IT was a year full of surprises and of many unprecedented events. Who knew a virus outbreak could shut down global economies, force countries to close their borders and ground airlines?
The market crash in March was a pandemic-induced one rather than a market failure like what happened during the Global Financial Crisis, Asian Financial Crisis and the dotcom bubble.
But the recovery in the stock market was surprisingly quick and investors are now looking at further pricing in an economic recovery, on the back of the hope that the Covid-19 vaccine becomes widely available.
Three fund managers spoke to StarBizWeek on their take on the outlook and challenges for 2021.
Below are excerpts of the interview with Affin Hwang Asset Management equity strategies and advisory director Gan Eng Peng (pic below), Kenanga Investors Bhd executive director and chief executive officer Ismitz Matthew De Alwis and RHB Asset Management acting CEO Mohd Farid Kamarudin.
Q: How would you describe the outlook for 2021? What is your investment theme?
Gan: Given how well markets have performed in 2020 and how much it has factored in the recovery, this change in liquidity condition is a major risk in 2021.
There is no doubt 2020 is a liquidity-driven rally, hence we think the change in liquidity condition will determine how it will evolve in 2021.
In Malaysia, we have an additional issue of the unresolved political impasse. This might lead to an election when Covid-19 conditions improve with vaccine roll out.
De Alwis: The deployment of a vaccine should help economic activity to recover, while extensive support from both fiscal and monetary policy provides a further boost. Interest rates remain at decade lows worldwide, while the Fed and European Central Bank continue to expand their balance sheet with various asset-purchase programmes. Hence, we should see a positive environment for risk assets into the first half of 2021, at least.
The themes here would be cyclical recovery and a barbell strategy is probably the most suited investment option under the current economic climate.
Although we reckon the technology sector will continue to perform well, investors should also consider shifting their weight to value and cyclical stocks as a balancing act.
The latter includes sectors such as commodities, industrials, financials and consumer discretionary.
Farid: We foresee 2021 to be a year of rebounded growth, as the news of a Covid-19 vaccine brought a much needed wave of optimism for the global economy. The results have further bolstered market optimism for a vaccine, especially from a logistical perspective.
This is good news to emerging markets, where logistics and storage capabilities may be limited, and would help to sustain the rotation play into the underperforming, lightly-owned emerging markets.
This positive development encourages us to add to the Asean region which has underperformed for much of the year. However, we remain positive of China, which is at the forefront of restarting the economy, as the Covid-19 spread has been effectively controlled and the country has more policy space to revive activity.
We have moved our strategy for more value names and reopening plays as more news of positive progress of vaccine efficacy emerges. Our portfolios continue to be positive on structural demand shifts, such as gaming, e-commerce and foundries. Such companies are found in North Asian markets, such as China, South Korea and Taiwan, and have ample policy tools to support the virus hit economy.
What are the risks or key concerns that we need to be aware of in 2021?
De Alwis: The global economic recovery remains fragile and predicated on a vaccine-led return to normal in business activities. Hence any delay or issues with the vaccine deployment could be a key risk. More important to watch will be the policies of the Federal Reserve as the US dollar liquidity is still a key driver of global asset prices. Closer to home, political risk is ever present with a high likelihood of a general election being called in 2021.
Farid: In the near term, news of the emerging vaccines is driving the market and economic developments. In the developed world, new cases still remain high in the US, Europe and the UK, whereas in Asia, Japan, South Korea, Hong Kong, Indonesia and Malaysia cases are rapidly increasing.
If we experience a major outbreak, the global economy will see a deep “W” recovery scenario, where we see periods of improvements, followed by rapid dips.
Given the intensifying economic, technological and geopolitical rivalry between the US and China, as well as with US domestic public opinion of China in terms of human rights policy and trade imbalances, we believe that tensions between the two countries will continue even as the US readies itself for a Democrat President.
While the strategy remains the same between the Republican and Democrat parties, the tactics differ between the parties. Nevertheless, the ongoing US-China tensions would be a concern even though the strategic initiatives may move to more multilateral discourses of diplomacy, as we do note that Europe has been losing market shares in the global trade as well.
Where do you see opportunities in the local equity market, and why?
Gan: Our investment themes for 2021 are almost carried over from 2020 as Covid-19 disrupted them. They are carried over because they are structural. We think global manufacturers will continue to diversify their manufacturing out of China.
The recent US-China trade tension will not go away. Manufacturers will continue to search for alternative sources of supply outside of China as well as physically setting plants out of China. This will continue to benefit tech and EMS players although we recognise shares have priced this theme well already.
For a government that is trying to digitalise but is short of cash, e-government is an opportunity for the private sector to come in. E-government businesses help expand government services at minimal cost to the government and at the same time bring forward government’s digitalisation plans.
The private companies, of course, get a share of the pie either directly or via add-on services.
Farid: Opportunities might come from the return of foreign monies into Malaysian equities. From a liquidity perspective, foreign portfolio outflows tapered significantly in October. Foreign outflows were slightly higher in November due to the MSCI rebalancing on Nov 30, following massive outflows between January to September 2020. We might see stronger inflows of foreign funds due to stronger rebound in corporate earnings.
Furthermore, foreign net outflows have tapered recently and foreign equities holdings of Malaysia’s stocks have declined to 20.8%, close to the Global Financial Crisis level of 20.7%. However, the downgrade by Fitch on Malaysia’s ratings recently might delay foreign inflows into Malaysia’s equity market.
From an earnings perspective, index is also expected to be supported by the rebound in corporate earnings. We note that the upgrade in earnings for Malaysian corporates is one of the strongest recently when compared with other countries in the region.
This is positive news as Malaysian corporate earnings have been weak for the past few years. Having said that, participation by retail players is still strong due to the low interest rate environment.
How do you approach stock selection during this volatile period?
Gan: Liquid and adaptive management is the way to counter volatility. We think 2021 should come with its fair share of macroeconomic, government and policy changes. Hopefully not as much as 2020. Despite major economic crises and big changes in policies and patronage, some companies have thrived in such an environment. Companies with business models and more importantly with management that can manage their way out of a crisis is important.
Farid: The uptrend in the index is expected to continue into the first quarter of 2021 and the cyclical sectors are expected to outperform the defensive sectors. However, index performance might be volatile due to the fear of Moody’s, S&P’s and WGBI’s review in the first half of 2021 and is followed by the end of the payment assistance period by banks at end-June 2021.
Therefore, a combination of cyclical stocks and high yield stocks are preferred. Nevertheless, we are of the opinion that we may see an uptrend of the index in either the third quarter or fourth quarter of 2021.
This is due to expectations of a stronger economic recovery in 2022, as the vaccine may be made available for everyone globally from the fourth quarter of 2021.