“Cut down your investment exposure to traditional sectors and tilt more towards those of the future. This is my key advice to investors,” says Anand Pathmakanthan, head of regional equity research at Maybank Investment Banking Group (formerly Maybank Kim Eng).

He says these sectors, unsurprisingly, are the technology and ESG-related (environmental, social and governance) sectors expected to thrive in the years to come. “Valuations in these sectors are high, but it is tough to think of money flowing out of them in a big way.”

Yet, are these sectors already a red ocean as investors globally have piled much money into them? For instance, the price-earnings ratios (PERs) of local semiconductor companies can go up to as high as 60 times, double or triple that of companies in traditional sectors such as banking, utilities, commodities and plantations.

Anand says the technology sector is enormous. Investors can uncover diamonds in the rough by doing more research instead of buying familiar tech names such as Amazon and Tesla.

“The tech sector is a huge space. If you want to look for blue oceans, it exists within the various subsectors of the tech sector. There are so many things happening in it,” he says.

The same goes for ESG-related sectors. Instead of investing in companies that manufacture solar panels — an obvious play — investors can look at renewable energy storage companies to ride on the sustainable investment theme.

“Everyone knows renewable energy is good. But if you can’t store it and make its supply stable, it cannot fully replace traditional energy sources. This is where a lot of money is flowing into now,” says Anand.

“I would advise investors to stay in these sectors. But look deeper into which subsectors are making more money.”

He says the PER, an indicator commonly used by investors to value a stock, could be a “red herring” that distracts them from investing in good technology companies. “A tech stock trading at a PER of 50 times could grow its profit by 30% and give you a return of 30%, as long as other investors attach the same level of valuation to it. It is only when the stock is de-rated, with investors giving it a lower valuation, that your return of 30% would cool down.

“The point is, which local investors will degrade tech stocks? A lot of money is chasing these companies.”

The Southeast Asian market, meanwhile, looks less attractive than the North Asian markets as they are dominated by companies of the traditional sectors.

Investors who hold shares of some of these companies would enjoy good returns as the global economy continues to recover from the pandemic. But the upside may be capped, says Anand.

“Of course, cyclical sectors would benefit from an economic recovery. Cyclical stocks would have their days in the sun.

“But over the long term, their growth profile is uninteresting to many, especially the younger ones who are growing in numbers and looking for a more exciting profile from their investments.

“There are values in Malaysia and Asean, in general, but we could be in a value trap for many years to come. We don’t have much of the new economy component, which is what investors globally are looking out for.”

However, it is not all doom and gloom for Southeast Asia. Suhaimi Illias, chief economist at Maybank Investment Banking Group, says Asean countries, including Malaysia, are fundamentally attractive from the perspective of its longer-term income and consumption growth.

“Two-thirds of the world’s middle-income group will be in Asia by 2030. India, together with Asean countries, is poised to benefit from such demographic changes.”

Companies in the manufacturing and consumer-related services sectors are prime beneficiaries of the increasing population and wealth of Asean, he adds.

The Regional Comprehensive Economic Partnership (RCEP),  which is a regional free trade agreement that involves the 10 Asean member nations, China, Japan and South Korea. Australia and New Zealand would further juice up the region’s growth, says Suhaimi.

According to Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed, the Malaysian government hopes to ratify the RCEP by early next year. “Asean growth would also be fuelled by its continuous progress in physical infrastructure development, supplanted by technology-related capital expenditure accelerated by the pandemic,” he adds.

Yet, it is pertinent that investors should be aware of key market risks next year, mainly a prolonged inflationary pressure that could erode consumers’ purchasing power and affect corporate profits, says Suhaimi.

Already, US inflation increased 6.2% in October, a rate not seen in the past 30 years in the country.

Suhaimi says the ongoing global economic recovery could be derailed by central banks aggressively hiking rates to curb fast-rising inflation, translating into higher cost of funds to finance consumer spending, capital expenditure and government borrowings.

“However, benchmark interest rates are generally expected to remain low well into 2022 to support the still-fragile economic recovery,” he adds.

Suhaimi says interest rates in Malaysia and other key Asean economies are expected to remain accommodative before gradually rising in late 2022. However, the Monetary Authority of Singapore (MAS) started tightening its monetary policy in October in response to rising inflation.

The new variant of Covid-19 virus is another key risk, with countries introducing a new round of containment measures. “The worst-case scenario is the emergence of Covid-19 variants resistant to the current vaccines,” says Suhaimi.

China is another “grey rhino” — a slow-moving danger that is obvious but tends to be under-played — amid regulatory crackdowns and government controls over a broadening range of businesses. The default risk in its high yield bond market is increasing.

“Furthermore, China is still pursuing its ‘zero Covid-19 tolerance’ policy as opposed to ‘live with Covid-19’ strategy, which can result in intermittent lockdowns and containment measures that are disruptive to the country and global economic outlook. All this could contribute to the risk of prolonging the supply chain bottleneck, given its centrality in the global trade and manufacturing supply chain,” says Suhaimi.