earn higher margins by offering niche capabilities and services.
Trends technology wise?
Other trends that we foresee happening will be in the area of biotech and healthcare, where more breakthroughs will take place in finding new cures for diseases such as cancer and infectious diseases. New vaccinations will also be available for a wide range of diseases and ailments we face today. Eco-tourism will be a new trend amongst the younger generation, to go back to nature and be closer to mother earth. Organic food and non-process food will change the way people live their lives, leaning towards alternative medicine to promote one’s well-being to curb stress and the hectic lifestyles of today. Finally, cost of doing business will also increase with increase regulations in the areas of risk management and compliance.
With those trends in mind, how will Asean fare, and would you still be bullish on Asean?
Overall, we see that Asia and especially Asean will emerge as the region with relatively stronger growth than the rest of the world in the next 5 to 10 years. Asean with the
structural advantage in demographics will emerge as the complimentary piece to China’s evolvement into a giant consumption economy. Adding on to the commitments by the governments in Asia towards infrastructure development, the region will feature prominently as the place for equity investments.
And under those circumstances, are you buying more stocks now?
Market could be volatile in the initial stage as economies endure structural reforms. We believe that stock picking and entry point are crucial at this stage, and we would be very selective especially to avoid sectors which are prone to excessively high expectation and valuations.
Contrarian opportunities could emerge in the medium term when bullish expectations turn pessimistic.
On investing in newer companies, how do you choose winners?
Choosing long term winners requires identifying companies that are able to maintain an extended business up-cycle. Management’s strategic direction and execution will be crucial and so is the ability to change and adapt to the rapidly changing business environment.
Companies with strong R&D and innovation capabilities is also a strong edge. Recognising the structural and transitory factors helps to identify long term or short term investments at good value.
What are the indicators that you look at, in guiding your decisions on the market? Why do you look at those indicators?
Macro indicators are important because market sentiment is broadly tied to the domestic economic outlook and external risk factors. US monetary policy is also important due to the significance of foreign investors in the domestic government bond market. The flows of these foreign investors sway the exchange rate and influence other parts of the economy.
Historically, domestic equity and bond markets have displayed substantial correlation to the currency due to the size of foreign portfolio flows. Inflation would be a key indicator as well, as market with controlled inflation will be attractive to investors in a relatively subdued growth environment.
What are the sectors that you are putting your money into?
Consumption driven sectors because they have a structural driver coming from the region’s rising income level. Infrastructure related companies because more projects are coming into the pipeline, and selective discretionary stocks.
In the medium to long term, we favour New Economy related companies, such as technology, internet, new energy and biotech companies.
Do you feel that the start of an interest rate hike cycle will in fact fuel up stock markets?
The interest rate upcycle in the US should lead to better allocation of resources to investment opportunities that meet a higher cost of capital. This should lead to higher returns in the medium to long term.
The US has predictable election cycles. In fact, by the third year of an election cycle, political aversion reduces because all onerous legislation have been imposed before the mid-terms. Hence, can we expect 2016 to be an especially good year for the market?
The eighth year of a presidential term is bearish for stocks, with previous cycles suggesting that April and September are normally the peaks for the year. Together with the current overbought position of the market, it would suggest that now is a good time to adopt a defensive stance for US equities.
Could we have your opinion on oil prices?
There is nothing in the oil market to change our expectation that the price of oil will continue to be lower for longer. After the failure of the Doha meeting on April 17th, we think that the oil market will remain in an oversupplied disequilibrium. As Saudi Arabia has decided to continue its market share war, we think that the recent rebound built on hope of a supply freeze has ended.
The recent developments on the demand side are not conclusive of the end of the bear market for oil either. For the time being, supply is at best stabilising as US production has weakened and demand growth has started to decelerate. We expect prices to average around US$30 per barrel over the 2016 to 2018 period.
In the coming months, we could see further pressures on oil prices and cannot rule out Brent and WTI to trade in the low US$20 per barrel in the second half of 2016 once the US dollar resumes its uptrend.
Moreover, we think that the market has focused recently too much on the supply side of the equation. Demand is critical for timing the recovery. As demand has shown signs of weakness recently and with supply not adjusting as fast as expected, we think that investors should be ready for a longer low oil price environment.
While we cannot rule out technical rebound from time to time, we remain bearish on oil, as any rebound particularly in WTI will incentivise US light oil producers to keep rigs up and running, and allow them to hedge forward production at favourable levels.
Demand-side shocks, such as China aggressively increasing fiscal stimulus, or money supply to avoid a hard landing in its economy, represent a risk to our bearish view.
What are the markets you would be focusing on this year and why?
Despite the uncertainties stemming out from the structural reforms, we are positive on China with its undemanding valuation and the recent strong economic data showing signs of cyclical upturn.
Taiwan, having high free cash flow and dividend yields, could also benefit from a cyclical upturn given its technology-heavy nature. In Asean, Indonesia and the Philippines are structurally attractive, and Malaysia could see emerging of values as most negative factors are already priced in.