Surviving an uncertain investment climate

  • Corporate News
  • Saturday, 04 Jan 2020

The new year has arrived and fund managers are gearing up strategies to outperform a volatile and uncertain investing climate.

The uncertainty about Malaysia’s leadership transition, ongoing trade war between the United States and China, global recession fears and the upcoming US Presidential elections are some of the risks that could affect the performance of the stock market in 2020.

Coming from a perspective where Malaysian equities have been listless over the last three years, fund managers tell StarBizWeek how they plan their portfolios to thrive this year.

Below are five key questions we ask fund managers:

Anthony Siau

Managing partner

Kairos Capital, Singapore

What ails Bursa Malaysia? Is the transition of power the only concern? How should Malaysian investors position themselves to weather this uncertain political climate?

Bursa Malaysia is one of the worst performing bourses in Asia for the final year of the decade, is it dawn before the storm as predicted by many people. I prefer to look at 2019 as the dark period before the dawn in 2020.

Malaysia went through a political tsunami in 2018. The initial euphoria has subsided and the not-so-new government is struggling to manage the country in line with the rakyat’s expectation. Is this a case of unmet expectations or unreal expectations?

The transition of power isn’t the only thing ailing our market. Bursa Malaysia, after years of cronyism, is undergoing a transformation under the new leaderships of both the Securities Commission and Bursa Malaysia. To be fair, it is not an easy task to revamp long-standing dated structures and practices. It was only 18 months ago that the political tsunami happened.

While the regulators are trying to introduce guidelines that are in line with other jurisdictions, they need to assess the suitability and practicality, taking into consideration the background of our equity market, which is very different despite the similarities.

It takes time but at least the wheels are now set in motion.

Despite the underwhelming performance of the local bourse, there are still pockets of opportunities to invest in the stock market besides the improving bond market.

Outside of Malaysia, there are many bourses that are doing very well, perhaps it’s time to diversify out of Malaysia for those who haven’t done so.

For the more sophisticated investors, there is this ever-growing asset class called private equity, which is consistently the top performing asset class over the past few years, in terms of total returns and assets under management.

The recent flurry of unicorn IPOs have also enlightened the investing public on the potential of the private market, which was once the playground exclusively for the rich and famous.

It is now available to all who are able to understand the risk.

All is not lost and the once fading tiger of Asia is starting to gain momentum reminiscent of the force we used to be many years ago.

I believed that under the current prime minister’s astute leadership, he has no choice but to be tough and ruthless, as there are so many things that require undoing.

With the base set, the incoming prime minister will need to be charismatic to manoeuvre the economy to its former greatness.

Malaysia will attain a developed nation’s status, which will mean a stronger and more robust capital market for investors.

Avinash Satwalekar

Country head Malaysia and CEO

Franklin Templeton Malaysia

Will 2020 be a recession year? Will we see the long-awaited bear market, especially after the US elections?

At the start of 2019, there was a high level of expected volatility as a number of issues had investors concerned such as Brexit, US-China trade dispute, as well as other tensions globally.

However, the economic data proved to be less volatile leading the markets to continue their march up-and-to-the-right. The United States continued its leadership as the market of choice with the equity markets reaching new gravity-defying highs.

As we look to the future, it is incredibly important to focus on the numbers rather than the rhetoric and noise that has unfortunately become commonplace.

We continue to believe that the markets will move periodically from euphoria to panic, and in a fairly rapid fashion.

In our view, this creates an investment environment that is conducive to active portfolio management. We do not see a global recession looming and there are plenty of reasons to remain invested.

Consider these points:

> The bull market in equities has been the most unloved, however, economic data continues to display resiliency, especially in the United States with a potential recovery in Europe.

> US business sentiment has weakened, however, we have seen a similar level of pessimism in 2015-2016, when the US consumer kept the economy growing leading to a sharp rebound in business confidence at end-2016.

> “Don’t fight the Fed”: Will 2020 be the year that the adage is proven wrong? The US Federal Reserve has become increasingly dovish, which will continue to provide a bid for risky assets.

> Value investing in equities has had a challenging time for over a decade, the longest period of underperformance compared with growth. We believe there are a number of reasons to expect a change in the value against growth performance.

> Emerging markets are trading below their long-term average discount to developed markets, despite improving cash flows, dividend pay-out ratios, and corporate deleveraging.

