This article first appeared in Capital, The Edge Malaysia Weekly on January 13, 2020 - January 19, 2020

SLOWING global growth and increasing uncertainty brought about by unpredictable policy changes have created a fragile backdrop for markets in 2020 and beyond.

Vanguard Research says while more favourable valuations have led to a modest upgrade in its equity outlook over the next decade, fixed-income returns are expected to be lower given declining policy rates and lower long-term bond yields.

“Returns over the next decade are anticipated to be modest at best. Our expectation for fixed-income returns has fallen because of declining policy rates, lower yields across maturities and compressed corporate spreads,” it states in a report last month.

The pivot to looser policy by central banks around the world, according to the research house, will persist in an environment of low growth and low inflation.

“Despite increased doubts about the effectiveness of monetary policy, we expect central banks to continue to adopt unconventional measures, while significant fiscal stimulus remains unlikely unless there is a more severe downturn.”

Given the heightened policy uncertainties, especially the trade tensions between the US and China, as well as the continuing failure of major central banks to achieve their inflation targets, global growth is expected to slow further in 2020.

So, what should investors do this year and, for that matter, in the new decade?

As clichéd as it may sound, market experts The Edge spoke to insist that investing in stocks has always been, and will always be, the best way to accumulate and build wealth. However, portfolio diversification remains the most important component in reaching long-term financial goals while minimising risk.

But the million-dollar question remains: Where exactly should we put our money?

Malaysia not appealing

Value Partners Group Ltd founding chairman and co-chief investment officer Datuk Seri Cheah Cheng Hye says his overall investment approach is to diversify across different markets and asset classes, with an emphasis on value investing.

“In these uncertain times, I also prefer to put part of my portfolio in gold and cash even though yields are low. Safety and capital preservation are key considerations,” he stresses.

Cheah acknowledges that, globally, the overall investment environment is not encouraging, considering that all sorts of asset classes, including US stocks, have become too expensive as excessive liquidity results in excessive buying.

“Social unrest and climate change, as well as trade and technology conflicts exert a growing negative influence on the global landscape,” he explains. As such, Cheah continues to to be “overweight” on Chinese stocks and bonds, given that the country still has huge potential for growth.

Even if China’s growth slows to 5% to 6% in the coming years, the story remains intact, he says, adding that attractive themes in China include continuing urbanisation, innovation and the dynamic growth of services, including healthcare, education and travel.

Closer to home, while Cheah remains cautious on the outlook for Malaysian stocks, as he has been for some time, he refuses to issue a “sell” recommendation for Malaysia.

“Economic growth for 2020, projected at 4.5%, is solid. Personally, I think the ringgit is undervalued and due for a recovery. The country’s ability to achieve a peaceful transfer of power, as seen in the opposition’s victory in 2018, is hugely impressive,” he says.

He, however, warns that the Malaysian market, which is trading at 16.6 times earnings, is not cheap. Moreover, given the lack of liquidity and persistent weakness of the ringgit, it is not attractive to foreign investors. He cautions that in 2020, Malaysia faces the risk of being taken out of the FTSE Russell World Government Bond Index, which would further reduce the country’s overall appeal as an investment destination.

“The longer-term worry is that Malaysia is caught in the middle-income trap and faces difficult structural issues. With recession risks rising globally and free trade in retreat, an export-driven economy like Malaysia’s is under challenge.”

Do not forget value investing

Value investing is an approach to invest in well-managed companies that offer long-term returns and stable dividend income, especially when their shares appear undervalued.

Dr Tan Chong Koay, founder and chief strategist of Pheim Asset Management Sdn Bhd, believes value investing works most of the time, but not all the time, and this makes investing very challenging. “Equities can easily outperform fixed deposits in the long run. However, at times, equities may have to face off with volatility. A crisis creates volatility, but at the same time provides many buying opportunities.

“Following an investment philosophy that allows you to navigate volatile times will help you improve your performance in the long run, although you may face temporary underperformance. Very few, in the long run, can outperform their benchmark every year,” says Tan, adding that a good fund manager is one who can cumulatively outperform the relevant benchmarks over a long period of time.

“If an investor does not have the experience or time to look at equities, he should focus on picking a fund manager with a long-term track record whom he trusts and is comfortable with,” he advises.

