february 2019 headwinds & tailwinds: riding the turbulence
TRANSCRIPT
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February 2019
Headwinds & Tailwinds:
Riding the Turbulence
Affin Hwang Asset Management Bhd
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Table of Contents
► Global market outlook
► Malaysia outlook
► Investment Strategy
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Global Market Outlook
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The Asset Class Quilt of Total Returns
Source: BofA Merrill Lynch, Bloomberg, as at Dec 2018
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Economic cycle showing signs of maturing
• Current economic expansion is now
116 months, making it the second
longest on record.
• Probability of recession is at 15% now,
way below the 40% level which
signals an imminent recession.
• Market expectation for the next
recession is now pushed to 2020.
Late Cycle
Source: US National Bureau of Economic Research, Bloomberg, Jan 2018
120
116
106
92
80
58
0 20 40 60 80 100 120 140
November 2001
June 2009
November 1970
March 1991
October 1945
July 1980
Month
US economic expansion (Duration, Trough-to-
Peak)
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Fault Lines: Geopolitics and polarised politics
Geopolitics
Photo credit: Matthew Absalom-Wong; Source: Financial Times, CNN, Jan 2019
Trade War
• Temporary truce to end by 1 Mar
2019
• Ceasefire / escalation in trade war
• Potential return of tit-for-tat tariff
battle
Politics
• Divided US politics
• Next focus: 2020 US Presidential
Election
• Good chance for Trump to get re-
elected
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Fault Lines: South China Sea
USD values denotes a ballpark estimates of imports and exports using
UNCTAD group statistics and BCA calculations
Source: BCA Research, UNCTAD, 2018, FAS, CRS, CSIS and US EIA.
Dispute
involving island, maritime and
economic claims between China,
Taiwan, Vietnam, Malaysia,
Philippines, Indonesia and Brunei
Busy Traffic Roundabout in South China Sea
$3.4 trillion
Global trade through the South
China Sea in 2016
40%
of global liquefied natural gas trade
transited through the South China
Sea in 2017
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Central Banks: Shrinking global liquidity
Source: BofA Merrill Lynch, Bloomberg, Jan 2019
G3 central bank balance sheet contraction
2019 marks the start of the net liquidity
withdrawal by global central banks.
Central banks are slowly turning off the
taps:
• US Fed embarks on balance sheet
reduction and successive rate hikes
• ECB has ended QE and switched to
reinvestments
• BoJ continues its monetary easing
• USD cash yield is rising
Overhang
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Interest Rate: How Fed tightening cycles end?
Source: BofA Merrill Lynch, Bloomberg, Jan 2019
• Raising interest rate too fast could
hurt the economy.
• Possibility of a policy mistake may
grow if the Fed misjudges the
strength of US economy.
• Any dovish remarks would give
market some breathing space to
adjust to new interest rate reality.
Policy
tighteningHow Fed tightening cycles end?
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Expect the Fed to pause and USD to peak in 2019
Projection by Federal Reserve seems
a bit too aggressive for the current
economic situation.
We expect to see downward revisions
in the rate projection:
• Core inflation to hover +/- 2%
• Narrowing growth divergence
between US and the rest of the
world
2.50
3.25
3.50 3.50
3.00
2018 2019 2020 2021 Longer Term
US Fed Fund Rate Projection by Federal Reserve
Downward
Revision
Source: US Federal Reserve, Bloomberg, Dec 2018
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Valuation is cheaper
Source: BofA Merrill Lynch, Datastream, IBES, MSCI, FactSet, Jan 2019
12-month trailing Price-to-Book
• Current valuation is about 17%
above the average low seen prior to
bear markets.
• Asia ex-Japan earnings have been
revised downward by 12%.
• With a slowing macro backdrop,
there is further earnings downside,
indicating cheaper valuation ahead.
Cheaper
Valuation
Global profit expectation remains high
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Negative market sentiment
Source: BofA Merrill Lynch, Jan 2019
Bull and
Bear
Indicator
Risk-Love
Sentiment
Heatmap
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China: Easing cycle is unfolding
• China’s monetary reflation could see
its economy bottom out in 2Q 2019.