Thus, although uncertainties remain, we have a cautiously optimistic outlook for 2020. It is important to focus on hard data and not just headlines.

Investors should be selective and – not complacent – amid a changing market landscape by focusing on allocations that can provide true diversification against highly-correlated risks across the asset classes.

For our portfolios, we are looking for innovative companies within their respective industries and also see potential in out-of-favour value stocks.

Although many investors have spent 2019 worried that the global equity bull market was nearing an end, we believe that global equities can remain an appealing asset class in 2020.

Tutiana JusatTutiana JusatAndrew SanAndrew San

Tutiana Jusat

Chief investment officer Malaysia fixed income and global sukuk, Amundi Malaysia and

Andrew San

Head of equities Amundi Malaysia

How will the trade war continue to impact world markets? Has it been priced into the market? From a Malaysian perspective, how should investors position themselves?

TUTIANA: Global economic outlook remains weak with accommodative central banks and political uncertainty weighing on trade, capital expenditure spending and manufacturing activity.

The global reassessment of trade dynamics impacts countries differently. European exports have been hit by generally weak intra-EU demand and the declining demand for intermediate and capital goods extra-EU (especially Italy and Germany). The United States is persistently advancing on the path of imports substitution.

Emerging markets are trying to transform the challenges posed by the trade tensions into opportunities. Trends are emerging for the two championed winners of the trade war, where Vietnam is benefiting from small business relocation from China, while Mexico is benefiting from imports diversion by the United States.

Malaysia has also benefited from the trade war as we are seeing a pick-up in foreign direct investment from both Western and Chinese MNCs setting up operations here.

The likelihood of a global trade agreement is very low, affecting business confidence, while manufacturing has yet to bottom out and profit deterioration continues.

In the bond markets globally, the search for yield has pulled institutional investors in a low rate environment towards credit risk accumulation.

In the ringgit space, new issuances in government bonds are expected to match the same quantum as in 2019 of around RM115bil given the fiscal deficit target of 3.2%.

The markets are pricing in an accommodative stance from Bank Negara with room for yields to compress given the lack of supply in jumbo corporate bond issuances.

Therefore bond investors can still benefit from a long duration positioning while being tactical on government bonds and selective credits.

SAN: Given external vulnerabilities and headwinds, ample local liquidity is expected to support foreign capital outflows as domestic demand is still strong.On the domestic equities front, we view that the trade war will continue to have an impact where its effects are being felt beyond only import and export sectors.

We see the weak consumer and business sentiment, partly as a result of the trade war, has filtered into declining domestic consumption, investments and loan growth, affecting the market as a whole.

Such challenging conditions are expected to continue as sentiment remains weak and as we see the doctrine of trade weaponisation beginning to be adopted by other countries as well (for example recent Indian imports of Malaysian palm oil), further adding to the uncertain environment. We believe that such downside risk is not fully-factored into the market.

Nevertheless, we see pockets of opportunities that are consistent with our philosophy of investing in quality growth companies at reasonable valuations.

A key theme going forward is our focus on “niche” companies that are strong operators within their targeted sub-sectors.

They include small and mid-sized banks (rather than large cap players), telco fibre owners (vs wireless operators), oil and gas asset owners (vs service providers), consumer staples (vs consumer discretionary companies) and tech players that are exposed to capex related demand (vs component makers).

Furthermore, in such times of uncertainty, it pays to have a stable base of companies that provide sustainable and attractive dividends as well.

Munirah Khairuddin


Principal Asset Management Bhd

Can the Malaysian tiger economy make a comeback? How would you position during this period?

The South-East Asia region – including Malaysia – continues to show an abundance of opportunities for individuals and businesses.

This is one of the reasons why Principal strengthened its commitment to the region by taking over majority ownership in Principal Asset Management Bhd, its joint venture with CIMB.

As we look at 2020 from an investor perspective there is a heightened risk velocity due to compounding external factors such as the ongoing trade tension and political uncertainty that speed up the occurrences of risk.

Consequently, we expect economic growth to remain moderate.

The government is confident that the country’s economy will achieve a stronger and more sustainable growth of 4.8% for 2020.

Among the contributing factors are strong macroeconomic fundamentals, such as a highly diversified economic and export structure, supportive labour market, low and stable inflation, strong and well-capitalised financial sector and healthy current account surplus of the balance of payments.

