100 Days: Move Past Kitchen Sinking to Gain Clarity on Growth

In the following interview Gan Eng Peng, Director of Equity Strategies & Advisory, Affin Hwang Asset Management discusses the market outlook for Malaysia as Pakatan Harapan (PH) approaches its 100-day term in office.


1. Pakatan Harapan (PH) will soon approach its 100th day term on Aug 18 – what’s your assessment so far of the new government and has it sent the right signals to the market?

The way we look at this government is like a new management coming in, taking over and kitchen-sinking. Thus, the first 100 days is about pressing the reset button. But eventually, we need to move beyond this phase. Investors are very clear about what’s wrong with the country; the 1MDB scandal, high debt levels, and the fiscal deficit.

Where there is less clarity now is policies the government has to promote growth. For this, we are waiting for the 100-day Government of Malaysia Symposium which will be held for the first time in September and Budget 2019 that will be tabled on 2 November 2018.


2. PH has a long list of issues to address. From the RM1 trillion debt, narrower revenue sources, capital outflows and brain drain – what are the more pressing challenges ahead for the country and are we addressing them?

There is no doubt that Malaysia has high debt and a narrower revenue base. To allay these concerns, the government needs to show clear evidence of curbing wastages and leakages. We need to start to see this being reflected in better expense/capex control for government departments and government linked companies.

In addition, the government needs to be pro-growth as the risks of high debt and a narrower revenue base subsides significantly as GDP gains momentum. The key concern of the market is whether the country can continue to grow amidst all the kitchen-sinking.

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Affin Hwang Investment Forum 2018: What’s Next?


As volatility roars back into markets in 2018, with the spectre of a trade war looming, a deepening rout in emerging markets (EMs) and widening policy divergence across global central banks; investors were taken on a wild roller-coaster ride thus far as markets soar to roaring highs and plunge to chilling-lows.

Should they stay risk-on or risk-off? Buy the dip or stay on the side-lines for now?

Running for its fourth consecutive year, Affin Hwang Asset Management successfully hosted its annual investment forum fittingly titled ‘What’s Next?’ to address these questions.

The forum took place on 14 July, Saturday at MITEC, Jalan Dutamas and saw overwhelming response with more than 1,200 participants eager to find out what lies ahead for markets and how they should position their portfolios against such a volatile backdrop.

Joined by our investment partners, the forum featured prominent speakers including:-
– Chung Man Wing, Investment Director, Value Partners Limited
– Dr. Gerald Garvey, PhD, Managing Director, BlackRock
– Siva Shanker, Past President, Malaysian Institute of Estate Agent
– Teng Chee Wai, Managing Director, Affin Hwang Asset Management

New China Awakens

The forum got off the ground with the first session by Chung Man Wing, Investment Director of Value Partners who wasted no time to get into market chatter and expounded on the issue of trade war and its implications to economic growth and stock market volatility.

“Chinese equities have been weak of late and this is partly due to reasonable, but slightly overblown concerns from investors about short-term headwinds like the ongoing trade spat between US and China. We think that there will be ultimately a compromise or resolution and even in a worst-case scenario, the Chinese economy is resilient and open enough to withstand a full-blown trade war. Even if you discarded all of China’s exports for an entire year, the incremental damage to China’s overall GDP growth is just at 1.2%. From a fundamentals perspective, we are not overly concerned,” he said.

He also shed light on the changing economic and social structure of the ‘New China’ that currently sits on a crossroad between its deliberate slowdown and deleveraging to rein-in credit bubbles, whilst also achieving sustainable growth by moving up the value chain.

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Five Lessons from Football to Score a Winning Portfolio

From the Football Pitch to the Trading Floor

The 2018 FIFA World Cup is set to kick-off in a couple of weeks. Through glazed eyes and sleepless nights, football fans across the globe will be neglecting their spouses and family for at least a month to cheer on their favourite team into the finals.

But beyond the dribbling and hat-tricks, the game of football also offers valuable lessons that investors can use.

Here are 5 lessons from the football pitch that you can apply in your portfolio management:-

Lesson 1: Stay on the Ball

For 90 minutes, players on either side of the field have only a single objective in mind. To score the most number of goals within the allocated time-frame.

Similar to investing, you need to define your objectives clearly according to your investment horizon and wealth needs.

It’s easy to lose focus in the game when stakes run high and emotions get the better of you. The football pitch can be an assault of the senses with the thunderous cheers of the fans applauding and the field becomes mired in mud before the slinging begins.

Markets can be equally nerve-racking with investors often engulfed with a torrent of information and data, which is made even more stressful because your money is on the line.

But, just like how a striker is able to dribble past opponents to score, an investor must be able to navigate through the trappings of market to block out noise and stay focused on their objective.

