KUALA LUMPUR: Malaysia’s equity market is expected to remain in a consolidation phase for at least until the end of June this year.
According to UOB Asset Management (M) Bhd (UOBAM), the benchmark FBM KLCI will likely be range-bound between 1,650 and 1,700 points over this consolidation phase before the uptrend resumes.
Noting the limited upside to the market, UOBAM chief executive officer Lim Suet Ling says the current FBM KLCI's valuation is not exactly attractive.
“The current market valuation is not ‘extremely cheap’ at about 15 to 16 times (earnings), which is its historical mean valuation,” Lim said.
"The valuation for the index is fair, considering all the noises at the background. We think more clarity is needed before we move out from the consolidation phase," she told reporters during a briefing at the launch of the group’s United-i Global Balanced Fund here yesterday.
Lim said the market’s consolidation would likely last at least until the end of the second quarter of this year.
She said the group presently projects the FBM KLCI to end at 1,750 by the end of 2019.
The market consolidation and volatility aside, Lim said, there are certain sectors that still provides value to investors.
On that note, Lim said her group was “positive” on the the consumer, automotive, technology and manufacturing sectors, while remaining “neutral” on banks, given the slower pace of economic growth.
Lim said her group remained “underweight” on the property, plantation and construction sectors, citing the need for greater clarity on government policies and job contracts, particularly for the construction sector, before a review on its recommendation.
“Sentiment has been weak recently, however, we expect improvements in 2019,” Lim said.
She noted the challenges the local financial market were facing come mainly from external sources, rather than internally generated.
Among the external headwinds to watch out for included the US-China trade war, slowing China growth, upcoming elections in several Asian countries, as well as auto tariffs in Europe.
“Internally, we feel the (new) government is doing its job,” Lim said.
“Malaysia is still in a transition phase. The new government has come in almost one year, and they are cleaning up our fiscal position,” she added.
She viewed the government's move to cancel or renegotiate infrastructure project deals as beneficial for the country’s economy in the medium term.
“When the government tries to adjust/relook at our economy, there will be certain sectors that will be hit. It is unfortunate but the government is just trying to achieve a long term sustainable growth,” Lim explained.
Meanwhile, on the risk of recession, Lim said UOBAM did not expect such scenario to materialise this year. In any case, she said, a recession would only set in by late 2020 or early 2021 if the US yield curve were any indication, as the inversion of the US yield curve had typically been used as a common indicator to predict a recession by about 18 months down the road.
“There has not been a negative inversion yet… the recession check list is not in the warning area but getting closer; hopefully we won’t go into that,” Lim said.
Nevertheless, she said, the group remained cautious, considering the fact that the global economy currently had one of the longest expansion in terms of growth for the last 10 years.
“We are at a late stage of economic cycle. Although we don’t expect a recession, we are cautious that things can go the other way, so we’d rather be conservative in our strategy to make sure our fund can weather through the volatility,” she explained.
Lim said the newly-launched United-i Global Balanced Fund, which is the company’s first Shariah global fund, aimed to help Malaysian investors achieve stable income with lower volatility by investing in a diversified global portfolio of Shariah asset classes.
“The fund’s investments are diversified across Asia, Europe, Middle East and the US. Further diversification is achieved through asset class allocation which ensures that the source of the fund’s returns are not concentrated in one asset class but spread across different classes that exhibit little correlation with each other,” Lim said.
The fund would generally adopt a balanced portfolio between Shariah-compliant equities and sukuk in the ratio 50:50, she said, adding that the sukuk portion would provide stability to the fund, while the equity portion would provide the added return in the rising market.
“Historically, the blend of this 50:50 balanced fund return was between 6% and 9%. We are targeting for a return of about 7% per cent or better over the medium term for this fund,” she said.