This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 8 - 14, 2016.

Sluggish global growth, still loose monetary policy by the US Federal Reserve and China adopting further stimulus measures to avoid a hard landing for its economy — this about sums up the key events that could shape the global investing environment this year.

Ibra Wane (picture), senior equity strategist at Amundi Asset Management, says there is a 70% probability that global growth will stay close to 3% this year, which is 0.6% lower than the International Monetary Fund’s (IMF) most recent forecast. 

The Fed is also expected to be extremely careful about increasing interest rates again and China will likely adopt further stimulus measures for a soft landing. “There is a big probability that this will be the scenario this year, which we call the ‘central scenario’,” says Wane.

What is the investor to do when the environment is not conducive to growth? According to Amundi Asset Management in a report, investors can still look at risky assets such as equities and corporate bonds. However, the investment strategy should include a “macro hedging” approach, says Wane. 

Under this approach, investors are advised to apportion part of their investments into US treasuries and German bunds. Amundi’s report suggests overweighting equity markets in the eurozone over the US and staying cautious and selective on emerging markets. 

“In a period of stress, bonds, in particular US treasuries and German bunds, are considered safe havens. If the interest rates in these countries go down, bond prices will go up,” says Wane. “You can have, on the one hand, a 10% correction in equities [due to stock market volatility] and on the other, an appreciation in the pricing of bonds.”

Apart from US treasuries and German bunds, another macro hedging tool investors can look at is gold. “Though gold prices were battered for the third consecutive year in 2015, it is the only risky asset class that rose during the Gulf War, the 9/11 terrorist strikes in 2001, the 2002 recession and the sovereign debt crisis,” he says. 

There are signs that economic growth in the US and China — the two drivers of global growth — is decelerating. For one, US wages have yet to show signs of a significant uptick. 

“For a complete recovery, you will need wages to increase. Otherwise, the consumption engine will run out of steam. Currently, the wage increment in the US is 2%. You need at least a 3% wage rise to have a 2% CPI (Consumer Price Index) inflation,” says Wane.

Other factors that could cause the US economy to slow down include the strength of the US dollar, the Fed’s interest rate policy and a nosedive in the energy sector, which could impact the banking sector. 

Wane expects the Fed to hike the interest rate another two to three times gradually — by 100 basis points this year. But some of his counterparts based in Paris have trimmed the forecast to 75 basis points. 

“If the US economy is going to decelerate from 2017, then the Fed would have to face this new dynamics. There is a possibility there could be some kind of further quantitative easing,” he says.

Positive on eurozone equities

Amundi is positive on the eurozone, which is recovering gradually. In its report, it says eurozone GDP growth has improved to its 2007 levels, although investment remains 15% below. Economic sentiment, exports of goods and services, loans to the private sector and employment rate all saw an improving trend last year, albeit a slow one. 

In line with its positive outlook on the eurozone, Amundi believes that equities in the region can be expected to outperform bonds this year. In its report, it notes, “Interest rates are likely to remain extremely low in the eurozone … and rise only very gradually in the US. Yields on corporate credit have also subsided, falling from more than 4% for AA [rated corporate bonds] in 2011 to 0.5% today. At more than 3%, the yield on eurozone equities remains particularly attractive compared with other asset classes.”

Investors have shown a renewed interest in eurozone equities due to the European Central Bank’s monetary policy, which is expect to loosen further amid the decline in the euro and oil prices.

The Institutional Brokers’ Estimate System (IBES) consensus shows that earning per share (EPS) growth in Europe and in the European Economic Monetary Union is expected to be 6% and 8% respectively in 2016. In the US, EPS growth is seen at 7% this year (in line with global EPS growth), making equities relatively expensive.

At the same time, the margins on US equities are topping out due to the rebound in prices to high levels, coupled with a stronger US dollar, drop in oil prices and growth slowdown.

Emerging markets

As at Jan 26, the MSCI emerging market index stood at 707.69 points, a six-year low since July 2009. This pushed valuations to a 10-year low and a question asked is whether this could be a signal for investors to start bargain-hunting. 

According to Amundi’s report, cheap valuations in emerging market equities have taken into consideration the looming negative factors. Hence, it expects an improvement in oil prices and China’s growth could prompt a “counter trend rally on the oversold”.

Amundi’s Global Emerging Markets team expects Russia, India, the Philippines and Thailand to outperform. Russia is expected to outperform due to its macro adjustment and the improvement in the Ukraine situation. Preferences [are given] to companies [that] are making structural gains even in a difficult environment. This is mainly in the technology, financial and food and retail sectors.” 

India has been one of the fund managers’ favourites since last year due to its strong domestic demand and young demographic. It is also a beneficiary of plunging oil prices. 

Amundi expects India to outperform, owing to its new government tackling key economic issues (including lower energy subsidies, improving tax collection) and rising inflation due to an improving food supply chain. “It is one of the few economies that has steadily gained market share in world exports … and has low foreign ownership of government debt,” it says in the report. 

Of course, there will be challenges and these include the ability to implement structural reforms, the already priced-in valuation of the equity market and a high fiscal deficit of around 4.5% of its GDP last year. 

Looking at Southeast Asia, the key positives in the Philippines include solid overseas remittances, which make up 10% of GDP, resilient private consumption and an improving debt profile and investment outlook. “The risk appears low and outlook attractive. Valuation is a concern for some sectors such as consumer and property. We keep a preference towards banks.”

In Thailand, growth is expected to start bottoming out on the back of the approval of foreign direct investment, an improving tourism environment and the infrastructure projects underway such as the double rail tracks and the extension of the metropolitan rail system. Risks include banks facing rising non-performing loans, political uncertainties and the King’s health, which would impact its political scene.

What about Malaysia?

Amundi shares the prevailing view that Malaysia’s economy is facing some challenges. These include the government’s limited ability to cushion an external slowdown, given its high fiscal deficit and public debt.

Malaysia downgraded its GDP growth to 4% to 4.5% in its revised Budget 2016, which was announced on Jan 28. Earlier forecasts had put growth above 4.5%.

Amundi says, “Overall investment has been flat and has relied a lot on public investment. The secular decline in FDI (foreign direct investment) is explained by a loss of competitiveness and productivity. There is also a lack of strong drivers for domestic demand and high credit to GDP.”

But, it adds, there are opportunities, given the undervalued currency and a resilient equity market. 

Compared with the MSCI World Index, which had fallen 6% year to date, the FBM KLCI has fallen 2%, which shows that the local market is quite defensive due largely to the support of the pension fund for government-linked companies. 

The fund house’s investing theme remains focused on exporters, given that a weaker ringgit will be a boost for players in the apparel, furniture and electrical and electronic sectors. Other sectors to look at include healthcare and construction.

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