Tackle your way to seize opportunities when markets dip, but also have the mental fortitude and self-awareness to know when to conserve your energy to last the entire game

Lesson 2: Diversify your Squad

Having a well-balanced team is like having a diversified portfolio. With only 11 players in the field, you have to manage the available resources at your disposal to assemble a team with killer instincts and an indomitable will to succeed.

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Post GE-14: A New Market Script for Malaysia

Tide Turns in Malaysia

In a watershed election, the opposition won the 14th General Election (GE14) wrestling traditionally held strongholds from the incumbent by taking over states such as Johor, Kedah, and Melaka. Whilst an opposition win raises questions about government regulation and economic policies, we view that such concerns on policy uncertainty will fade as the incoming government clarifies its position.

All markets dislike uncertainty and we expect this could lead to bigger discounts with the adjusting factor being lower share prices overall. This would be the immediate reaction as the selloff will be broad-based.

We are looking at 5-8% immediate downside within the next 1-3 days, where we note that pre-results the market has already corrected by 3.5% since it reached its record high in April.

Stocks including contractors, politically-linked counters and CIMB could take the brunt of the hit. Our Malaysian portfolios have currently 12-15% exposure in such stocks with the largest weights in CIMB, Gamuda and IJM.

Markets Won’t Stay Down For Long

The street is overwhelmingly bearish if the opposition wins. We are on the contrary, bullish.

Any new government will want to generate confidence for the market and overall population. This fading of uncertainty should bring investors back to the market.

Ultimately, we think markets will end up higher in less than a month than pre-election with this new government – barring any unforeseen global macro overhang and a smooth transition of power is achieved.

We take comfort in the fact that major regime changes in overseas markets only had short-term negative impact to their respective markets. The Thai military coup of 2014 drove out foreign investors but strong domestic liquidity boosted the market for a full recovery within 6 days. The correction from Brexit only lasted 3 trading days.

Similarly, the impact from Donald Trump winning the US presidency lasted just 3 hours.  The unfavourable referendum for Italian PM Matteo Renzi only had a 3 minute negative effect.

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Cutting Through Noise to Make Sound Investment Decisions

Bracing for Market Turbulence

Volatile. If there ever was a word to describe markets now, that would be it. Markets were whipsawed last month amidst a torrent of trade retaliatory measures between the US and China, as fears of an escalated trade war kept markets on edge over who will blink first.

Geopolitics also took centre stage following a missile attack in Syria by US-allied forces, as part of a joint-coordinated strike to stem the Syrian regime’s use of chemical weapons in its arsenal.

Locally, Malaysia will also hold its 14th General Election (GE14), with polling taking place on the 9th May.

Trade tariffs, geopolitics, missile strikes, elections – that’s a lot to digest for any experienced fund manager, let alone a casual observer. So, what’s an investor to do?

It’s important to first realise that global markets are prone to ‘noise’ and that most short-term fluctuations in asset prices are a direct reaction from traders reacting to such noise occurrence.

Broadly, noise refers to any information (true or false) or activity that distorts the price trend or underlying fundamentals of an asset class.

In this fast-paced digital age with social media platforms such as Twitter and Facebook, such noise is further amplified in markets that can lead to further confusion.

Here are 3 tips on how investors can cut through the noise to make sound investment decisions:-

Stay Rational

In this current 24-hour news cycle, it’s easy for any investor to be overwhelmed by the constant stream of news flow including economic data and market news that flood our inbox notifications all the time.

Sometimes, this can lead to investors making rash decisions that puts their portfolio at risk. It’s important for investors not to overreact in this instance and to sometimes take a back seat and wait for the dust to settle.

Media outlets including financial publications, online news, business portals and TV channels have the habit of sensationalising headlines and narratives because that’s what sell news and ads.

Market sell-offs, plunging indexes, a sea-of-red, and doomsday scenario headlines prod at our basest instincts of fear and anxiety, which makes us want to tune-in to find out more.

The field of behavioural finance has conducted plenty of research as to why investors behave the way they do in stock markets.

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Keeping an Eye on Inflation

Return to Calmer Waters

After January’s US inflation scare that sent jitters across markets and caused ripples all the way to Asia – it looks like markets are making its return back to calmer waters. US consumer prices held steady in February, soothing investor’s concerns over any sudden spike in inflation that would trigger an acceleration of the pace of interest rate hikes by the US Federal Reserve.

The US consumer price index (CPI) rose 2.2% in the 12 months through February, compared with 2.1% in January, whilst core CPI was up 1.8% from a year earlier for a third month.

