This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 20 - June 26, 2016.
Against a backdrop of negative yields globally, the region still has plenty of potential for investors. Patrick Chang, chief investment officer at CIMB-Principal Asset Management Bhd, says the region’s economic growth, as a result of growing affluence and infrastructure spending, coupled with healthy dividend yields, makes it an attractive investment destination.
Chang says today governments can either stimulate the economy through monetary stimulus such as rate cuts or fiscal policy expansion. “The beauty of the US$120 oil price coming down to US$30 per barrel is that inflation expectations are very low in Asean. Some countries such as Indonesia have cut interest rates by 75 basis points this year to stimulate their economies. They also need to stimulate the broader economy from a fiscal point of view.”
He points out that countries such as Indonesia, Thailand, Malaysia and the Philippines will embark on very loose fiscal policies to stimulate their economies. In turn, they will spend on infrastructure and tourism in the next decade.
“They will spend more money on infrastructure for several reasons. Now that the commodity boom is over, these governments need infrastructure spending to support growth. If they don’t improve on infrastructure, they will lose out on FDI and tourism. With FDI moving from China to Asean, these governments will need the hard assets to attract foreign investors and tourists,” says Chang.
The significant benefit of spending to improve infrastructure is the multiplier effect. “People would think that infrastructure spending means mega projects such as highways, airports and railways. It is not necessarily the case. We have to factor in the multiplier effect,” he says, giving the example of roads in countries such as Thailand, Indonesia and the Philippines, many of which are not in good condition. The road maintenance projects to repair potholes and pavement cracks will be awarded to contractors. This kind of projects has a huge market.
“For less developed Asean countries such as Myanmar and Cambodia, better airports, roads and facilities will take time to build. Tourism is one of the soft assets in these countries and it is a multi-year story — it will take three to five years. These countries will need proper hard assets to tap it,” says Chang, adding that supportive monetary policy, fiscal spending and tourism are what will keep Asean’s growth engine going.
Within Asean, the only market that CIMB-Principal Asset Management does not have exposure to is Vietnam. But that will change soon as Chang is looking very closely at the country and has personally invested in it over the past five years.
China remains on the radar screen for Chang as he likes its new economy. “We like [existing] companies that have increased automation, robotic and e-commerce capabilities. These sectors are the reason we are bullish on China.” he says.
“The power of smartphones has made a lot of things more accessible. This is the biggest disruptor out there. It has changed the consumption pattern of people, from going to a mall to buying everything online using Alipay and Tenpay.”
From a sector perspective, Chang likes healthcare as it gives the fund house good exposure to the ageing economy in countries such as Thailand, which even exports healthcare services to emerging markets such as Laos, Vietnam and Myanmar.
One such example is Bangkok Dusit Medical Services (BDMS), which is one of the CIMB-Principal Asean Total Return Fund’s top holdings, owns and operates six hospitals in Thailand and two in Cambodia.
BDMS’ network includes Thailand-based National Healthcare Systems Co Ltd, the largest and most advanced blood analysis centre in the country, and Bangkok Helicopter Services, which is Southeast Asia’s first medical evacuation provider. In 2015, BDMS was ranked No 5 in the world for revenue, recording US$1.8 billion. Bloomberg data shows that the stock closed at THB24 on June 14, a 24.63% increase from a year ago, giving the company a market capitalisation of THB368.7 billion.
The CIMB-Principal Asean Total Return Fund, which was launched in March last year, has outperformed its peers in the Ringgit Malaysia category. According to Morningstar, the fund had delivered a one-year return of 6.3% as at June 9.
According to the fund factsheet, as at end-April, the fund’s asset allocation was mostly in the industrial sector (23.86%), followed by consumer goods (11.88%) and trading/services (11.54%). The fund had invested mostly in Indonesian stocks (28.16%), followed by Malaysian counters (21.57%) and Thai equities (21.27%).
