This article first appeared in Capital, The Edge Malaysia Weekly on March 26, 2018 - April 1, 2018

ALTHOUGH a number of foreign stock markets have climbed, stocks in Singapore and China are still slightly cheaper than in Malaysia in terms of price-earnings ratio. (PER). The local stock market is still not cheap enough to get an investor like Datuk Seri Cheah Cheng Hye excited.

The chairman and co-chief investment officer of Hong Kong-listed Value Partners Group Ltd says the FBM KLCI is trading at a PER of 16.1 times (at the time of the interview) — higher than its historical average.

“The Malaysian market is not attractive enough for me to be excited. Remember my words ... it will struggle to have a rather small positive return this year,” he tells The Edge.

He anticipates the local benchmark index to get a boost of as much as 10% this year due to the general election, but warns that any potential polls-driven rally is likely to be short-lived.

“The election is coming, but before any announcement on the dissolution of parliament, it is better to wait and see. I don’t have any pressure to take any action ... just wait and see, have the money ready.”

The 14th general election must be called by August. It is widely speculated that it will be held in late April or early May before Datuk Seri Anwar Ibrahim, the opposition coalition’s de facto leader, is released from jail.

Cheah acknowledges that based on past trends, the local market will be stimulated by election campaign spending, but the lift in investment sentiment will be temporary.

“Malaysia is not a huge market and lacks liquidity. In fact, the stock market is smaller than Singapore’s, while the average turnover is less than 10% of Hong Kong’s stock market,” he remarks.

Cheah, 64, is also an independent non-executive director of Hong Kong Exchanges and Clearing Ltd (HKEX).

He favours the Chinese market and sees Malaysia benefiting greatly from China’s ambitious Belt and Road initiative, although the execution will take decades.

“It is a very serious effort by China to create its own ecosystem of mutually supportive economies outside the US umbrella,” he says.

Value Partners was one of the first foreign asset houses to tap the mainland China market, setting up an office in Shanghai in 2009.

Its Greater China High Yield Income Fund, launched six years ago, has grown into one of the largest funds of its kind in Hong Kong, with assets under management of US$4.5 billion as at Dec 31 last year.

Cheah remains optimistic about commodities and has a positive view of plantation stocks as there is a new equilibrium between supply and demand in the market.

He notes that in recent years, commodities have gone through a severe shake-up because of falling prices and oversupply. However, the excess capacity has been sharply reduced as China shut down polluting factories.

“Commodities are interesting. Starting last year, we saw a new cycle in commodities, including soft commodities like palm oil, as well as hard commodities like iron ore and coal. Demand and supply has rationalised, even for petroleum, which is the big elephant in the room,” he says.

While there is a good story in commodities, the problem is the disconnection between commodities and stocks , which have risen mainly due to FANG and other tech stocks, instead of being driven by the old economy.

FANG refers to US technology-related heavyweights — Facebook Inc, Amazon.com Inc, Netflix Inc and Google, whose parent is Alphabet Inc.

“The story about commodities has been overcapacity and overproduction. When the story changes, it takes time for investors to realise there is a new hero in the movie,” Cheah says.

Too much complacency, not enough fear

On the global outlook, Cheah admits he is cautious about the market’s long-term prospects. This is the time for investors to be defensive, considering there is still a high degree of complacency in the global market.

“Investors are, in my view, far too complacent, and are not sufficiently worried. I actually think it is a good sign if we see more fear among them,” he says.

“But at the moment, many of them seem to feel that if the stock market drops, it is an opportunity to buy more. It seems to them that the world is a happy place. To me, this is not a bullish signal, but instead, a bearish signal.”

He explains that the stock market usually goes up in a climate of fear and uncertainty, and when the top is near, there is a high level of confidence and complacency.

He also warns that interest rates and inflation are trending upwards, which does not bode well for fixed income and equity markets.

“We are now in a pretty late stage of the cycle, where interest rates finally start to go up, albeit not very fast. I believe that for the rest of this year, we will see three to four rate hikes from the US Fed.”

In the longer term, Cheah’s constant worry is the US, the world’s largest economy.

Long perceived by many as a strong nation, he believes the US is much weaker than it appears. For example, Americans are short of savings as the US household savings rate is only 5% of its gross domestic product (GDP) — a very low level.

“I’m not sure whether people would bother to look at the fact that the Americans consume far more than they save, and have been relying on borrowed money from foreign countries, especially Japan, China and East Asia, to finance their deficits.

“It is not good when the world’s No 1 economy has that kind of fundamental weakness. We may see a persistent trend of a weaker US dollar. At some point, we may even see real fear coming back,” he says.

All in, Cheah was optimistic at the beginning of last year but is now pessimistic at the beginning of this year.

“We have been cautious since Christmas last year. It doesn’t mean we are not investing at all, but we are more defensive. Investors should increase their level of cash and be more selective in what they choose to buy,” he advises.

On a positive note, although stocks are quite expensive globally, there are still cheap or reasonably priced counters, he says. For instance, China stocks are trading at a PER of 12.5 times, only slightly higher than the historical average.

“The Chinese economy is slowing down, but still generating a double-digit growth in corporate earnings. That’s not an expensive market. We are still buying, but I must say we are not as aggressive as we were a year ago,” he says.

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