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BlackRock, Inc lead strategist Jonathan Reoch told The Edge in an earlier interview that the sun is shining on Asia again. He said despite the economic headwinds, Asia remains the part of the world where there is still economic growth, although the pace is weaker than in the past three years.
According to him, values are re-emerging on Asian bourses after an earlier correction. But in contrast to the current rush into defensive stocks, Reoch is looking at cyclical counters that have been bashed down.
Meanwhile, with seven votes against an interest rate hike versus three for it at the US FOMC meeting last week, the Federal Reserve kept the rate unchanged. The decision to stand pat is taken as a sign that the US authorities are not fully confident of the economic health of the world’s largest economy.
This is expected to spur interest in equities outside the US, at least until the next FOMC meeting in mid-December. Not many think there will be a rate hike until next year, which augurs well for Asian markets. These were sold down when global funds shifted to the US in anticipation of higher yield as a result of interest rate normalisation — a climb from zero.
“What drives the market?” asks Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng.
“The interest rate is a key factor that detects market direction because its trend decides the movement of investment funds,” he says, highlighting the fact that foreign funds are already back in the region.
Three neighbouring markets — Indonesia, Thailand and the Philippines — are leading the pack. Year to date, the Jakarta Composite Index, the SET Index and the PSE Composite Index have gained 17.3%, 15.9% and 11% respectively.
On the home front, the FBM KLCI is still in negative territory, down 1.27% since the start of the year. Nonetheless, the benchmark index has rebounded 4.4% from a low of 1,600.92 in January. It closed at 1,670.99 last Friday.
Despite the general perception that the outlook for stock markets is gloomy due to poor corporate earnings, sentiments are more positive than in 2015 when investors across the world were plagued by such concerns as a sharp fall in crude oil prices, global economic headwinds and the likelihood of the US tightening its monetary policy.
“Investors should buy long equities now. Central banks, globally and regionally, remain in an easing mode and even the US Fed, which intends to raise interest rates, is doing it very cautiously,” says Pacific Mutual Fund Bhd CEO and executive director Teh Chi-Cheun.
“Broadly speaking, the low interest rate environment and quantitative easing in certain countries has resulted in ample liquidity and this liquidity needs to be deployed. Hence, the stock market will be well sustained,” he explains.
It appears that the liquidity-driven rally in Asia, which started after the 2008/09 global financial crisis and stopped abruptly around May last year, may start again. When the rally had ended at the time, it was a perfect storm, particularly for oil producer Malaysia — which was hit hard by the meltdown in crude oil prices and the sharp depreciation of the ringgit, apart from domestic issues.
Are things really looking up going forward? Or is it a bull trap?
Low interest rates will oil the wheel of economic growth in the US. This means there will be a rate hike sooner or later. Last week, the Fed indicated the likelihood of it.
“The effect of low interest rates on US economic growth will be more prominent next year. The Fed will raise its rates sometime in the first half of next year … the US dollar will remain strong, which will attract global funds to the country,” says the equity strategist.
However, he points out that Wall Street is trading at a historical high. The Dow Jones Industrial Average (DJIA) has nearly tripled since it rebounded from the trough of the GFC in September 2009 of around 6,500 points. The DJIA closed at 18,392.46 points last Thursday.
“As valuations continue to climb in the US, sooner or later, in relative terms, the emerging markets will start looking attractive again,” says the strategist.
Ang concurs that the foreign funds will be attracted to Asia. “The weak currencies in the emerging markets could give the foreign fund managers double bonus when both share prices and currencies appreciate,” he says.
What about the Malaysian bourse?
Although concerns like slower economic growth, weak consumer spending and declining national coffers are making the headlines, fund managers are not that bearish.
“Things may not be as bad as they seem … I would say I’m not super worried now compared with a year ago. We still see some growth, driven by the government’s effort to pump prime the economy, although it is not as strong as before,” says an insurance fund manager, who is looking for good bargains on Bursa Malaysia.
He agrees that corporate earnings are not as impressive across the board, but not all are bad. Indeed, to some, a profit drop of between 10% and 20% is considered a saving grace.
The national budget that will be unveiled on Oct 21 is expected to bring some excitement to the local bourse, although it might not be able to lift it entirely out of the doldrums. “The government is expected to table a people-friendly budget amid the belief that an early election is possible,” says the fund manager.
Teh has the same stance he had early this year — the FBM KLCI will perform better in the second half of the year. He, too, opines that the upcoming budget will be a fresh catalyst for the local market.
“There are a few factors that should drive the FBM KLCI’s recovery. First, there has been the OPR (overnight policy rate) cut by 0.25% to 3% by Bank Negara Malaysia in July. Second, there is the minimum wage and civil servants’ pay increase in July as well, which will result in more consumer spending.
“I believe the upcoming Budget 2017 will have measures to stimulate the economy,” Teh tells The Edge.
Historically, Malaysia has traded at a much higher PER premium than its peers but now Indonesia is nearly on a par with it and Thailand is not far behind, he says. At this juncture, he favours the construction, property and plantation sectors.
“The key risk is the outcome of the US presidential elections. If Trump is elected, we could see trade barriers and trade wars will begin. As an open economy that has significant exports, Malaysia will be negatively impacted.”
Whether the government pulls a rabbit out of its hat remains to be seen. Economists are cautious, given the tight budget on the one hand and the need to stimulate the domestic economy on the other.
Some quarters believe the national budget could be a short-term catalyst. Realistically, certain domestic issues will continue to weigh on the market, one of which is political risk.
“Foreign funds have not entered in a big way because the valuations here are not as appealing as those elsewhere in the region. The political factor is another deterrent,” says the equity strategist.
“And these uncertainties will only be cleared after an election. Speculation of an early one is gathering steam … but until Parliament is dissolved, it is everyone’s guess when the polls will be held,” he says.
In the meantime, the market will move sideways with some upward bias when there is an uptick in crude oil prices, he adds.
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