TA Investment Management Bhd chief investment officer Choo Swee Kee expects equities to continue to perform at least over the next one-year period as interest rates remain low and liquidity is abundant.

“Within equities, we would prefer emerging markets to developed markets. Commodities, other than gold, have a good chance of recovery too. However, long-term investors should always have a diversified portfolio and not rely on a single asset class for returns,” he says.

Choo is of the view that global stock markets, including Bursa

Malaysia, will continue to be cyclical, with ups and downs along a long-term growth pattern.

He expects the benchmark FBM KLCI to grow at an average of 4% to 5% per annum over the next three years. However, it should be noted that the stock market is also volatile and may outperform the average in one year and underperform in another to compensate.

Diversify, diversify, diversify

Phua Lee Kerk, chief strategist at Phillip Capital Bhd, believes portfolio diversification is crucial. “What could happen in the next 10 years is really unpredictable. At moderate risk, you should put 50% in equities, 40% in fixed income and the remaining 10% in alternative investments.”

Phua says the Malaysian stock market has not been performing well in recent years, and it will only become lively when there is more certainty in the political scene.

“Foreign funds are still waiting for the right time. Like it or not, unless another crisis happens, investors will find it more difficult to make money from the stock market in the next decade than they did in the past decade,” he says.

Geoffrey Ng Ching Fung, investment adviser and director at Fortress Capital Asset Management (M) Sdn Bhd, says Malaysian investors need to be broadminded now, rather than depending on the traditional names that have been around in the market for a long time. “We have to look at instruments that can give us exposure, not just to the Malaysian market but to other assets classes around the world. For instance, exchange-traded funds could give us exposure to the developed market. Now would be a good time to be defensive.”

Those looking at a diversified portfolio could consider allocating about 40% to 50% of their capital in equities, he says. “Even then, look for dividend stocks. For fixed income, go for the shorter dated ones. Maybe 10% to 15% should be allocated in private equity. Peer-to-peer, yes, but make sure you do some homework, because the ongoing credit monitoring is still not very mature.”

Secular growth drivers

Franklin Templeton Emerging Markets equity portfolio manager and research analyst Ismar Isqandar Izhar favours companies that can potentially benefit from secular growth drivers, such as rising consumer spending. And investors should also look out for companies that are innovative within their respective industry sectors. “We also like companies with improved corporate governance and where material improvements in ESG [environmental, social and governance] are being seen.”

According to him, the key themes in the new decade are consumption growth, trade and cyclical sector recovery, as well as technology innovation and digitisation.

Ismar says the growing middle class translates into rising affluence, driving the premiumisation of goods and services. “We perceive the young working population with rising wealth as a secular driver and we expect it to continue to lift demand for goods and services.”

Meanwhile, Malaysia is well-positioned to tap opportunities resulting from trade diversion due to the ongoing US-China trade tensions.

“Malaysian businesses continue to secure new contracts and receive additional orders from new customers and brand owners,” says Ismar.

Franklin Templeton also favours companies that are on board with digital transformation in their respective industries, as it sees potential benefits from the 5G migration and trade diversion.

Given the low interest rate environment, coupled with ample liquidity, Kenanga Investors Bhd executive director and CEO Ismitz Matthew De Alwis continues to favour equities in Asia. “In particular, we see secular growth drivers that will continue to benefit the tech sector, which include an accelerating rollout of 5G to benefit the equipment supply chain, artificial intelligence and Internet of Things driving hardware upgrades and 3D sensing driving camera module upgrades,” he says.

All these, according to Ismitz, should translate into strong demand for the tech supply chain and component manufacturers in the region, including Malaysia. “There is also value in the commodities space, particularly in oil and gas and palm oil. Oil and gas activities are starting to pick up, which may drive the demand for assets and services across the value chain.

“For palm oil, a shortage is estimated this year due to falling yields, slow replanting previously and rising demand from biodiesel usage in Indonesia. As investor sentiment on these sectors has been depressed for a long time, valuations are still undemanding in this space.”

Ismitz adds that there are also opportunities in the construction and building materials space as the implementation of various infrastructure projects pick up this year. “We also see tactical opportunities in selective companies and government-linked companies that could undergo reform or restructuring, hence unlocking shareholders’ value.”

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