This article first appeared in Capital, The Edge Malaysia Weekly on December 12, 2022 - December 18, 2022

EQUITY markets are likely to continue on a bearish and volatile path as the world goes into a recession before some optimism emerges in the second half of next year, according to Principal Asset Management Bhd (Principal Malaysia), the country’s second-largest asset manager.

“Markets are always ahead of the real economy by easily six to 12 months. So, this whole year, the markets have already indicated to us that we will go into a recessionary period, globally. Markets are telling us how inflation has been persistent, especially in developed [countries] like the US,” country head and CEO Munirah Khairuddin tells The Edge in an interview.

Stubbornly high inflation in the US led the Federal Reserve to raise interest rates by 75 basis points (bps) last month, for the fourth time this year, lifting the target range for the Fed funds rate to between 3.75% and 4%, its highest since January 2008.

While the aggressive rate hikes helped slow annual inflation to 7.7% in October from 8.2% in September, it remains high.

“With headline inflation that high, the Fed will continue to hike rates as it needs to firmly [drive] down inflation. As a result of that, you have US dollar strength, which in the end makes it quite difficult for the rest of the world, especially exporting countries like Malaysia,” says Munirah.

“You can see that the yen is at its lowest, Europe is struggling and China has its own issues of Covid-19 restrictions. So, the world is definitely going into a recessionary period.”

These challenges to the global economy, including high inflation, will remain for some time, she opines.

“But at some point, we are hoping that the Fed and the rest of the world will be able to [put to] bed that inflation, and we probably will find a stalling of rising interest rates. We expect that maybe by the second half [of 2023], we could see some relief. And if China opens up, that will provide some relief to the markets as well,” she says.

“So, maybe in the second half of next year, we could see more optimism in equities globally. Until then, it will be volatile, like what we’re seeing right now.”

Be that as it may, she advises investors to remain invested.

“In any market cycle, there are always opportunities for investment. Like [in a period of] rising inflation, usually real assets have a real play. You’ve seen, for example, a lot of interest in alternative [investments] like real estate and commodities. As fund managers, there is always opportunity for us … and for investors, it’s really important to remain invested and ride that [cycle],” says Munirah, who has helmed Principal Malaysia since August 2013.

Principal Malaysia is 60%-owned by US-based global fund manager Principal Financial Group, with CIMB Group Holdings Bhd holding the other 40%. With assets under management (AUM) of RM76.4 billion at end-November, of which about 15.2% (RM11.6 billion) is shariah-compliant, Principal Malaysia is the country’s second-largest asset manager after Public Mutual Bhd. It competes closely with third-ranked AHAM Asset Management Bhd, which had AUM of about RM75 billion at end-October.

Within Asean, the Principal group manages RM90.03 billion worth of assets, of which 12.9% are shariah-compliant. It has about three million customers in the region, of which 2.89 million are in Malaysia.

“We are very focused stock-pickers and quite sector-agnostic,” says Munirah, when asked about its investment decisions in the current environment. “We like inflation-hedge plays [like] commodities, but this depends on the valuations of some of the oil and gas companies.

“We like companies that have some kind of hedge in their sustainability plays. Some technology companies, that have been really hammered, have very interesting valuations. Basically, we’re sector-neutral, but look for gems in [terms of] companies that are resilient and are able to sustain their business model in this kind of environment.”

Munirah is keen on stocks, particularly in the US, Japan and Asean markets. “We like the US market because some of the [stock] valuations are really looking cheap, and they have very good fundamentals. Japan is also looking very cheap. We do like some of the Asean plays … there are some interesting Indonesian names. We even like Vietnam. We like plays on companies that can benefit from the US-Sino stress.

““We don’t take a call on a country. But we like the Asean bloc a lot because its interest-rate rises are not as strong as in the West. Valuations have been hammered and it is a very good long-term story of exports, biotech and semiconductors. Our Asean funds are doing really well.”

As at Dec 8, all key Asean stock market indices were down year to date, except Singapore’s Straits Times Index (up 3.6%) and Indonesia’s Jakarta Composite Index (up 3.38%).

Although ESG (environmental, social and governance) investing is increasingly important to Principal Malaysia, Munirah acknowledges that only “a very small portion” of its AUM can be considered sustainable. That is because of the approach it takes on such investments, she explains.

Principal Malaysia has been a signatory of the United Nations Principles for Responsible Investment (UNPRI) since December 2019.

“The approach that we are taking is one of integration and not exclusion. This means if we like a company and it’s not fully net zero but has the potential to do better and is committed to it … we invest in those companies,” she says, adding that if one were to exclude such companies, then the options for investment would be “too narrow”.

“So, what we would rather do, which is what we are very active in, is to work with the companies that we invest in, monitor the management and their attestation to net zero. And if they are in conflict with certain issues, whether it is labour issues or climate change, we [have] our own research score and we put pressure on those companies,” says Munirah.

“Because we are a large institutional investor, we [can] put pressure on the companies to commit to the plans to get to their sustainable targets. We think that is a more meaningful way in the long run, because many Asian companies still have some way to go.”

She goes on to explain that this is why it is hard to say exactly how much of its AUM is considered sustainable. “We’re very careful of [running the risk of] greenwashing as well.”

Meanwhile, Munirah notes that Malaysia does not fare too badly on the “S” (social) aspect of ESG. The country emerged as the 20th most financially inclusive market out of the 42 analysed globally in Principal Financial Group’s inaugural Global Financial Inclusion Index 2022.

The Asian countries that fared better were Singapore, which took the top spot, Hong Kong (No 4), Taiwan (No 16), China (No 17) and Thailand (No 19). The index is built around three pillars — government support, financial system support and employer support.

What is interesting is that Malaysia ranked high — taking 5th position — on financial-inclusion support provided to employees by their employers.

“So, [Malaysia] does have some very strong financial inclusivity scores globally that I think many are not aware of. Financial stability and security is very much a part of sustainability, and people tend to downplay that [as they focus] more on climate change or governance. But the social aspect is really important,” Munirah points out.

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