The fund’s top five holdings were Telekomunikasi TBK PT (Indonesia), Airports of Thailand pcl (Thailand), Sino Thai Engineering and Construction pcl (Thailand), Bangkok Dusit Medical Services (Thailand) and IHH Healthcare Bhd (Malaysia).
Going forward, Chang says the process-driven, high conviction view of the fund house will see it continue being agile in its investment decisions. “Our funds did very well last year because we took the initiative to be out of the old economy sectors in China, including banks, commodities and energy. These helped us to outperform.”
He says the fund house likes internet and automation companies that will benefit from the so-called fourth industrial revolution. This refers to the current trends in automation and data exchange in manufacturing technologies such as cyber-physical systems, the Internet of Things and cloud computing.
Time to look at Malaysia, says Mobius
Mark Mobius, executive chairman of Templeton Emerging Markets Group at Franklin Templeton Investments (picture), believes that the negative interest rate policies in Japan and Europe are good news for emerging markets.
“I was looking into Singapore REITs, some of which give 7% to 8% yield, which is incredible. You also see companies in Malaysia with much better yields on value. We are in a situation where a lower interest rate policy is good for emerging markets,” says Mobius, who spoke at the recent CIMB Preferred’s 100th Financial Advisory Series.
He says investors should consider investing in Malaysian stocks mainly for their low price-to-book value ratios and significant currency undervaluation. According to his estimate, the ringgit was 24% undervalued against the US dollar in April. The currency undervaluation was calculated using the purchasing power parity of the country versus the US, with a base date of January 1990.
“When you have this down trend, it will eventually go back up. We are seeing it happening already. It is not a bad idea to hold on to the ringgit because usually, the currency does not stay down long. If you believe commodity prices are bottoming out, the future looks pretty good for the ringgit,” says Mobius.
He believes that the ringgit is at the lowest end against the US dollar as it is the highest percentage he has seen compared with many other Asian currencies. “The Asian financial crisis [which saw the ringgit slump to a record 4.88 per US dollar] was a very unusual situation for Malaysia. [The then prime minister Tun] Mahathir shut the window for people taking the ringgit out of the country, and Malaysia was the only country in Asia to do so. It destroyed the whole situation as it looked very bad in the offshore market. I hope that won’t happen again.”
Mobius says investors should take a longer view on sectors and countries to invest in and always diversify their portfolios. “Let me tell you what I have in my portfolio to give you an idea. I have 70% in equities — 80% in Asia and 20% in global markets — about 15% in fixed income, 5% in gold, palladium and platinum, and the rest in property.
“I allocate 70% to equities because in many cases, equities yield better than bonds. I think the weighting should [be maintained at this level]. For example, if your equity portfolio goes up to 80%, it will be a good idea to take profit, cut back and put it somewhere else. You need to keep watching and adjusting your portfolio.”
He says gold and precious metals become very attractive in a negative interest rate environment. “It is not a bad idea to hold gold as this asset class has no yield. I think we will see a shift into precious metals going forward.”
According to Marketwatch, gold prices hit levels not seen in weeks on June 13, as investors sought safety in the precious metal amid concerns over the Brexit referendum and some high-profile central bank meetings. Gold for August delivery rose 0.9% to settle at US$1,286.90 an ounce, marking the highest settlement since May 6.
Mobius says that out of the last 28 years, the emerging markets index has outperformed the world index for 17 years. “On the MSCI Emerging Markets index, the longest bear markets declined 49% and lasted for 17 months while the longest bull market increased 619% and lasted for 116 months,” he points out, adding that investors should stay invested in a bear market.
He also shares a story on investment advice. “Many years ago, a young lady asked our founder John Templeton when she should invest. John said the best time to invest is when she has money. He sounded like a mutual funds salesman.
“But what John really meant was you could be investing in a bear market or a bull market, but in the long run, you are going to be in good shape because the bear market is very short. Buy more during the bear period and you will do very well over the longer term.”
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