Value hunter (Pt 2)

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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 29 - March 6, 2016.

Kenanga Investors Bhd chief investment officer Lee Sook Yee’s diligence and thorough research process have helped her discover small  and mid-cap gems — and  outperform her peers in the industry.


Moving forward, Lee will be focusing more on the smaller funds under her watch and actively searching for investment opportunities in the region. “We will look at some of our smaller funds as they are more nimble, have well-defined investment objectives and share the same bottom-up strategy as our flagship funds. The most important thing for us now is to continue establishing a solid track record for these funds. I feel we are now ready to go out and promote them,” she says.

“Also, we have been quite Malaysia-centric. We launched our first regional fund — the Asia-Pacific Total Return Fund — in 2013. Its benchmark is against a compound return of 10% per annum. Our total return funds look at the absolute returns of the funds instead of following the old way of relying on benchmarking as a performance indicator,” she adds.

“Two years later, we launched our second regional fund — the Asean Tactical Total Return Fund — focusing only on Asean. This fund previously lagged its biggest peers [in Northeast Asia]. So this time around, our Asean fund is in a good position to leverage the expected improvement in the regional market. A reversal in the strength of the US dollar will also benefit the emerging markets, including Asean.”

Lee is confident the regional funds will perform in the future, owing to her experience in regional asset management in Singapore and Kenanga’s expertise. “The Singapore experience has given me an entirely different perspective. It is very useful for me to actually build up the expertise in our regional funds. We also have expertise in the regional market and have experienced fund managers.”


Challenging year ahead

Last year, the global stock markets saw a lot of volatility due to the market’s anticipation of a Federal Reserve interest rate hike and China’s slowing growth. The latter caused commodity prices to tank and sent shockwaves throughout the world’s stock markets.

Lee says she expects volatility to remain high this year. “It will be a very challenging year. We have entered a bear market judging by the extent of the fall in major exchanges globally. The Hong Kong, US and Europe indices are down double digits [from last year]. Defensive markets like ours are down 3%. The equity markets started off the year badly.”

The volatility going forward could be due to the market’s reaction to the Chinese government’s policy adjustment, as the economy experiences slower growth as it transitions into a consumption-driven one, she adds. “It is not China’s economy that really matters, it is the reaction to the policy. You saw the renminbi devaluation [last year] was just a few percentage points and that was already big enough to cause a global selldown in all regional currencies.”

However, Lee is not expecting China’s economy to have a hard landing as its service sector remains robust and the People’s Bank of China (PBoC) still has a lot of room to ease its monetary policy. “The PBoC’s reserves have come down to RMB3 trillion, but that is still one of the biggest currency reserves in the world. It can cut interest rates or implement fiscal spending to shore up its economy,” she says.

Unlike the doomsayers, Lee does not expect a global recession to happen. Rather, she foresees the global economy growing slowly and unevenly.

“The central banks, especially the BoJ (Bank of Japan), ECB (European Central Bank) and PBoC, still have a lot of policy room to manoeuvre another round of quantitative easing. In fact, the US rate hike process is likely to be delayed in the current environment. We are not painting a global recession scenario.” 

Against such a backdrop, stock-picking will be one of the keys for alpha performance, says Lee. She is overweight on the “new economy sector” in the Northeast Asia region, which includes China, South Korea and Taiwan. The sectors she prefers are internet, telecoms, healthcare and technology, such as electric vehicles.

“These countries are transitioning to a new economy. As an investor, you should go along with the governments’ policy or what they do,” she adds.

As for the Asean region, Lee is overweight on the infrastructure sector, including the construction sector in Indonesia and Thailand, which are banking on higher infrastructure spending. Infrastructure concessionaires and construction companies are expected to be the beneficiaries.

“There is always execution risk. It happened to Indonesia last year, but there have been some improvements in terms of the [execution] momentum and [capital] disbursement. I think Indonesia stands on relatively better ground than Thailand [as it still cannot sort out its political problems],” she says.

The Indonesian government launched several infrastructure projects last year, including a Trans-Sumatra toll road, a plan to develop 24 seaports and an ambitious power plant programme. It was also reported that more than US$500 billion would be spent on new infrastructure projects in the next five years.

Major infrastructure projects underway in Thailand include the 300km double-track railway line, the construction of which kick-started this month and is expected to be completed in the next 36 months. There is another 600km of railway projects to come in the next year. The Thai government announced that it planned to spend more than US$100 billion in a seven-year infrastructure programme. 

On the home front, Lee is negative on the local economy as she expects the country’s gross domestic product growth to decelerate on the back of lower consumption, falling commodity prices and slower external demand. 

Investor sentiment is also being capped by the weak currency and subdued corporate earnings growth while the market’s valuations remain relatively high compared with its regional peers such as Indonesia, Thailand and the Philippines. This is despite the positive news that the 1Malaysia Development Bhd debt issues have been resolved and there is liquidity support for the market from a large institutional base.

Against such a backdrop, Lee is overweight on sectors that have more resilient earnings. They include construction and infrastructure players as well as exporters. “[We are overweight on] the construction and infrastructure sectors because of the continuous fiscal pump-priming, and exporters for their currency earnings and gradual global growth,” she says.

Lee cautions investors who are following the exporters theme to look at the ringgit’s weakness, especially moving into the second half. “Exporters, such as those in the technology, furniture and manufacturing sectors, may still be good in the first half, but one has to be nimble and watch for a potential reversal of the ringgit’s weakness,” she says.

“And of course, if the ringgit strengthens, you will probably have to start looking at the reverse beneficiaries. For example, the automobile sector because their cost is in US dollars or Japanese yen, but their revenue is in ringgit.”

Looking forward, Lee expects a rebound in the second half for the local economy. “While I am cautious, I am fairly optimistic of a rebound in the second half because Malaysia was one of the worst performing markets last year in US dollar terms. Its index lost 22% — worse than Indonesia, Thailand, Singapore and the Philippines,” she says.

“At the same time, there is potential corporate earnings rebound in the second half. This is simply because of the low base effect. The numbers have been negative for the past two years.”

Another reason for her optimism is that oil prices may start bottoming out in the second half of the year, which in turn will see the ringgit strengthen. “Oil prices are so depressed that I don’t think they can stay there forever. At some point, a physical market adjustment will take place, such as Opec [Organization of the Petroleum Exporting Countries] cutting production. When these marginal guys cannot survive anymore, that is when your supply comes down and oil prices rebound.

“And when this happen, the ringgit will probably strengthen. So, these are the possible catalysts for the local market in the second half of the year.”