This article first appeared in Personal Wealth, The Edge Malaysia Weekly on September 7, 2020 - September 13, 2020

Malaysia’s second quarter GDP data shows the scale of destruction that the Covid-19 pandemic has brought to the economy. At a -17.1% contraction, it is the deepest fall in any quarter, even worse than the -11.2% that Malaysia experienced during the height of the Asian financial crisis. Looking at the expenditure component, the bulk of the pain came from a sharp pullback in household consumption and investment activity.

While the Movement Control Order compounded the economic damage, the payoff is clear now. Malaysia has gotten the pandemic under control, and that will aid the economy to regain its footing. Since June, business activities have shown signs of improvement. Even though we are still in the Recovery Movement Control Order phase, it feels almost like life is back to normal — daily traffic jams, long queues at the hotpot restaurants, and even packed malls over the weekends.

Well, looking at things positively, that is good news for our economy — business activities are picking up. Consumer consumption is slowly getting back on track given that a lot of restrictions by the government have been lifted. Interstate travel is now allowed, encouraged even. This means Cuti-Cuti Malaysia is officially on again. Domestic hotels are seeing a pick-up in the number of local tourists. This is all great news.

That being said — yes, you knew it was coming, didn’t you? — we see GDP growth still being in the negative in the third quarter. But it should only get better from now on. Malaysia’s director general of health, Tan Sri Noor Hisham Abdullah, has done a tremendous job managing the coronavirus crisis so far, and the second wave looks to be under control.

Further, with the enforcement of the mandatory face mask ruling, all Malaysians must strictly adhere to the standard operating procedures to lower the chance of a third wave, if any.

In a worst-case scenario, if our region were to be hit by rising infection rates and the country adopts strict lockdown measures once again, it is likely that a recovery may only be seen in mid-2021 and an economic recovery back to 2019 levels will be delayed to 2022.

Bank Negara Malaysia is now expecting 2020’s growth to be within the range of -3.5% to -5.5%, compared with -2% to 0.5% before. There continues to be a good chance of Bank Negara further cutting the overnight policy rate (OPR) by 25 basis points to a new record low of 1.5% owing to the yet uncertain global outlook for the second half of the year. Just like the US Federal Reserve, it is not even thinking about raising rates, but will continue to provide support for the economy, and see interest rates stay near zero through 2022.

Furthermore, the loan repayment moratorium period is due to end this month. Even though the authorities have extended the moratorium for some categories of borrowers, that is, those who have lost their jobs, and put in place restructuring and rescheduling initiatives for those who saw their salaries cut, the moratorium is no longer implemented across the board for all borrowers.

Given that the moratorium has been a key factor in supporting private consumption, the need to ease the sudden transition back towards having to service their loans once more has become even more apparent to the consumer. Hence, easing interest rate burdens via another interest rate cut could be a factor for the Monetary Policy Committee to consider.

Further interest rate cuts will impact those with a major portion of their cash sitting in fixed deposits (FD) and savings accounts as these will now generate even lower interest. Diversifying your cash into alternatives such as investments or savings plans is key in a low interest rate environment.

Given the uncertain second-half outlook and escalating US-China tensions, most investors are looking to have a consistent income. In this case, diversifying into dividend-yielding assets like bond and income funds can provide predictable income with relatively lower risk.

For those with a longer-term view, we suggest staying invested in equities. Given that valuations are now on the higher side, it is best to stay the course, invest as planned and use a dollar-cost averaging strategy to benefit from this volatile market.

Those who are more conservative and looking for certainty in the longer term would value having a portion of their cash diversified into endowment plans that are able to provide steady, higher-than-FD returns that come with life protection.

Of course, your investment choices would really depend your risk appetite and life goals.

Should we buy more gold? Amid the risk-off environment, gold prices have tested new highs. Gold prices are being supported due to the historically low interest rates. Alongside this is the reality that the pandemic is still not under control. However, we remain reserved when adding gold to our portfolios given its nature as a hedge against market risks.

Remember, gold does not yield any return, so when treasury yields are higher, it makes it less attractive to hold gold. When yields are lower, it means investors have to give up less potential yield in order to hold the precious metal. Therefore, it is recommended to have not more than 5% to 10% of gold in your portfolio.

Ultimately, it is important that we build multiple income streams from the different investment asset classes to generate steady and consistent returns, amid the uncertain outlook for the rest of 2020.

Volatility continues, hence we should always stay vigilant. But do not let your cash sit too long until it erodes in value in a lower-for-longer interest rate environment.

Michael Lai is executive director of wealth advisory (wealth management) at OCBC Bank (M) Bhd

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