Friday 29 Mar 2024
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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.

Impact of low oil prices to last 

Low crude oil prices have had a negative effect — a revised Budget 2016 at home and capital expenditure cuts in many countries. Oil-producing nations have been urged to stop pumping at record levels to bolster crude oil prices, but many of these countries are unwilling to do so. By doing so, they could lose market share, which may be hard to win back.

“If we look at crude oil prices over the last 20 years, they have gone up and down several times. When the price was around US$130 per barrel, everyone seemed bullish and pundits even predicted that it would rise to US$200 a barrel, which never happened. Likewise, the price is at the lower end of the band now and everyone seems bearish and pundits are suggesting it can go even lower,” says PMB Investment Bhd CEO Ameer Ali Mohamed.

“With the current development, it is a matter of time before crude oil prices recover. This, in turn, will help the ringgit recover. Any significant change in crude oil prices and the ringgit will definitely have an impact on most of the listed companies. Therefore, we will need to restrategise based on the latest variables.”

Pheim’s Tan says it is unlikely that the current oil price rally will be sustained over the short term, given the difficulty in reaching an effective and binding consensus among producers. “Oil prices of between US$30 and US$40 per barrel would be good for the global economy. We prefer to remain conservative and look for gems in the current circumstances. 

“On the domestic front, following the significant outflow of foreign funds in 2015, any recovery in oil prices or upside to the ringgit may attract an inflow of foreign funds, which will help underpin the local stock market. Government-linked funds, which are reducing their foreign investments in favour of domestic equities, will help provide buying support for stocks on Bursa Malaysia.”

 

Asia ex-Japan still the fastest growing region 

Despite the record outflow from emerging markets last year following the increase in US interest rates, Asia is still among the fastest growing economies in the world, says Ken Goh, CIMB-Principal Asset Management’s acting chief investment officer for Asean. 

“With about a third of the world’s population, Asia’s consumer spending base will develop at an accelerated rate. Although China’s annual gross domestic product (GDP) growth is expected to stabilise at about 5%, its GDP is still expected to reach US$15.4 trillion in the next four years. More importantly, in Asia, we do not foresee a sharp deterioration in employment, investment spending, inflation or consumer spending within the countries our funds invest in,” he adds.

But the firm is not sanguine that oil prices will improve this year as oversupply is likely to persist, says Goh. “Although we still believe there is downside risk to the ringgit, we do not foresee the same drop in magnitude we saw last year as a lot of negative sentiment has been priced in.” 

AmFunds Management Bhd (AmInvest) chief investment officer for equities Andrew Wong says growth is expected from Asean, with Indonesia and the 

Philippines in the lead. “The macro picture is currently clearer with regard to Asean. We see an opportunity in the technology sector, especially once more clarity surfaces and when we see limited downside,” he adds. 

“Market conditions, such as volatility, continuous earnings downgrades and slowing growth, would affect all strategies. In order to limit downside risks, we will focus on dividend yielders, countries with better fiscal and monetary policies, and non-discretionary sectors such as medical tourism.”

Wong advises avoiding the banking and technology sectors as a result of the rising cost of credit and softening demand in the Internet of Things sector.

CIMB’s Goh remains slightly guarded about Malaysia’s economic growth rate and the government’s commitment to fiscal rationalisation. “We stay cautious on Malaysian funds with the portfolios defensively positioned. We think the current strength in the ringgit is not sustainable. Hence, we continue to like exporters, but will rotate into lower price-earnings ratios and [companies] with high growth [potential]. We like construction companies for infrastructure plays,” he says. The ringgit fell to a 17-year low in August last year, below the psychological level of 4.00 against the US dollar.

AmInvest chief investment officer for fixed income Goh Wee Peng says there may be further cuts in Bank Negara Malaysia’s statutory reserve requirement or an adjustment in interest rates in the second quarter of the year if growth prospects worsen locally. “We will be avoiding sectors that are cyclical in nature and that require high capital expenditure in the coming years, for example, the oil and gas, automotive and technology sectors.”

She adds that there are pockets of opportunities in various asset classes and in different trading spaces. “Via active management, we will take advantage of volatility to enhance the returns of the funds. It can be a combination of asset allocation, duration positioning and spread trading. With strong conviction and a disciplined investment process, we are confident of continuing to deliver consistent above average returns.” 

 

Sectors poised for growth

In the light of the uncertainties, asset managers are overweight on sectors that could potentially be resilient such as infrastructure, utilities, telecommunications and consumer staples.

Public Mutual’s Yeoh says sectors with secular growth trends, such as healthcare and technology, are also something to look out for. “Companies that are able to increase sales by growing market share or by introducing new products, as well as sectors that benefit from ongoing changes in lifestyle and demographic trends are anticipated to perform well,” she adds.

However, given the challenging economic circumstances, Yeoh advises caution when buying into companies that are highly geared or have poor operating cash flow. 

“With the uncertainty in foreign currency movements, we are cautious on companies that have a high proportion of operating expenses or borrowings denominated in foreign currencies,” she says, adding that Public Mutual’s strategy is to focus on markets and companies with strong fundamentals. 

Despite the headwinds in the market, she advises investors to continue investing on a regular basis as market down cycles offer potentially good investment opportunities for long-term investors. “Investors are advised to maintain a diversified portfolio with allocations to select domestic, regional and global equity funds as well as fixed-income funds.”

While it is difficult to predict the movement of equities, Sheila is positive about “high single-digit returns”. The fund house has its bets on sectors such as construction, plantation and industrial products. “We will continue investing in the manufacturing and consumer sectors, which are expanding capacity and markets, rather than just depending on the benefit of a stronger US dollar against the ringgit. Additionally, a weakening against the US dollar could provide a further boost to the plantation sector.”

Ameer recommends that investors have a minimum three-year investment horizon. “Make sure you know the investment objective, investment strategy and asset allocation strategy of the fund in which you invest. If the fund has a historical performance, make sure you know its geometric annual performance and volatility level. Make sure you invest in a fund that suits your risk appetite,” he says.

“If you are in a savings mode, then you should invest periodically, preferably on a monthly basis, in the same fund. Do not be afraid to add on to your investment when the market is down. Keep yourself updated on the performance of the fund — not on a daily or monthly basis, but on a quarterly basis.”

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