This article first appeared in Capital, The Edge Malaysia Weekly on August 12, 2019 - August 18, 2019

WHILE talk of a third national car has intensified, one vehicle that clearly needs a jumpstart is the stock market and its benchmark index, the FBM KLCI.

Last Tuesday, the index fell to as low as 1,588.98 points — not far from its lowest point for the year on May 14 of 1,572.03 — following a sharp sell-off in US markets.

This time, there were reasons aplenty, starting with US President Donald Trump’s threat to impose a 10% tariff on the remaining US$300 billion of China imports from Sept 1, followed by US Treasury Secretary Steven Mnuchin’s declaration of China as a “currency manipulator” after the yuan fell to its lowest level against the US dollar in more than a decade.

Not helping were the intensifying geopolitical risks, the riots in Hong Kong and a growing trade conflict between neighbours Japan and South Korea. Nonetheless, a fund manager who spoke to The Edge on condition of anonymity, believes it is domestic factors that are keeping investors on the sidelines.

“We want to see contracts being awarded. That will have great multiplier effects. For the past 14 months, there have not been any. It is like being in a cinema and waiting for the movie to start. We don’t care who the actors are, we just want the movie to start,” he says.

That appears to be the sentiment across the board as fund managers search for signs of a market recovery.

TA Investment Management chief investment officer Choo Swee Kee has mixed feelings.

“The FBM KLCI has been a laggard for the past three years, with zero net return, and it should be trying to catch up with its regional peers. However, valuation-wise, it is trading at a relatively rich price-earnings ratio (PER) of 17 times due to the overall slow corporate earnings growth for 2019,” he tells The Edge.

Choo says it is difficult to justify a spike in the FBM KLCI if it is not reflected in the earnings growth of benchmark component members. As such, he does not recommend either a broad “buy” or “sell” strategy but suggests investors use the current global correction “as an opportunity to selectively pick stocks with promising prospects”.

But what do you buy during the current bout of uncertainty?

Given the market volatility, most fund managers shy away from disclosing their stock picks, but sector-wise, some are still positive on technology.

This is something of a surprise, considering that the sector was widely reported to be a clear casualty of the China-US trade tensions. Take the gargantuan US$150 billion in market value lost last Monday by the FAANG stocks — Facebook, Amazon, Apple, Netflix and Google (Alphabet Inc) — as tensions between the US and China were raised another notch.

Inter-Pacific Asset Management Sdn Bhd CEO Lim Tze Cheng says, “I am still positive on the sector as you cannot derail technology. It is a sector that will continue to move despite the trade war. For example, when 5G gets off the ground, the whole 5G value chain will see robust activity, so it is still a sector I would put my money in.

“The PERs for some tech stocks, however, are very high, at 30 times or more, but there are some in single digits. Personally, in a normal environment with no uncertainty, I would not pay more than 20 times for a tech stock,” he tells The Edge.

TA’s Choo also likes the technology sector, and construction for that matter, because of their growth prospects.

“We also like real estate investment trusts and banks for their dividend yields. REITs are good defensive stocks. They provide high dividends, and rental yields are generally locked in for three to five years. The low interest rate environment is also favourable to REITs,” he says.

The Bursa Malaysia REIT index has gained 9.3% year to date to 1,010.49 points last Thursday.

VM Markets Pte Ltd managing partner Stephen Innes is taking a more cautious stance as he thinks it is difficult to make a compelling argument for equities given that markets are in a heightened state of alert owing to the risk of both the trade and currency wars.

“Even with central bank easing, it is unclear during these trying times if corporations will take advantage of the easy money policy to reinvest in these companies.

“There are defensive strategies in healthcare that are generally considered recession proof as the global population ages,” he says.

Innes believes the FBM KLCI will be supported by local demand and a relatively resilient local economy but prefers to err on the side of caution because of the trade war.

“Local pension funds have very deep pockets but even then, a further escalation in the trade war would be damaging for the global economy and local shares. I think exercising caution is key [as I believe] the current sell-off could extend on increased global recession fears,” he says.

Choo concurs. “Just based on domestic factors, we believe the FBM KLCI is resilient and well supported by local funds. However, if the global situation deteriorates further, this could pull it down in line with the global trend.”

However, Choo believes that the escalation in geopolitical risks is not severe enough to cause pandemonium in the markets, as in the 1987 Black Monday crash. “I do not think we are at the panic stage yet as the Dow Jones has corrected by only about 5% from its recent high and the Euro Stoxx 50 by only 8%. These two big markets are not even in bear territory yet.”

However, fears of a global recession have intensified. Moody’s Analytics Asia-Pacific chief economist Steve Cochrane says the odds of a global recession in the next 12 to 18 months have increased from 40% to 50% given that the trade war has escalated beyond expectations and the stakes are high for the global economy.

“The tariffs cause prices to rise on an array of consumer goods in the US, resulting in higher inflation and weakened consumer confidence. Currently, consumer spending is the primary driver of growth in the US.

“If consumer spending falters, recession risks will rise. With these new tariffs, the risk of recession in the next 12 to 18 months rises significantly to about even odds,” he says.

Commodities guru Jim Rogers, too, believes a recession is coming, one that will be the worst in his lifetime. “I explained before, that 2008 was caused by too much debt. I explained that debt has skyrocketed since, so it is clear the next economic [recession] will be the worst in my lifetime.”

Discussing what asset classes investors can look at in these times, Rogers says he owns gold, but is not buying, and is waiting for “a good price collapse to buy more”.

Asked whether he would consider alternative investments such as bitcoin, Rogers had this to say, “Cryptocurrencies, as we know them, will disappear and go to zero. Investors should only invest in what they themselves know a lot about. They should not be listening to the television, internet, me or anything else. If you do not know anything in which to invest, put your money in the bank and wait until you find something.”

For investors today, at least until there is greater policy clarity both on the domestic and international front, that could be food for thought.

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