Balancing act for stable returns


Malaysia’s market also faces uncertainties due to local developments such as the end of the six-month blanket loan moratorium on Sept 30, potential snap election, and the unveiling of the Budget 2021 next month. In its equity market report, MIDF Research says it is closely monitoring the impact of the end of the loan moratorium

Globally, stocks have made significant gains since their March lows.

But with volatility setting in since August and headwinds looming large in the final months of 2020, some fund managers reckon there is still upside potential for investors.

For JP Morgan Asset Management, the key is maintaining a diversified and nimble strategy to cushion the oncoming risks.

The group’s head of global multi-asset strategy John Bilton says he is optimistic that the economic recovery, which began in the second quarter, will extend over the next 12 months.

“In our view, the economic recovery is gaining pace and we expect a robust expansion into 2021, but the tail risks - in both directions - are palpable, ” Bilton says in his note to clients, citing the improvement in macro data improves, strengthening business and consumer confidence, and the unprecedented level of monetary and fiscal stimulus.

Nevertheless, he concedes there are looming event risks in the fourth quarter. Among them are the uncertainty about the US election outcome, the shape of any Brexit deal and rising Covid-19 case counts in Europe.

“The apparently growing level of risks in the fourth quarter might suggest it is time to reduce portfolio risk levels. However, while some prudence may be justified, there are tail risks in both directions, ” Bilton argues.

“Certainly, we should not ignore the upside risks around a vaccine, further monetary accommodation and renewed fiscal support, ” he adds.

In addition, he points out, corporate earnings are starting to rebound and there are powerful base effects as we enter 2021.

Moreover, signs of a pick-up in capital expenditure and a rebuilding of inventories present further upside potential, he says.

Diversified exposure

At the portfolio level, JP Morgan maintains an “overweight” to equities and credit, while sticking to its “underweight” on bonds. The group also downgrades its view on the US dollar to underweight, citing further, but gradual, downside for the greenback ahead, as the global recovery gains momentum.

“We spread our risk between stocks and credit, while within equities we favour a broad regional diversification, ” Bilton says.

Within equities, the group favours a broad regional diversification and are overweight on European and emerging market (EM) equities, as well as US equities, with a tilt towards small caps. Although the group is mildly underweight duration, it reckons central bank backstops in credit markets sometimes allow it to use high quality corporate credit as a proxy for duration.

Bilton notes the group’s multi-asset portfolios reflect its optimism over the economic recovery.

“Nevertheless, we anticipate some volatility and expect to remain well diversified and nimble, in equal measure, as we navigate the final months of 2020, ” he says.

Similarly, Russell Investments concurs that the global market is in the early recovery phase of the business cycle following the Covid-19 recession.

According to the asset management group, this implies an extended period of low-inflation, low-interest-rate growth - an environment that usually favours equities over bonds. It points out that the recent equity market pullback was not surprising after the rapid rebound from the March low, noting that US tech stock valuations are elevated, and the upcoming US elections are creating uncertainty around tax changes, government regulations and the re-escalation of China-US trade tensions.

“Beyond this, we believe the market looks set for a rotation away from tech/growth leadership towards cyclical/value stocks. This also implies a rotation toward non-US stocks, with Europe and EM likely the main beneficiaries, ” Russell Investments writes in its recent note to clients.

Russell Investments is of the opinion that the second stage of the post-coronavirus economic recovery should favour undervalued cyclical value stocks over expensive technology and growth stocks. Notably, it says, other major markets are overweight cyclical value stocks, relative to the US.

In addition, it likes the value in emerging markets equities.

“China’s early exit from Covid-19 lockdowns and recent stimulus measures should benefit EM more broadly, ” Russell Investments says.

On bonds, it considers government bonds universally expensive at this moment.

“Low inflation and dovish central banks should limit the rise in bond yields during the economic recovery from the lockdowns. We have a neutral view on high-yield and investment-grade credit, ” it says.

As for currencies, Russell Investments expects the US dollar to weaken during the economic recovery, given the greenback’s counter-cyclical behaviour.

“The US dollar typically gains during global downturns and declines in the recovery phase. The main beneficiaries should be the economically sensitive commodity currencies, ” it says.

Political uncertainty

Locally, the capital market will also be subject to event risks arising from the external environment such as the US presidential election, Brexit deal outcome and continuation of the US-China trade conflicts.

In addition, Malaysia’s market also faces uncertainties due to local developments such as the end of the six-month blanket loan moratorium on Sept 30, potential snap election, and the unveiling of the Budget 2021 next month.

In its equity market report, MIDF Research says it is closely monitoring the impact of the end of the loan moratorium on the asset quality of the banking system and its consequent impact on the level of consumer spending and business investment is currently

“In the event that the impact is more severe than expected which necessitates downward revisions to the forward earnings estimates, we can expect further weakness in the share price of banking stocks. As the banking sector commands the largest weightage in the FBM KLCI, the market barometer is expected to weaken likewise, ” the brokerage explains.

“On the other hand, a smaller than expected impairment to the asset quality of banking system would attract buying interest on banking stocks to the benefit of the broader market barometer, ” it adds.

MIDF Research maintains its year-end FBM KLCI target at 1,400.

On the upcoming Budget 2021, the brokerage says it expects that the plan to be expansionary, with allocations for development spending plans delayed by the Covid-19 pandemic. This will likely benefit the construction stocks.

Meanwhile, the bond market has entered a seasonally weak quarter.

Maybank Investment Bank (Maybank IB) in its report says Malaysia’s rate cut cycle has probably come to the tail end, but the need for fiscal support remains strong. Such a policy mix could keep the Malaysian Government Securities (MGS) curve steep unless rates outlook turns dovish.

“In the absence of new catalyst, MGS yields could stay in range but we would exercise caution going into the tabling of Budget 2021 in a seasonally weak fourth quarter, ” the brokerage says.

“The supply of government bonds may remain heavy next year, and it is unclear whether the 60% debt ceiling will need to be revised like what happened during the Global Financial Crisis, ” it adds.

As the MGS curve has already corrected meaningfully of late, this will provide some cushion, MIB says.

“Overall, we are forecasting slightly higher MGS yields with a target of 2.75% for 10-year yield by end-2020, ” it notes.

On private debt securities, MIB says, credit conditions remain broadly stable although the ratio of outlook increase versus decrease has weakened slightly. “We think the current macro settings and credit outlook are still supportive of stable credit spreads in the next three to six months, ” it says.

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