KUALA LUMPUR (Jan 18): Global economic growth is expected to moderate this year, but market volatility is likely to remain heightened in the months ahead, United Overseas Bank (Malaysia) Bhd (UOB Malaysia) said today.

Lingering geopolitical risks, including trade tensions between the US and China and lower commodity prices, are among challenges facing the world’s financial markets.

According to UOB Malaysia managing director and country head of personal financial services Ronnie Lim, uncertainty will continue to dominate trade relations between China and the US in the year ahead.

"We believe that the worst-case scenario would be the imposition of tariffs on a wider range of Chinese goods. This could escalate trade tensions, should China retaliate and ultimately divert trade and investment away from China and the US," he said in a statement today.

"Continued trade woes could also affect Asian economies that are plugged into global value chains," he added.

Lim said the US Federal Reserve's (Fed) increasing of interest rates on the back of low unemployment could give rise to a stronger US dollar and add further pressure on Asian economies.

"European politics stand to face another turbulent year, adding further pressure to global markets. The UK’s Prime Minister, Theresa May has lost her parliament’s vote on her crucial Brexit deal. There remains a wide and complicated range of Brexit outcomes, including the possibility of a no-deal Brexit

"(As such,) financial markets could see more volatility in the run-up to the March 2019 Brexit deadline," noted Lim.

He added that other key political events such as the European Parliament election in May, as well as the Portuguese and Greek elections in October, could result in additional uncertainty for the financial markets.

Given the market uncertainty in 2019, Lim advises investors to remain discerning, when it comes to choosing their investments.

"They must distinguish between market noise and investment fundamentals. For example, equity investors should focus on the fundamentals of the security when making a stock selection.

"This means paying close attention to what a company does, its balance sheet and how it is positioned to compete with other players in its industry," he said.

"Investors should be less driven by the supply and demand for a security based on its last market price," he added.

Lim also said investors with a medium to low tolerance for risk and with a long-term investment horizon should stay defensive and prudent throughout 2019.

"These investors should consider anchoring their investment portfolios in low volatility investments that can generate sustainable income while mitigating wider market risks.

"Building a portfolio that is diversified across asset classes and includes an allocation to bonds can offer greater stability to an overall investment portfolio. Bonds have a valuable role to play in a portfolio as they provide an added measure of stability by providing regular income streams. They also display lower volatility, compared with other asset classes such as equities," he said.

On his outlook for the Malaysian economy in 2019, Lim said the bank expects Malaysia’s gross domestic product to expand by 4.9%, albeit at a slower rate than last year.

"Domestic growth is likely to be supported by strong demand from private consumption and steady inflow of foreign investments and exports. The new administration’s efforts to build a more transparent government, steady growth, low unemployment and a surplus current account will help support the domestic economy in the year ahead," he said.

Lim believes Malaysia is also likely to benefit from regional and multilateral trade initiatives such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which will help boost trade and investment across Asean. "Stronger connectivity and closer trade links with our regional partners will help enhance the country’s resilience against rising global trade protectionism," he added.

Over the medium term, UOB Malaysia is expecting the local economy to continue on its growth trajectory given its strong fundamentals and ongoing policy reforms to stimulate growth through labour productivity, capital spending and technology.

"Slowing interest rate rises favour fixed income and balanced income strategies. While we expect equities to achieve good returns in 2019, the asset class is expected to remain volatile and may be less suitable for investors with lower risk tolerance levels," said Lim.

Based on UOB Malaysia’s house view, the outlook for fixed income should improve in 2019, given yields may be more attractive, as the Fed slows its pace in raising interest rates in 2019.

"Additionally, we think the current widening of credit spreads makes valuations of global corporate bonds quite attractive at current levels. As such, we are overweight on investment grade credits and prefer short to medium duration high-grade bonds that are positioned defensively to weather the heightened volatile environment.

"Our positive outlook for corporate credit bonds is underpinned by strong security selection in which we look at corporates with strong balance sheets, sound management structures and business plans," Lim said.

In terms of security selection, Lim said UOB Malaysia looks at the fundamental indicators such as global economic growth, corporate earnings, bond yields and recession risks. These securities, underpinned by strong fundamentals, have the potential to offer added stability to an overall investment portfolio by mitigating risks and generating income.

"For global equities, we believe they have the potential to generate positive returns, especially based on current valuations following the market correction in the fourth quarter of 2018. Nevertheless, investors still need to be cautious amid a volatile, market sentiment-driven environment.

"In developed markets, we are neutral on US and Japanese equities, and slightly negative on European equities. With the sell-down in late 2018, the absolute valuations of US equities look reasonable, but relative valuations to other regional equities remain elevated," Lim said.

On emerging market equities, UOB Malaysia favours Asia (ex-Japan) in light of the region’s healthy economic growth and compelling valuations. "Within the region, China equities offer better return potential, as valuations have fallen, following the recent market sell-off," Lim said.