• Market expects more policy support:
• Tax cuts
• RRR / interest rate cuts
• Local government special
bond issuances
Monetary
reflation
Source: BofA Merrill Lynch, Bloomberg, Jan 2019
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Malaysia Outlook
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Malaysia equity underperforming in a rising market
• FBM KLCI was the only ASEAN
market to post a negative return in
January 2019.
• However, the FBM SmallCap index
had a nice run (YTD 2019 11.6% vs
2018: -32.2%).
• Foreigners bought RM1 billion worth
of equities in January 2019, after
withdrawing RM11.9 billion in 2018.
Laggard
Source: Maybank IB Research, as at 4 Feb 2019
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Exports surprised on the upside despite moderating growth
• 2018 GDP slowed to 4.7%
compared to 5.9% in 2017.
• Moderation trends in both private
and public consumption.
• Private investment slowed while
public investment was further
curtailed.
• External demand (i.e. Malaysia
exports) held up well in December,
especially compared to the negative
data seen among regional peers.
Growth
moderation
Source: Maybank IB Research, as at 15 Feb 2019
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New Government: Reset, Reform and Reposition
• Divestment exercise to pare down
stakes in non-strategic assets
• Market perception: Increase in
regulatory risk (i.e. Telekom, Tenaga,
MAHB, etc.)
• Government to expedite the RM35
billion tax refund to encourage
private investments
• Repositioning Malaysia to attract FDI
Pressing the
reset button
Source: Hong Leong Research
Company Changes in
top
personnel
Company Changes in
top
personnel
TM 12 CIMB 1
Axiata 4 MAHB 1
Malakoff 3 Tenaga 1
Petronas 2 KLCCSS 1
TH Plantation 2 FGV 1
BHIC 2 UEM Sunrise 1
TH Heavy 2 MRCB 1
Star Media 1 CCM 1
Pos Malaysia 1 Sime Darby
Plantation
1
Pharmaniaga 1 Sime Darby
Property
1
Bursa 1 Boustead 1
BIMB 1
Change in GLC top management
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2019 Earnings: Downside risk
• 2019 growth estimate of 5% may
need to be revised downwards.
• Bank profitability (single digit growth)
becomes the main driver to the
overall market earnings.
• With comfortable capital ratios,
banks do have the capacity to
increase dividends.
Tepid
earnings
Source: Macquarie, CLSA Research, Dec 2018
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Keep faith in Malaysia Baru
Transition2019/20 is a year in
transition
PoliticsToo much politics in
the mainstream
media
ExperienceExperience matters
in the new dawn
PolicyClearer policy
actions to engage
with private sector
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Investment Strategy
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Asian Equity Strategy – Keep an open mind
What could go wrong?
• Further downside if recession
is imminent
• Broadening trade-inflicted
damage
• High debt levels in US and
China
• Geopolitical / Policy mistakes
USD demand as safe haven to
increase could see further fund
outflows from EMs
Investment Strategy
Tilt toward large-cap and high-quality stocks
What would reverse the tide?
• Yield curve reverts back to its
normal shape
• Fed to maintain neutral rate
• Temporary trade truce leads to
eventual compromise
• Stronger China stimulus
The return of risk appetite would
reflate the confidence toward EM /
Asia
Photo credit: Associated Press
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Malaysia Equity Strategy: Investing in a slower growth environment
Defensive
Remain defensive
with 25% cash
buffer
Dividend
Like dividend
yielders (REITS)
and banks
Bargain
Small caps worth
monitoring due to
last year's sell-down
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Drawing up an action plan for a better 2019
How to invest?
► Focus on quality and liquidity
► Diversify – asset classes, geographic
region, cash
► Be aware of risks
► Be prepared to be patient and to
scale in
Fundamentals
Uncertain
Valuations
Attractive
Positioning
Favourable
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Thank you