It wasn’t all plain sailing for the economy last year, and it may be even more challenging this year. Nevertheless, local fund management companies remain optimistic and will continue to look for investment opportunities. Read on in the first part of this series.

FOLLOWING the events of last year, 2015 is anticipated to be a year of economic divergence. The US and China are expected to grow moderately this year, while Japan and Europe could see low to zero growth.

The normalising of interest rates by the Federal Reserve, as well as a strong consumer base, will put the US on a path of modest recovery. China, meanwhile, is expected to have more stable expansion, with the government acknowledging the slower, “new normal” reality with a growth target of 7% this year.

However, the Bank of Japan (BoJ) and the European Central Bank (ECB) will be pursuing further monetary policy easing to stimulate their respective economies. 

These differing central bank policies point to uneven growth patterns in the global economy. “These competing influences are expected to keep global growth bumping along a baseline of about 2.5%,” says Jason Chong, chief investment officer at Manulife Asset Management Services Bhd. 

“The US recovery is primarily consumer-driven, with retail sales, new car sales and consumer confidence figures remaining robust over the next few quarters. Given the healthier household balance sheets, with household debt falling from around 95% of gross domestic product in 2008 to around 80% in 2014, consumer spending should remain strong,” he adds. 

“This should lead to upbeat industrial production, which has been buoyant, while manufacturing sentiment surveys have reached new highs since 2011.”

China’s economy should be driven by contained credit risks, earnings growth and successful economic rebalancing via structural reforms in 2015. Andrew Wong, chief investment officer for equities at AmInvestment Services Bhd, says he anticipates better return-risk pricing and a resilient property market. 

However, US rate hikes and China’s anti-corruption drive could trigger more volatility. Wong says this could give rise to sector rotation between the old and new economies, as seen in the second half of last year. 

“We believe markets will continue their upward trend in the first half, while volatility will set in towards the second half of 2015.”

Slower global growth would mean weaker trade for many of the emerging economies, resulting in potentially higher debt and weaker currencies. 

Malaysia is expected to face several headwinds this year. The market is likely to continue experiencing challenges from corporate earnings risks and weaker consumer spending, due to the implementation of the Goods and Services Tax (GST) on April 1. 

The country’s high household debt of 87.1% of GDP (as at end-September 2014) and weaker terms of trade, via lower commodity prices, are the other contributors to the challenging environment. 

AmInvestment’s Wong believes the market is too optimistic at the moment in expecting 8% year-on-year earnings growth. He sees a potential contraction of margins, which could be a drag on earnings. 

“We see a more volatile market ahead as we draw closer to a potential rate hike in the US,” he says. “At current valuations, Malaysia is neither expensive nor cheap. However, we might see some downside risk to the consensus earnings forecast of 7% to 8% for 2015. If the earnings forecast were revised downwards, we would see the KLCI coming off.”

In the light of the impending headwinds, Bank Negara Malaysia’s decision to maintain the overnight policy rate at 3.25% on March 5 was within market expectation. AmInvestment chief investment officer for fixed income Goh Wee Peng expects the central bank’s policy to continue stimulating domestic growth.

“Against the abovementioned backdrop, we believe Bank Negara will likely continue its policy pause and maintain its cautious stance in the near term,” Goh says. “[It] will remain in ‘wait-and-see’ mode, pending further economic data releases, so as to provide some insight into the direction of the domestic economy and its implications for the capital markets. This should be supportive of the local bond market in 2015.”

The outlook for 2015 is riding the lacklustre review of the previous year. AmInvestment’s Wong forecasts disappointing corporate earnings for 2014, as there were downgrades in the projections for earnings growth that was initially at 10%.

“[These were] mainly the bigger caps, due to weaker than expected results and almost flat current earnings expectation for 2014. We saw major downgrades in the banking sector due to rising competition, especially those with offshore exposure,” he says.

“The plantation sector also underperformed due to a drop in demand, especially from China as Beijing cracked down on commodity financing, and the run-up in plantation share prices in expectation of El Niño, which did not materialise. The oil and gas sector saw a de-rating as crude oil prices fell from US$100 to US$75 per barrel.”

According to Wong, small caps supported the market in the first nine months of 2014, but the unrealised gains were quickly erased in the last quarter when markets became jittery about Malaysia and more positive on the US, leading to an outflow of funds from emerging to developed markets.

The bond market was less downbeat than the equity market, yielding mixed results. While short-term bond yields rose on the back of expected higher inflationary pressure and interest rate hikes, Goh reports a decline in the yields of bonds with long tenors. 

Declining crude oil prices had affected the bond market in late 2014 due to their potential impact on Malaysia’s economic health. Nevertheless, the overall bond market performed better than in 2013, says Goh. 

The global market performed well in the first half of last year, only to decline from the third quarter onwards. Factors that pushed its initial performance included accommodative remarks on monetary policy by the Fed, strong US economic data and expectations of China implementing a stimulus.

The second half of the year, however, saw geopolitical concerns as well as uncertainties over the end of the Fed’s quantitative easing programme and the timing of the US rate hike cycle.

“By end-November, the plunge in oil prices took the markets to lower levels. What started off as profit-taking with oil and gas equity players, given the concerns about declining oil prices impacting energy-related capital spending, spiralled into other non-related sectors,” says Manulife’s Chong. 

“As oil prices headed south, foreign investors began to worry about the negative impact of lower oil revenue on the country’s budget deficit and balance of payments or current account positions. Foreign investors soon sold across the board, even blue chips. Adding to the momentum was the pick-up in local redemptions, forcing managers to continue selling down in order to raise money.”

This aggravated the negative sentiment, scaring potential buyers away. The FBM KLCI tumbled 11.6% to a low of 1,673.94 points on Dec 16, 2014, from a peak of 1,892.65 in July.

This article first appeared in Personal Wealth, a section of The Edge Malaysia, on March 16 - 22, 2015.

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