The Edge-Citigold Wealth Webinar Series 2020: Wide gap between performance of value and growth stocks

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on October 5, 2020 - October 11, 2020.

From left: Fan, Ho and Teng chatting before the webinar session, which was broadcast from the Citigold Centre in Menara Citibank

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Investors should be mindful of the wide gap between the performance of growth and value stocks, as it is one of the key investment risks in the post-Covid-19 landscape, said Affin Hwang Asset Management Bhd managing director Teng Chee Wai at the first instalment of The Edge-Citigold Wealth Webinar Series 2020, held on Sept 26.

In his presentation titled, “Investing in the New Normal: Market Outlook Post-Pandemic”, Teng explained that the recovery in earnings has been very strong in specific areas, causing investors without certain portfolio exposures to suffer a lack of performance.

“For instance, if you are invested in technology and healthcare stocks in the US or the large markets, you would have benefited from the lockdowns and other trends related to the pandemic. Meanwhile, if you are invested in dividend-yielding stocks, you should have seen a lack of performance. 

“In Singapore, if you are invested in REITs (real estate investment trusts) in the data centre or logistics space, your portfolio will be up between 16% and 30%. If you are invested in hospitality REITs, you are down 20%. Everything is still classified as REITs, but it’s the segment that you need to invest in that makes the difference.

“Similarly, in Malaysia, if you are invested in glove stocks, you would have made decent returns. But if you take away the performance of glove stocks, the entire Malaysian market is actually down year to date. That is the nature of the markets that we have today. It is very skewed, to between 10% and 20% of the stocks in the marketplace. The broad 80% to 90%, which are largely concentrated in the value space, continue to lag in the marketplace, thereby creating a big gap in valuations. While growth stocks have taken a big leap [forward], value stocks have taken a big step backwards this year,” said Teng.

Value stocks will perform well only when the markets are very certain, he said. He added that the gap would eventually narrow in mid-2021, when the stocks are supported by an uptick in economic activities in a sustained manner, instead of through fiscal and monetary policies.

Teng said: “When talking about value stocks in Malaysia, banks, telcos and other big-cap companies come naturally into the big picture, as they provide decent dividends. However, there are also stocks in Malaysia that are at a discount to their net asset values, which could provide good returns to investors who are patient.”

Currently, many investors are chasing growth. Still, Teng thinks it is an overcrowded trade. “Sure, that is where things are so certain — you cannot argue that people want their food to be delivered to their doorstep, that e-commerce platforms are booming, and that Covid-19 has caused us to depend heavily on certain technologies. But you have to … realise that these stocks are trading at very expensive valuations and are generally just benefiting from the trend.”

Another risk that investors should bear in mind is the prolonged low interest rate environment. According to Teng, the current low interest rate environment, induced by the pandemic-driven economic slowdown, may continue until 2022. Malaysian investors should, therefore, take steps to mitigate the effects of this situation on their portfolios.

“Interest rates will stay low for much longer than what we would have expected. This may not be an issue for investors in Singapore or the US, as they have been in prolonged low interest rate environments before. But we have never experienced this in Malaysia. Interest rates [locally] did not go as low as this even during the 1998 Asian Financial Crisis.

“What should Malaysians do with their deposits? We have been very good at saving our money for rainy days. We have set aside a good amount of money for our retirement and a lot of retirees actually depend on income from the interest to cover their monthly expenses. I think this will be a challenge for many Malaysian investors,” said Teng.

To find alternative sources of income, he suggested that investors reallocate their assets and take risks that they are comfortable with. “There is no one solution — we never know how things will pan out in the next two years. Growth could surprise us on the upside, owing to the fiscal support given by the government and ample liquidity being created. Investors could [then] start chasing this, which is very unhealthy.


Pictures by Sam Fong/The Edge

“Instead, investors may want to have a bit of everything, so that they are prepared for anything. If they are near retirement, about 60% of their portfolios should probably go to more income-driven assets. They can buy some gold as a hedge in case things do not work out, some allocations in fixed income, value stocks as well as structural growth stocks — many of which are in the tech space.”

It will take time for global economic growth to return to its pre-Covid-19 levels. Central banks have indicated their commitment to providing liquidity as needed. This would create an environment that aids recovery, said Teng. “Central banks are prepared and will continue to be prepared to keep interest rates low, increasing liquidity in the system as and when needed. The anecdotal evidence that we see is that when central banks start to reduce liquidity, the markets tend to pause. At the moment, I think there is commitment from central banks to continue to provide the needed liquidity to support a recovery in the economy.”

While there is no doubt that situations are normalising and economic activities have been picking up from the low in March, some sectors such as travel and hospitality are still suffering, said Teng.

As far as the economic cycle is concerned, it will probably take another few quarters before investors can expect a full recovery, he added.

The third risk that investors should be mindful of is the US presidential elections, which will take place next month. Teng says President Donald Trump’s victory seems to be what the markets favour, as they prefer a sense of continuity, especially in terms of things such as tax policies.

“One key risk that we need to watch out for is what will happen if Trump loses and then refuses to hand over power. While it is something that has never happened before in the history of the US, we cannot write off the possibility. If the supporters get upset, things can get very chaotic.

“Another thing that I want to highlight is that the tension between the US and China will continue with or without Trump. The US’s position in trade and technology has been challenged by China, so they are not going to stay put and not respond, regardless of who the president is. Those who have invested in China should be mindful of this risk,” said Teng.

Earlier, in his welcome remarks, The Edge Media Group publisher and group CEO Datuk Ho Kay Tat noted that, although 2020 started out with so much promise and hope, it turned out to be crazy, surreal and economically damaging.

“What will the rest of 2020 hold for investors? Many experts say we should brace for a slow and uneven recovery in the second half of the year. Key factors to watch out for would be a second and, possibly, a third wave, of the coronavirus, the development of a vaccine and the November US presidential election,” he said.

Themed “Thriving Amid Volatility”, the session is part one of four in the webinar series that will be held in the coming months, said Citi Malaysia consumer business manager Elaine Fan during her opening speech. This was the first time that the annual flagship event, referred to as The Edge-Citigold Wealth Forum, was held virtually.

“During these unprecedented times, we are constantly finding innovative ways to keep our customers abreast of the latest market updates and insights — and with your safety and soundness in mind.

“I hope this series will provide deep insights into your investment journey during these uncertain times and how we, as investors, can better position our portfolios and thrive amid volatility,” said Fan.