Equities said to be trading at low valuations
JASON Chong Soon Min of Manulife Asset Management Services Bhd (MAMSB) is no stranger to the financial services and investment industry.
While he has been chief executive officer of MAMSB for almost two years. the market is familiar with Chong’s solid style of investing and analysis. He has always been known as one of the better analysts and fund managers. Chong has been in the industry for some three decades now.
Chong joined the company in 2010 and was appointed a director in 2012. In his time with Manulife, he has led the asset management organisation including the equity, fixed income and multi-asset as well as other business functions such as operations, compliance and product development investment teams.
Prior to joining Manulife, Chong was the chief investment officer (CIO) of a local-foreign bank-backed joint venture AMCO, where he managed about RM5bil worth of domestic and regional equity and fixed income funds.
During this period, funds under his management outperformed for three consecutive years, winning numerous awards.
Before joining the fund management industry, Chong spent 14 years as an investment analyst in Malaysia covering local and foreign equities.
Chong holds a Bachelor degree in economics and finance from the University of Southern New Hampshire, United States. He also holds a capital markets and services representative licence in fund management.
Meanwhile, MAMSB is a wholly-owned subsidiary of Manulife Holdings Bhd , listed on Bursa Malaysia which is majority owned by Canada-based Manulife Financial Corp.
Other subsidiaries under Manulife are Manulife Insurance Bhd and Manulife Insurance Labuan Ltd.
MAMSB offers a comprehensive range of 48 unit trust and PRS funds in the asset classes of equity, fixed income and money market.
Having been in the financial services and investment industry for over three decades, what do you think is your greatest strength or niche?
Having been in the investment industry for the last three decades, I don’t think I can synthesise my strength to one particular attribute. I would rather share with you the experience I have learnt at different stages of my career. I started as an equity analyst, then a fund manager, CIO and now CEO.
This career progression has taught me to first appreciate the need to understand the fundamentals, identifying values, being decisive and having conviction in your calls.
While these traits helped me to become a more effective fund manager, being CIO and CEO taught me the importance to put customers first, being truthful and working together as a team to deliver the best outcome for our customers, shareholders and colleagues.
We are coming from a poor 2018. Most people have lost money. How would you be positioning yourself or your fund?
It won’t be fair and accurate for me to come up with a conclusive response on how we’re positioning our funds given the variety of our offerings in terms of asset classes and markets invested. To help you better understand, I’d want to spend a little time providing an overview of MAMSB and its evolution over the past couple of years.
As the Malaysian arm of Manulife’s wealth and asset management division, MAMSB brings together the best of two strengths – fund distribution and investment expertise. MAMSB has always been known as more than a typical asset management company where investment expertise is of paramount focus, we also boast of a distribution network of over 2,300 advisers in Malaysia.
In line with Manulife’s integration of wealth distribution business and the asset management operation in Asia that was set in motion about three years ago, MAMSB has expanded significantly in the bank partnership distribution channel, the sales of which is fast catching up with that of our captive advisor network.
Combining the two channels, the compounded annual growth rate of our unit trust asset under management over the past five years reached 59%. We have also enhanced our adviser channel, almost doubling it over the past five years.
But numbers don’t tell the full story. By combining our expertise and experience in both investment and distribution, we customise multi-faceted, outcome-oriented solutions that address each and every of our client’s needs. Today, we offer 47 onshore and offshore mutual fund products in Malaysia for our customers to choose from.
Do you see this as an opportunity for a better 2019? What is your outlook?
In terms of 2019 outlook, we should remember that 2018 started on a wave of optimism over prospects for synchronised global growth. However, it turned out to be one of divergent trends and increased geopolitical and economic uncertainty, which weighed heavily on financial markets. For 2019, it’s a different story in the sense that we are coming into the year with a low base.
In 2019, we expect a moderate and more balanced global growth, which will reduce worries over inflation and interest rates, and put less pressure on bond markets. We think central banks will not deliberately trigger recessions as long as inflation remains well behaved. Meanwhile, the US dollar is peaking and could begin its descent in the course of the year, which could provide an important tailwind for emerging markets.
The gradual progress in trade negotiations between China and the United States is a hopeful sign. We could see economic growth in major regions re-converge at moderately lower levels that would make the continuation of that growth more sustainable. Moderate, better balanced global growth will reduce concerns on inflation and interest rates, which will put less pressure on bond markets and allow equity markets to recover from last year’s selldown.
Globally we had trade war worries and fears of an impending recession in the United States. Does this worry you or do you feel it is more or less priced in?
“Going along very well” was the headline of the week by President Donald Trump on US-China negotiation. This may signal a reduction in trade friction between the world’s two largest economies. A long-term solution will still depend on some fundamental reforms from China in areas that, aside from trade and tariffs, include industrial policy, security threats and external influence.
The Trump administration, Congress and US business are all united on the key issues that China needs to address and the US negotiating team will insist on meaningful targets, dates, and verification for what is agreed in the next three months.