As inflation gradually firms up to the Fed’s inflation target, markets have now repriced asset prices in terms of inflationary expectations, where after years of loose monetary policy and quantitative easing (QE) programmes have finally resulted in an uplifting of growth.

Markets were only priced-in for 2 rate hikes by the Fed at the start of the year, before we saw markets sold-off on the back of strong inflation data. But with the correction behind us, markets are now priced in-line with the Fed.

Nonetheless, we don’t expect any rapid runaway inflation data that would spark another market correction like we did in early-February, where markets sold-off over concerns that the Fed would tighten too quickly.

Wage growth has been persistently stubborn, despite tightening labour market conditions. The US added over 313,000 jobs in January beating the average median estimate of 200,000 jobs monthly – however wage growth slowed to 2.6% from 2.9%.

The labour data suggests some uncertainty surrounding existing slack in the US economy and lack of wage growth that would keep the Fed from raising rates too aggressively and stick to a more gradual pace.

A lot of the structural-plays has also not really changed, where we see a global economy that remains heavily indebted with an ageing demographic.

New frontiers in technology including advancement in robotics and increasing automation has also compressed wages, creating the so-called ‘Amazon effect’ that should keep inflationary pressures muted and from rising too quickly.

Though, recent hard data suggest that inflation is picking-up, we don’t expect a breakout in inflation anytime soon that would damage the shoots of early economic recovery. With most of these structural plays still in force, we expect inflation to remain range-bound between 1.5% – 2.5%.

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Positioning in a Market Correction

A Necessary Jolt to Investors

Markets officially entered correction territory in early-February, triggering a global sell-off that sent ripples all the way to Asia.

After 9 years of expansion following the 2008-GFC, volatility roared back into markets unsettling the calm that pervaded markets for almost a decade. But behind the pullback is a reminder to investors that markets can go down and that volatility is part and parcel of investing.

A market correction is simply an attribute of a normal and healthy functioning market that helps re-establish the relationship between interest rates, inflation levels and valuations. A 10% stock market correction like that seen in February is not uncommon if one were to look back at the long history of stock market cycles.

Whilst, market volatility isn’t something investors look forward to or anticipate, the recent correction serves as a useful (but often painful) lesson for investors to never take volatility for granted and always be prepared.

Here are some tips how:-

  1. Expect the Unexpected

Volatility is here to stay and the sooner investors’ start accepting this as a market truism, the quicker they can accept and move on.

Even though markets have since rebounded and are now gaining back some lost ground from the recent sell-off, global markets are unlikely to revert back to the unusually calm and tranquil market condition last year.

For context though, stock market volatility was unusually low in 2017. The Cboe Volatility Index or VIX, otherwise known as the ‘fear gauge’ of markets and the most commonly used barometer of expected near-term volatility for US stocks, posted a historically low average of just 11 last year.

During the recent correction, the VIX index spiked up 20.01 points to close at 37.32 on 5 February. A sharp unwinding of inverse volatility products exacerbated the sell-off and contributed further to the violent swing in markets.

But with most of these positions now already unwounded, we could expect some market stability moving forward as this correction appears to be driven by the reduction in leverage rather than deterioration in fundamentals.

The level of fear in markets has certainly fallen, but is still unlikely to return back to pre-correction levels. Investors would be wise to do the same, by staying vigilant and not remain complacent.

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The Case for Holding Gold in a Market Correction & Strengthening Ringgit Environment

Making the Most of the Ringgit Strength

The Ringgit’s resurgence has dampened the risk appetite of investors when allocating into offshore assets.

As the Ringgit continues its steady climb upwards, rallying by over 3.66% YTD (as at 30 January) to close at 3.899 – many investors are rightfully anxious about unfavourable forex translation, when converting back their investments into the local currency.

However, chasing currency movements is often a superfluous exercise and investors are bound to get burnt.

Instead, investors should avoid such short-sightedness and take the opportunity to also capitalise on the Ringgit’s strength to diversify their portfolios and allocate a portion of their holdings into offshore assets including gold which is denominated in USD, and hence diversify their currency exposure.

Markets Enter Correction Phase

With the S&P and Nasdaq repeatedly pivoting to all-time highs, and the momentum in markets looks set to continue unabated, underpinned by positive earnings revision and rising corporate profits following the passage of US tax reforms and strengthening crude oil prices – some investors are also understandably cautious of how long until the rally starts to dissipate.

In fact, we already see markets puling back which is likely an overdue correction, as markets begin to reprice itself and settle to more healthy levels.

After a strong start to the year, global equities were broadly down as a bond rout deepened which lifted US Treasury Yields to a 4-year high of 2.84%.

