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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 14 - 20, 2016.

 

The gloomy investing climate looks set to continue this year. But every cloud has a silver lining — value is emerging from regional equities and bonds for long-term investors.

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Last year was beleaguered by tumultuous financial markets, dismal commodity prices and a weak ringgit. Fund managers expect the stormy weather to continue in 2016.

But it is not all doom and gloom. There are still investing opportunities in the market, the fund managers tell Personal Wealth. Investments such as regional equities and bonds are likely to be priced lower than in previous years, and they recommend staying invested as value is emerging from stocks that have been under the radar. 

“The macroeconomic outlook remains uncertain in 2016. Investors should look for undervalued companies with strong management and improving fundamentals [that are] potentially outperformers,” says Pheim Asset Management Sdn Bhd chief strategist Dr Tan Chong Koay. 

“Asia-Pacific ex-Japan still offers tremendous growth opportunities over the long term as investors can diversify across currencies and economies. The valuations are more compelling after the selldown in equities and depreciation of currencies. Clients should remain invested. The ratio of equity investment to total available long-term funds depends on the risks the investors are able and willing to take.” 

Public Mutual Bhd CEO Yeoh Kim Hong sees what the potential regional markets have for investors with a long-term horizon. “The retracement of regional markets has resulted in the valuations of select markets falling to a discount of 20% or more relative to their historical averages. As such, these markets offer potential investment opportunities for long-term investors,” she says.

As it is difficult to predict when the headwinds will change direction, Amanah Mutual Bhd CEO Sheila Halim recommends diversifying for better returns. “Unless it is warranted, avoid relying on one or two sectors for good returns. Instead, have a wider range of sectorial allocation and broaden your portfolio slightly to include stocks, bonds and cash,” she says.

Eastspring Investments Bhd chief investment officer for retail and institutional business Chen Fan Fai says that with uncertainties aplenty it would be advisable to realign one’s investments to focus on short to medium-term returns. “If one’s investment horizon is short to medium term, an income-oriented or perhaps defensive high-yielding equity strategy is more appropriate. Having said this, investors should assess their own risk appetite, the returns they need or desire, and their investment horizon,” he adds. 

In terms of returns this year, Tan believes that investors can expect to get 5.5%, 7% and 9% from income, balanced and growth funds respectively in the long run.

“We like to think that investors would expect an equity fund to beat the one-year fixed deposit interest rate and the annual Employees Provident Fund dividend rate,” he says.

 

Lack of growth drivers

The challenge in 2016 will be the lack of growth drivers for the global economy. Tan says China’s transition into a services-based economy comes with risks as it comes at a time when the recovery of developed markets is slower than expected while the emerging markets are affected by a slump in commodity prices. He says physical properties and equities will help investors ride out the current market conditions.

“We assume many potential investors have their money in savings or fixed deposit accounts. They are not necessarily happy with the returns as the interest rates are low. It is difficult to be too bullish on gold when the US dollar is strong. It is challenging to invest in long-term bonds when the interest rates are rising,” he adds. 

“Property and equities are two possible investment outlets. Physical property can be illiquid. Equities are relatively liquid but not without risks. It is logical to put your money to work in equities when the stock market is depressed.” 

The fund managers say the downturn in economic activities in China, followed by a further deterioration in the global financial markets, could potentially derail global economic growth. China’s economy is expected to slow to 6.3% this year from 6.9% in 2015 and 7.3% in 2014.

“More earnings downgrades and disappointing economic data will lead to a market correction. However, we view the slump in stock prices as a good buying opportunity for long-term investors. [Pheim’s] equity exposure is now at a moderate level,” says Tan.

Yeoh envisages that developed markets, namely the US and Europe, to be particularly challenging this year as the growth outlook is uncertain and market valuations are not cheap relative to their historical averages.

Last year will be remembered for the nerve-racking global volatility, from the lengthy build-up to the Federal Reserve’s interest rate hike to the slowdown in China. Exacerbated by geopolitical conflicts, such as the Syrian refugee crisis and a potential outbreak of the Zika virus as a result of rising infections, the International Monetary Fund (IMF) has warned that the world economy is “highly vulnerable”.

RHB Asset Management Sdn Bhd managing director Eliza Ong says the biggest threat to the global economy, apart from China’s slowdown, is the associated rising corporate default risk. The fund house has since reduced its exposure to vulnerable sectors such as commodities and property.

“We believe that oil prices will stabilise in the next two months, but with a yearly average that is still below that of 2015. The stabilised oil prices may lift sentiment on the ringgit. Furthermore, barring any unforeseen circumstances, we expect the resolution of the few non-macro issues to increase ringgit attractiveness and hence, our more positive view [relative to consensus] on the ringgit’s performance in 2016,” she says. 

“Against such a backdrop, the strategy has been to continue investing in companies with capacity expansion, with the right cost structure that can still reap the benefits of low raw material costs amid lower commodity prices. Above all, our in-house rigorous and in-depth bottom-up fundamental research process will help us pick the right companies with strong growth potential and healthy balance sheets that commensurate with the business these companies are in. Our aim is to select companies that are able to thrive in various economic cycles.” 

On the home front, the effects of the Goods and Services Tax (GST) implementation are tapering off, say the fund managers. The controversial consumption tax, which serves as crucial revenue for the federal government following the protracted oil price slump, was implemented at 6% on April 1, 2015.

Sheila says the impact of GST is gradually smoothing out, although domestic consumption was badly affected when it came into effect last year. The fund house believes consumption will normalise going by past experience.

“Strong domestic consumption can be translated into positive corporate earnings for the market. This may lead to an improvement in the stock market,” she says.

“We will keep some cash to take advantage of any significant market weakness. We will also continue to employ a stock-picking strategy to generate outperformance. The focus will be on undervalued companies to ride select investment themes, including pricing power, higher crude palm oil (CPO) prices and dividend and capital management.

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