Ample liquidity, low rate to favour equities

RHB asset management Eliza Ong

PETALING JAYA: RHB Asset Management Sdn Bhd, one of the leading fund houses in the region, is taking a cautious but opportunistic stance on fixed-income funds in view of the recent sell-off in US treasuries.

Chief executive officer Eliza Ong told StarBiz that in recent times, fixed-income returns had been negatively impacted from rising bond yields in US treasuries.

While credit spreads have tightened amid the ongoing economic recovery, she said it was only able to offset some of the negative impacts from rising yields.

“Although we see value in fixed-income funds at this current level, we remain cautious if there may be more US treasuries sell-off before the domestic bond market stabilises itself. Generally, the market tends to overshoot and we believe that this would be one such instance.

“For now, in the fixed-income space, we prefer to stay defensive by focusing more on the mid of the yield curve and look for opportunities to go long-dated at a later stage, once the current US treasury sell-off abates.

“On top of that, with the Federal Reserve (Fed) pledging to keep interest rates at the current low level, at least until 2023, we see the pivot towards emerging market yields which are still attractive compared to developed nations.”

Malaysia, which is part of the emerging market, should benefit from this flow because of its yield attractiveness and relatively deep onshore ringgit government bond market, Ong noted.

Another significant boost to the Malaysian fixed-income onshore funds was the move by FTSE Russell’s in removing Malaysia from watch list status as well as the retention of membership in the FTSE Russell World Government Bond Index (WGBI).

She said the market reacted positively to this development and this has led the Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) yield curves to flatten considerably.

However, Ong is cautiously optimistic on equity-based funds. She anticipates such funds to perform well as corporate earnings for fundamentally sound companies with strong management teams will remain resilient and improve further in alignment to economic recovery in the long term.

“The low interest-rate environment and ample liquidity will favour equities in 2021. Stocks’ valuation may remain elevated due to a prolonged low interest-rate environment and corporate earnings are at the early stages of a rebound, ” she added.

RHB Asset Management Group, which includes its regional offices, has total assets under management (AUM) of RM57bil as at end-March 2021.

In order to ride out the volatility in markets, Ong said investors should construct a diversified portfolio in terms of asset classes, geographical focus and themes.

The distribution of investments, however, would differ according to risk appetite of respective funds, she said.

As such, she said RHB Asset Management would continuously monitor developments and outlook of the market, uncovering opportunities and create solutions for the differing risk appetites of investors to provide them with the best possible potential returns in line with their investment objectives.

On the attention given to environmental, social and governance (ESG) and sustainability in fund management amid the Covid-19, Ong said the pandemic has impacted economies and lives across the globe, and highlights the direct impact of sustainability considerations, including the spread of diseases and environmental change.

“This social awakening has accelerated the growth of ESG for the fund management industry and there is increased focus on how investment managers can create a positive impact on society while minimising potential negative impacts through investment practices.

“More specifically, the spotlight was turned on how companies navigate the ‘social’ factor within ESG including labour standards, human capital management and governance. It was increasingly evident that companies with poor working conditions and those that placed little importance on employees’ health and safety were more susceptible to the pandemic.

“In turn, this increased scrutiny on corporate sustainability practice, amplifying the correlation of financial returns with ESG practices. This trend is quickly gaining traction in Asia and we believe it will progress steadily forward, ” she added.

On the outlook of the fund management industry and the possible pitfalls, Ong said the key themes for this year would focus on economic recovery, as well as global trade.

Cyclical sectors are expected to benefit as the economy recovers, she said, noting that the asset management company expects a rotation from defensives into cyclicals and the return of global funds to Asian markets this year.

“In the meantime, we expect uncertainty to persist as suggested by the elevated volatility seen in both the fixed-income and equity markets. Globally, economic recovery has been uneven and the rate of recovery remains very much dependent on the outcome of vaccination programmes throughout the world, among many other factors.

“Expectations of a strong recovery in the economy and corporate earnings will be at risk should there be new upward trends in Covid-19 infections and delays to the deployment of vaccines.

“Geo-political risks will also likely to continue as the US administration continues to put pressure on China and this may further affect market sentiment. Additionally, emerging market equity performance may be negatively impacted in the event the US dollar makes a strong comeback this year, ” Ong said.

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