The budget deficit as a percentage of GDP is expected to be moderately lower in 2019 and 2020 at 3.4% and 3.2% respectively compared with 3.7% in 2018.

The growth-oriented budget is also looking to have a long-term positive neutral impact on most major sectors within the economy.

On the manufacturing and technology front, foreign and domestic investments are expected to be boosted by tax incentives to promote high value-added activities in the electrical and electronic sector to transition into 5G digital economy and Industry 4.0.

In tandem with the values and principles of Shared Prosperity Vision 2030 (SPV 2030), the government will be placing emphasis on developing new economic areas.

The SPV 2030 will be the guiding beacon for all as Wawasan 2020 manifests itself. In our quest to becoming a tiger economy, we believe the art of statecraft rests in the hands of policymakers.

Nonetheless, there is definitely room for growth, and we support the vision as we are capable of great things. We expect the accommodative monetary policy will focus on reinventing Malaysia in the digital space.

For 2020, we maintain a tactical asset allocation of 60:40 between equities and fixed income to capture the potential turnaround in economic activities and better earnings clarity.

Jessica Ground,

Global head of stewardship


How do you see sustainability evolving? What are the key trends and changes taking place? How should investors prepare for this?

The year looks set to see climate change become more widely-recognised as an investment issue, creating an opportunity for active managers.

Climate change is moving from being simply “interesting” to having a real impact on investments.

This is being driven by growing public concern, rising regulatory pressure and increased demands for corporates to disclose climate-related risks and opportunities.

We have only reached the tip of the (quickly melting) climate change investment iceberg.

My bold prediction for 2020 is that climate change will move from being a storm in a tea cup to making the investment weather.

There are three main reasons driving climate change’s move from simply “interesting” to actually impacting investments.

> Growing public concern: We can see this most clearly in the Schroders global investor study that we undertake for both retail and institutional investors on an annual basis.

In 2019, institutional investors chose climate change as the No. 1 engagement issue, trumping the previously favoured area of corporate strategy. Meanwhile, retail investors made it clear that they are prioritising the planet over other areas such as prosperity and people.

It is simply a matter of time before these preferences start to drive significant asset flows into climate-related investments. Yet although the number of climate change sceptics has diminished quite dramatically, those who see climate change as an investment issue are still in the minority.

> Rising regulatory pressure: It’s not only the public that has woken up to the challenges posed by climate change. Financial regulators have the topic in their sights and while discussions regarding different approaches have been ongoing for some time, The new year will see climate change formally entering the investment regulation arena.

For example, the UK’s Prudential Regulation Authority (PRA) has introduced a climate change investment stress test for insurers and European regulators have indicated that they will shortly be following suit.

Furthermore, part of the EU sustainability finance package is to ensure that environmental, social and governance or ESG risks and opportunities are embedded in investment decision-making structures.

With this kind of regulatory pressure, it’s not hard to imagine that momentum will start to build for investors to change their portfolios as a result; after all, what gets measured gets managed.

> Increased demands for corporate disclosure: Companies are being pressured into disclosing more on climate-related risks and opportunities.

This can be seen in the growth of the number of organisations supporting the Task Force for Climate-related Financial Disclosures (TCFD) which now stands at 867 (as at September 2019).

Japan has the most number of companies that have agreed to disclose against the framework. As we get more disclosure, we expect investors to realise that the second order effects are far greater than they first envisioned. As our carbon value at risk work shows, total global equity earnings could be hit by up to 15% from transition risk alone. The spread between the winners and losers could be significant.

Transition risk is the financial risks that could result from significant policy, legal, technology and market changes as we transition to a lower-carbon global economy and climate resilient future.

The sectors that are hit extend far beyond the extracting industries such as oil and gas and miners, and into airlines, building materials and industrial stocks.

However, climate-related risks and opportunities are not just confined to equities. As some of our recent work on divestment showed, thinking of climate change in investment terms is about far more than just avoiding fossil fuel equities. We expect scrutiny to spread to debt markets holdings and bank loan books.

All of this creates a potential opportunity for active management. Climate change is widely-known but poorly understood, particularly the knock-on effects.

I think we will look back 10 years from now and view climate change investment risk as something that we “just live with” in investment terms, similar to how we’ve had to learn to cope with low interest rates over the past decade.

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