This article first appeared in Capital, The Edge Malaysia Weekly on November 23, 2020 - November 29, 2020

INVESTORS can build a satellite portfolio to invest about 20% of their money in US and China equities to enhance investment returns during the ongoing pandemic, says Sani Hamid, director of economics and market strategy at independent financial advisory firm Financial Alliance Pte Ltd.

Savvy investors, he notes, tend to diversify their investments across the globe to reap good and stable returns over the long term. However, their investment performance might not be great this year as the Covid-19 pandemic has sent global markets into a tailspin.

“Most equity markets globally have been in the doldrums. The two markets that have performed well are the US and China. And if you narrow this down further, there are just a handful of stocks that have performed well in the two countries. In the US, they are mainly the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google),” says Sani.

This is where a satellite portfolio comes in. Investors can allocate about one-fifth of their investment money to invest more actively in specific sectors of the US and China markets over a shorter period.

“This is what we are telling our clients. Their core portfolio should remain diversified. But they can carve out a portion to invest tactically in the US, China or other countries that they think could do well in the current situation. They may want to be a little more active and opportunistic in deploying a smaller part of their money,” he adds.

Sani expects the US market to outperform other regions as political uncertainty has been reduced with the completion of the US presidential election. The country is also at the forefront of the global Covid-19 vaccine race while monetary easing and huge fiscal stimulus have helped buoy its economy.

China also seems to have contained the Covid-19 virus well and the latest data shows that its economy is recovering from the pandemic. “Investing in these two markets, particularly the US, is a momentum play (which means investors are riding short-term positive market sentiments). Investors might also want to look at other countries that have recovered relatively well from the pandemic, such as Taiwan and South Korea,” he says.

Investors can look at countries such as India and Indonesia if they want to position themselves for the post-Covid-19 period. These are countries with very large domestic markets but are vulnerable to the coronavirus outbreak at this point in time. Sani believes that when the world emerges from the pandemic, these two countries will recover better than others.

Financial advisers tend to provide their clients with asset allocation advice from a geographical perspective before providing them with investment exposure through unit trust funds. However, investors today are increasingly looking at investment from a growth versus value, or sectorial, perspective.

“All these things about geographical allocation may have to be reconsidered. Investors are now looking at stocks from the perspective of growth versus value [stocks]. Growth stocks are now outperforming value stocks. When are they going to switch? Then, they have the sectoral perspective of IT (information technology) versus non-IT stocks.

“We have a person (in our company) who looks at equity markets from a sectoral perspective now [to better advise our clients]. We didn’t have one before. The world has moved towards such a direction. And we have to follow the trend,” says Sani.

Investors may be aware of various investment risks, the biggest of which must be the virus outbreak and its impact on economies and markets. However, what seems to be overlooked for now is the debt bubble.

Sani notes that there is an unprecedented amount of global debt that is building up as governments continue to push through trillions of dollars in fiscal and monetary stimulus, and this may not be sustainable over the longer term. The debt bubble, he says, may burst at some point.

“If you look at the balance sheets around the world, there is a huge amount of debt. Household, corporate and sovereign debts globally are at very high levels. The US Federal Reserve’s balance sheet, for instance, grew to about US$7 trillion (RM28.6 trillion) recently from about US$4 trillion [during the 2008 global financial crisis]. And it is expected to grow to US$10 trillion,” he says.

Such a high debt level globally — mainly due to the quantitative easing programmes introduced by the Fed in 2008 — would have led to a recession in the past as governments, banks and corporations start to deleverage, says Sani. However, the debt level has continued to grow as major central banks continue to adopt an easing stance to support their economy and financial market.

How should investors position themselves given the debt risk? Sani says investors should ensure that their core investment portfolio remains diversified, so that they can minimise their losses when things come to a head. Investors should invest more cautiously to avoid major surprises. “We are in a defensive mode these days as we believe the global economy is at the tail end of the cycle.

“If you are a conservative investor, we may advise you to have 10% in equities and the rest in bonds. We might even suggest you invest 100% of your money [allocated for bonds and equities] in bonds. And in the bond universe, we advise our investors to invest in some of the safest types, including money market funds and government bonds.

“For aggressive investors, we would advise them to invest 60% in equities and the rest in bonds. In the past, the mix was typically 80% to 90% in equities,” he says.

The valuation of emerging markets, including Malaysia and Singapore, provides investors with a more accurate sense of global market sentiments, says Sani.

The overall US stock market performance should not be seen as a guide, as it is propped up by technology stocks. He adds that the same goes for the US bond market. The Fed has shored up the country’s fixed income market by buying investment-grade and junk bonds through the purchase of various exchange-traded funds (ETFs) in the past few months. Some investment-grade bonds would have gone down to junk status without the Fed’s support.

“There is this saying in the investment strategist world: Don’t look at the US for market pricing. The US stock and bond markets are artificial. You should look at emerging countries where their stock and bond markets are less influenced by the central banks,” says Sani.

Malaysia’s and Singapore’s equity markets, for example, are less attractive to foreign investors for now as they do not have exposure to global technology companies such as Alibaba Group Holding Ltd and Tencent Holdings Ltd. These are companies that have done well and are expected to grow in size moving forward.

If investors buy into Singapore and Malaysia, it would be because valuations have become attractive. “If that happens, it would most probably be because some stocks are oversold. Foreign money could be back to push stock prices back to their equilibrium level,” he says.

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