Emerging markets (EMs) and Asia are still favoured investment destinations for their relatively better growth and valuation metrics compared with developed markets such as the US and Europe, says Lee Sook Yee, chief investment officer at Kenanga Investors Bhd.
“Stock markets in Asia and EMs offer higher earnings growth and are trading at lower price-earnings ratios (PERs) than those in the US,” she adds.
According to Bloomberg data, the earnings growth of the MSCI Emerging Markets Index (three to five years) was 14.7% while its PER was 12.3 times as at Jan 29. In contrast, the earnings growth of the S&P 500 was 10.6% while its PER was 17.9 times.
Lee says EMs could benefit from an improving liquidity environment, which is taking shape due to several factors. They include the peaking of interest rate hikes in the US, a more dovish Federal Reserve and a pause in US dollar strength. “Additionally, any positive outcomes from the trade negotiations would provide a boost to the global market.”
The sectors she likes in Asia include internet/e-commerce post-selldown as well as those that benefit from domestic consumption and government stimulus policies. In Asia, the fund house is overweight on Asean markets compared with North Asian markets, given their domestically driven economies, which are less impacted by the US-China trade war and slowdown in China. However, this position is tactical and the fund house is constantly monitoring the liquidity environment for signs of change.
Kenanga Investors sees value emerging in Malaysia as certain stocks have been sold down excessively. They include those in the technology, oil and gas and construction sectors. The fund house also expects certain situational plays to arise out of the government’s reform initiatives.
“For Malaysia, we have adopted a barbell strategy by having a selection of defensive stocks and a selection of value stocks. Thus, the portfolio should be able to benefit from technical rebounds while maintaining an overall defensive stance. Defensive stocks include those that offer good dividend yields with stable earnings and cash flow,” says Lee.
Last year, the MSCI Asia Ex-Japan tumbled more than 16% in US dollar terms while in Malaysia, the FBM100 and FBM Small Cap Index fell 9.3% and 33.7% respectively. So, Lee advises investors to adopt a trading approach, which could help them take advantage of sold-down stocks while remaining nimble to take profit when markets rebound.
Lee says investors should not only adjust their investment portfolio according to geography but also consider adjusting it by asset class going forward. “Equities, even in safe-haven destinations such as Japan and Germany, could be correlated to the global markets due to the high percentage of export-driven companies on their stock markets. These include automotive and capital goods companies in Germany and Japan, which are dependent on external demand.
“Investors who desire more downside protection could increase allocation to bonds, structured products and gold, apart from equities. They could also adjust their allocation of fixed-income securities to those that are denominated in safe-haven currencies such as the yen and US dollar.”
Lee says volatility is expected to persist going forward. The US-China trade talks remain the top focus for most investors, she adds. Following the announcement of the trade truce, there has been little news on the outcome of the negotiations except for China Vice-Premier Liu He’s scheduled visit to the US for further trade talks.
Considering the vast disagreement between the US and China over intellectual property rules, the trade negotiations are likely to be difficult and lengthy. So, investors should not be surprised if the trade truce and negotiations extend beyond the March 1 deadline, says Lee. “Investors should also be mindful that any hiccups during the trade talks could add to market volatility.”