IF one looks at the recovery clock, the US is seen as being at a more advanced stage of recovery compared with other countries. Nevertheless, fund managers advise investors to consider Asian equities, as the region is still attractively valued and has a sustained recovery story.
Given the unsynchronised global growth, local export-oriented stocks stand to benefit in the longer term as the country will grow further when global consumption increases. Also, companies in the oil and gas, construction, and property development sectors are expected to benefit from the RM282 billion worth of government-related projects that will kick off in the next two years.
These were some of the points discussed at The Edge 2015 Economy and Investment Outlook Forum held two weeks ago. The speakers were Manulife Asset Management Services Bhd chief investment officer and managing director Jason Chong and Eastspring Investment Bhd chief investment officer and country head Chen Fan Fai. The Edge Media Group executive chairman Datuk Tong Kooi Ong also presented a segment.
The recent market volatility, especially last month’s, has spooked investors somewhat as the FBM KLCI fell 6.58% from its record close of 1,892.33 early this year to a one-year low of 1,767.77 on Oct 16. Meanwhile, the Dow Jones Industrial Average fell 6.73% to a six-month low of 16,117.24 on Oct 6.
US recovering, but at a slower-than-expected rate Manulife’s Chong attributed the fall to economic uncertainties. The International Monetary Fund slashed its global GDP growth forecast again in early October to 3.3%. This compared with its forecast in January of 3.7%, April (3.6%) and July (3.4%).
“The trend has been recurring in the past four years, where economists would be optimistic in the beginning of the year [only to revise downward their forecasts later],” he said.
However, Chong, in his presentation titled Global Volatility: Time to Buy or Sell?, pointed out that the US is indeed recovering, albeit at slower-than-expected pace. “If you asked me earlier … the world was running on a three-cylinder car [on the road to recovery]. Now, I think it’s running on a two-cylinder [car],” he says.
Nonetheless, he said that the US, being the biggest consumer, had an all-time high household net worth of US$81.8 trillion (RM273.57 trillion) as at the first quarter of 2014. “They [the Americans] are now richer than before the global financial crisis,” Chong said. In the same quarter six years ago, the US’ net worth stood at slightly below US$65 trillion.
He added that in 1Q2014, household debt-to-GDP was also the lowest in more than 10 years at 80.89% (quarterly, not seasonally adjusted), according to Federal Reserve of St Louis.
Besides, another major driver of the US economic recovery is shale oil, which will transform the country’s “world’s largest importer” status into “world’s largest net exporter” in a few years, Chong said.
“If you look at the global recovery clock, the world is at six o’clock, where it has just passed a recession. However, the US is ahead of other regions as it is seeing property prices rising again, whereas other regions are still struggling to see inflation,” he explained, showing a diagram of an economic cycle where the “boom” period begins at the nine-o’clock-position. The “slowdown” and “recession” stages begin past 12 o’clock.
Nonetheless, with the Standard & Poor’s 500 rising at a compound annual rate of 12.6% since 2010, there might be a slower growth in the US markets. Although about 60% of US corporate third-quarter earnings exceeded expectations, Chong said the US economic boom might still take a few more years to take off. “It is fair to say that the returns going forward will be more modest, in the single digits.”
Asia is attractive
Eastspring’s Chen also thought that the US markets have been overvalued, compared with their Asian and European peers. This is evident in the price-earnings, price-to-sales and price-to-book ratios.
“The US’ earnings growth is not picking up as much as the share prices, but Asia’s prices are running and their earnings are delivering,” he said.
In his presentation titled US Continues to do Well …but Asia is Attractive, Chen said Asian markets’ performance has been relatively stable. “Asia will leverage the global economy in terms of exports and will pick up quite quickly.
“There is no major crisis, at least within Asia, waiting just to break out. Investors will come rushing in simply because Asia has the highest growth in the world.”
While Japan is still seeing stunted growth, Chen argued that Prime Minister Shinzo Abe’s Abenomics reform policies have lowered unemployment to 3.8% from 4.18%, when he was re-elected in December 2012. Meanwhile, the country, which is suffering from deflation, is seeing its GDP narrowing to close to zero rather than in the negatives.
As for Europe, both Chen and Chong agree that the continent will not go into another contraction, provided that the eurozone policymakers remain adamant in seeing reforms through.
“Although the monetary stimulus helps to buy time, the underlying reforms must happen. But there are signs that suggest the eurozone is bound to not go back to a contraction. Most of these things are behind them.”
What does this mean for Malaysia?
Chong said that Malaysia, being an export-reliant country, will see growth as the global recovery takes shape. “Meanwhile, domestic consumption is slowing down. Government projects, however, will help to sustain the economy.”
However, Chong pointed out that commodity prices have yet to fully recover and some have been battered. They paint a more accurate indicator of the economy.
He pointed to the more than RM282 billion worth of infrastructure projects that are expected to kick off over the next two years as being supportive of domestic economic growth. The projects include the RM27 billion Pan Borneo Highway, the Kuala Lumpur-Singapore High Speed Rail, Petroliam Nasional Bhd’s Refinery and Petrochemical Integrated Development (RAPID) in Pengerang, Johor, and the second mass rapid transit line.
However, Chong said that Corporate Malaysia is looking at an earnings growth of 6% to 8% this year. “And this will reflect the returns,” he said. Thus, he suggested a “bottom-up” approach to investing — by looking for stock ideas.
“Hidden gems” are out there somewhere. Chong pointed out that the FBM KLCI’s muted performance this year (lower 1.87% year-to-date, as at last Thursday) was completely in contrast to its counterpart Bursa Malaysia Small Cap Index, which has advanced 10.9% in this year alone.
“The 30 companies that make up the KLCI might not see exciting growths for now, but remember that there are nearly 900 companies listed on Bursa Malaysia,” said Chong.
A potential issue that Malaysia could face, he pointed out, is further disappointment in corporate earnings after the Goods and Services Tax (GST) is implemented next April, which will result in higher costs.
“We have to see how well Malaysian consumers weather the GST. This is something new for our country. When Japan increased its consumption tax in April, its economy did not rebound as much as expected,” he said.
This article first appeared in The Edge Malaysia Weekly, on November 10-16, 2014.