The US Treasury yield will now test the 3% level, as bond markets come under pressure from rising optimism over the strength of the economy and expectations that inflationary pressures are mounting, as global central banks also embark on their balance sheet unwinding process and gradually withdraw monetary stimulus.

Market volatility as measured by the VIX index is picking up and credit spreads have widened, implying that market volatility is rising.

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Malaysia Bond Market Outlook 2018

Malaysia Bonds Stay Resilient

In a global environment marked by heightened geopolitical risks, stepped-up talks of trade protectionism and a cautious undertone lying beneath markets that have rallied strongly at the start of the year – the Malaysia bond market stands as an outlier providing positive yield for investors in an era of low or negative yield rates.

Despite the prospect of tightening monetary conditions, and policy uncertainty surrounding a tumultuous administration led by US President Donald Trump, the local bond market held up strongly providing decent yields for bond investors.

The Quantshop MGS All-Index and BPAM Corp Bond All-Index yielded 1-year returns of 5.60% and 5.28% respectively in 2017.

Real Money Investors to Stem Fund Outflows

Underpinned by sound economic fundamentals, an increase in external reserves, along with an expansion in the current account surplus – we see these improving fiscal conditions to be supportive of fund flows into the local bond market.

The Ringgit has been on a steady climb and has rallied by over 3.66% YTD (as at 30 January), closing at 3.899 and would strengthen the risk-appetite for Ringgit-denominated bonds among investors.

Overall net inflows of foreign debt securities increased by RM2.7 billion in December’17, buoyed by inflows into both MGS of RM4.1 billion and GII of RM0.6 billion. Total foreign holdings of both MGS and GII, accordingly rose to 45.1% and 6.9% respectively in December.

Due to this recent large accumulation of government debt by foreign investors, some risk of reversal cannot be discounted, especially if the Ringgit strength starts to wane.

However, we do note that a large portion of the foreign flows are from real money investors such as pension funds, sovereign wealth funds and asset management companies who hold a more longer-term view in their investment horizons and tend to be more sticky.

Yields to Hold Up in Tightening Environment

Dispelling any further uncertainty of the timing of its interest rate hike decision, Bank Negara Malaysia (BNM) went ahead and pulled the trigger to raise its benchmark interest rate by 25bps to 3.25% at its policy meeting on 25 January.

We view the rate hike as more of a reversal from the central bank’s decision to cut rates in 2016 to pre-empt headwinds from the surprise Brexit vote, as opposed to the central bank signalling a more aggressive tightening bias.

The rate hike was not entirely unexpected given the fundamental strength seen in the broader economy, and the stronger growth outlook expected for 2018. The government is already forecasting a growth of 5.5% for 2018 on expectations that global trade and rising domestic spending will provide support.

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What Stocks Not to Own for the Long-Term

A Black List… Of Sorts

Many things have been said about what and how to buy stocks, but not much on what to avoid. In a typical portfolio, there will always be winners and losers. Sometimes these losers overwhelm the gains. Besides judicious cutting of losses before they swell further, avoiding them in the first place would be even better.

We highlight some categories of stocks below which we think are not suitable for long term holdings. The key word being long term. Another point is that this is not a total blacklist of what to avoid, some of them do turn out to be darlings, but the odds are working against you.

Penny Stocks with High Volumes

Look at any old listing of top volume penny stocks. How many have grown to be significant companies? Anecdotal evidence suggests none make it big. This is evidence enough that such positions are not meant to be held for the long term.

One should look at it from a listed company owner’s perspective – if one has genuine interest in growing the business, why would significant chunks of their shares be traded on a daily basis?

One has to question the motivation behind such moves then. Any real desire to grow its business is tenuous at best. There usually is some credible (sometimes incredible) story that goes with such high volume activity.

But, this isn’t strictly a Malaysian phenomenon. Markets across the world have their own versions of high volume penny stocks.

Our perspective of these stocks is that the business behind it is secondary to the current share price trading activity. The high volume is simply not a reflection of the interest of real investors.

The new contract announcement, concession-win, diamond mine or large profit almost never materialises or is sustained, except maybe in the form of a MOU. Quite frequently these companies then come back with high volumes – but with entirely new owners, new business ventures, or a new company name, but still the same disappointing results.

Penny stocks with high volume are perhaps good for high risk trading. But, holding them without a short term exit strategy or cut loss policy is detrimental to portfolios over time.

Owners Who are Not on Your Side

There are some high quality listed businesses in Malaysia, but unfortunately they are controlled by shareholders that make money differently from how you do as an investor (i.e. via share price appreciation and/or dividends).

The Malaysian corporate landscape is strewn with high quality businesses muddled by asset injections or acquisitions – unrelated diversifications, badly valued acquisitions or assets being flipped into the listed company for large profits.

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