China is prepared to put quite a lot on the table immediately and with mounting pressures from a slowing economy, is anxious to bring the trade war to a close. A trade deal would be an obvious catalyst for a rally in global equities in the first quarter of 2019.
The potential support is greatest for China equities, whose valuations could recover significantly if domestic investor sentiment improves. Chinese stocks have fallen around 20% in 2018, to a large extent due to valuation compression from the twin headwinds of financial deleveraging and the trade friction.
On the US economy, our view is clear that US is entering a late cycle, but there is no immediate threat of recession. The current majority consensus is that we are in the mature (or late) stage of this business cycle. A record 85% of fund managers say the global economy is in the late cycle, 11% above the previous all-time high in December 2007. Yet most recession gauges are not even flashing amber.
Despite the current media preoccupation with recession, we think it is too early to worry about the end of this cycle. The term “late-cycle” really should describe a particular state or condition of the economy, not a calendar period. It can easily last for a number of years, and in the past has delivered lower but positive real returns to investors.
It has taken the United States 10 years to catch up with the losses from the 2008 Global Financial Crisis. Thus, we view the United States as only just entering the “late cycle” phase, which poses no immediate threat to investors.
Do you feel this is an opportune time to buy, particularly in Malaysia? Have valuations fallen to more palatable levels?
Yes, we think it is time to accumulate or average down for those that bought last year. But first and foremost we should be selectively picking stocks based on valuations. Malaysian equities are currently trading at about 24% below their historical price-to-book value, and such valuations are unlikely to persist amid the existing currency market dynamics. While the US dollar appears to have peaked, funds may start flowing back into the Asian region.
Also, markets tend to react positively over the long term on newly-elected leaders, and we expect this to be the same for Malaysia should the new government continue to deliver on its promises.
On that note, which sectors/asset class do you see opportunities in? What would you ask your investors to buy now?
It is difficult to identify specific sectors we think will outperform under current market environment. Instead, we focus on bottom-up research to look for values across all sectors.
Over the next one year, what are some of the concerns or risks that investors should watch out for?
Geo-political risks still exist and could affect economies. The potential for trade disruptions between the United States and China, despite signs of moderating, still cannot be ignored. The greatest threat to Chinese growth is an escalation of the trade war. If the trade war did escalate further, the United States could impose tariffs on more China imports, which would have a material impact on Chinese economic growth.
Additional tariffs could also push inflation in the United States up since they also eat into corporate margins; firms are unlikely to pass the entire cost of tariffs on to the end-user in the form of price hikes as they try to protect their market share. Corporate margins could also dwindle as companies re-route their global supply chains to circumvent tariffs.
Trade tensions also pose a significant risk to European growth prospects in 2019. The eurozone in aggregate has seen growth decelerate significantly from the heady days of late 2017. In the absence of fiscal stimulus measures, Europe was always likely to see economic growth converge with potential GDP growth of around 1.5%.
Furthermore, there are divisions within Europe that can threaten growth. The Italian government has adopted a confrontational stance with Brussels over its budget deficit, which the former would like to expand in flagrant neglect of the eurozone’s fiscal rules.
Another key division within Europe is between the United Kingdom and the European Union. Given the fluidity of the situation, there’s no telling what could happen next.
Anticipation of easing
Last month, the Fed issued guidance on its balance sheet unwinding plans, which some believe reflects a newfound willingness to pause. The number of interest rate hikes will also be reduced. Do you see this as an additional fuel for this decade-long bull run to continue?
Market expectations in 2019 will switch from “fears of tightening” to “anticipation of easing” in 2020. This should provide support to stock markets while also removing significant further appreciation pressure on the US dollar which we think is currently close to its peak and will begin a structural descent some time in 2019, providing a welcome tailwind for emerging markets.
It is also clear the Fed is at the end of its tightening cycle as global central banks prepare for a particularly difficult US and global slowdown into 2020. That could keep markets from being too exuberant, and continue to make global bonds attractive over the next 12 to 24 months.
Earnings in the United States has been very strong. Coupled with an election year in 2020, are you positive on the US economy?
As 2019 begins, the US economy should be moving ahead at a “normal” rate of roughly 2% to 3% growth. Unemployment stands at multi decade lows, and wage growth could remain healthy.
Interest rates will likely be climbing at the gradual pace to which markets have become accustomed over the past two-plus years, and consumer and business confidence may remain close to multi decade highs. While US corporate earnings may experience slower year-over-year growth in 2019, we think they’ll be climbing at healthy rates, with lower taxes and lighter regulation continuing to boost prospects across a number of sectors.
Inflation should hew closely to the US Federal Reserve’s target level of 2%, especially if commodity prices remain in check.
We think these conditions, while tempered in strength relative to recent history, will still be powerful tailwinds to the US market.
In your interaction with your clients, what is the mood like? Are they becoming more cautious and risk averse or has the appetite for more risk and growth now increased?
It is still early days in 2019 and I think investors’ sentiment will continue to return for the reasons I talked about. One thing I can say is the Malaysian investors are getting increasingly more mature and sophisticated by the day. They crave choice and demand solutions that can truly address their investment needs.