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This article first appeared in The Edge Financial Daily on July 2, 2018

KUALA LUMPUR: “A medium dry Martini, lemon peel. Shaken, not stirred.” That would be the kind of refreshing cocktail the fictional British Secret Service agent James Bond would have ordered.

But the global economy is experiencing a very different cocktail at the moment — a “traditional cocktail” of bad news centred on global tightening among central banks, an appreciating US dollar and the recovery of the energy cycle.

The consequent result has been a huge selldown in emerging markets (EMs) and more than US$2 trillion (RM8.08 trillion) in market capitalisation wiped out since the beginning of the year, as foreign funds cut their exposure to risky assets.

However, David Gaud, the chief investment officer for Asia at Pictet Wealth Management (Singapore) Pte Ltd, said Malaysia could stand out as a preferred market in Asia despite the challenging environment, owing primarily to the recovery of the energy cycle and oil prices, currently hovering at US$78.23  per barrel.

“These are your traditional cocktails of bad news, bad development. In the case of Malaysia, the big difference is that it is still a surplus country. At least from that point of view, it’s stronger. The currency is also relatively stronger compared with the other markets. The big factor is the energy cycle and the oil price because the recovery of the industry is giving Malaysia a much-needed extra boost or support.

“Asia in general doesn’t tend to benefit that much, including [South] Korea, Taiwan and even China. This is actually a positive for Malaysia,” Gaud told The Edge Financial Daily in a telephone interview. Pictet Wealth Management had total assets under management of US$205 billion as at Dec 31, 2017.

Apart from the energy sector, he also viewed technology as another area that is very promising for the Malaysian market.

“Malaysia has been benefitting from the ongoing relocation of capacity, most notably in Penang. The business has been holding relatively well, better than some of the leading players in [South] Korea and Taiwan.”

 

Huge selldown of GLCs create investment opportunities

Following Pakatan Harapan’s stunning victory over Barisan Nasional (BN) in the 14th general election (GE14) in May, breaking the latter’s 61 years of unbroken rule, the Malaysian stock market saw a huge selldown in companies perceived to be linked to BN.

There was also a big move away from construction stocks as a number of large infrastructure projects were scrapped or reviewed. But although there was an increase in volatility and profit-taking, it was not a complete selldown.

Gaud said: “Well, the money has to go elsewhere. Some went into leaders in their own industries and some into well-established brands.”

He believes real opportunities have emerged for investors, especially companies that have a good balance sheet and history of attractive dividend yields since the average is 3.2% to 3.3%.

“For us, it is also a critical point to invest in leaders — national leaders and even regional leaders. Ideally, Asian leaders who have become global. In Malaysia, we are not short of opportunities in this space. A leader is either a group who can grow its market share externally or a company which enjoys some quasi-monopoly,” he said, adding that liquidity is another important element given monetary tightening.

“Anyone buying [stocks] today is not buying for a quick return,” he added.

While Gaud remains positive about the Malaysian market on both relative and absolute bases, he stressed investors should have at least a six to 12 months horizon as EMs are likely to see further outflows given the ongoing spate of negative news, before a recovery later this year or early next year.

Gaud opined Malaysia can represent up to 5% of regional exposure in Picket’s Asia equity mandate.

He is of the view that the earnings growth of some companies can hit 10% — outperforming projected gross domestic product growth — but noted that investors might have to pay a premium to get in.

Compared with other EMs, he also thinks Malaysia’s sovereign rating is less likely to be downgraded.

“I would like to wait for the revised budget for 2018 and Budget 2019. Probably these should give some comfort to the rating agencies about not downgrading Malaysia as the new government has clearly indicated that it wants to reduce the spending and streamline its expenses. If they give enough arguments and measures to support that view, on a relative basis, Malaysia stands a lesser chance to be downgraded.”

In any event, he observed compared with Hong Kong for instance, local institutional funds have a strong influence on the domestic market and their traditional support ensures better protection against volatility.

“The volatility in the Malaysian market, provided there is no domestic issue, has been lesser historically. It’s a safer market from a flow point of view,” he said, adding that the lesser exposure to hedge funds has also limited its downside.

He observed that the Malaysian equity market has outperformed its peers for the greater part of the first half, except May when GE14 was held.

 

Looking beyond the trade war

On the current trade tensions between the US and China, Gaud said it is essential to pick companies with strong global exposure and that are less likely to be affected.

“At the end of the day, as a long-term investor, there are companies (locals that are leaders in their industries globally) you want to be associated with. In the event of a trade war, we’re likely to see consolidation in certain industries and it’s usually the industry leaders that will emerge stronger.”

The US-China trade war tensions relate to the US’ continuing large trade deficits with China, which US President Donald Trump has vowed to resolve.

“We are not there yet. July 6 is when we’ll see the implementation of some of these tariff measures. So, the coming week will be very important. Hopefully, they can find a settlement,” he said, noting that stock markets have already moved in anticipation of the trade tariffs to be implemented.

Gaud suggested that investors also pay attention to a stronger US dollar as it could hurt EMs and their currencies, and to keep an eye on the 10-year US Treasury yield. Commodity prices are yet another factor as a slump would be another negative for these markets, including Malaysia.

“There is one [more] element we need to figure out. It’s the Chinese yuan — whether it’s going for more depreciation or not. That’s going to be a big subject in the coming months. It’s something that we need to consider carefully,” he added.

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