A Brief on Global & Local Markets, Investment Strategy. Week in Review | 20 March – 24 March 2017

Too much to handle for a young Trump administration

President Trump saw his first major legislative initiative ended in shambles, as attempts to repeal the Obamacare (Official name: Patient Protection and Affordable Care Act) – a federal law which aims to improve US citizens’ access to health insurance – failed to garner support. Trump has previously argued that Obamacare places a lot of cost and burden on US corporations to fund for their employees’ coverage, and subsequently introduced his own healthcare plan known as the GOP.

The GOP bill however, failed to be passed. While the GOP aims to provide US citizens with refundable tax credits to purchase health insurance, the bill also intends to eventually scrap off enhanced funding to provide coverage for the lower-income adults; which wasn’t too popular during the reading.

Market reaction was fairly mild despite the news. The failure however – to some extent – has brought about concerns and doubts over Trump’s capability to actually push through his other policy pledges. Such uncertainty may cause some pullbacks in the USD, and we will likely see UST yields trend lower in the interim. Nevertheless, the underlying economy in the US remains fairly stable, and attention will be now turned towards Trump’s Tax Reform bill – which is expected to come in August at the earliest.

Given the weakening greenback and resistance from the Euro, we expect the MYR to strengthen against the USD in the near-term, and have since lowered our USD exposure for some of our portfolios.

Reinforced measures to curb China’s capital outflow

Global housing developments – including several properties in Malaysia – which are targeted toward the Chinese mainlanders are in somewhat of a bind as China’s government continues to exert control over capital outflows. Nonetheless, infrastructure projects that are sanctioned by the government for strategic reasons (G2G) – such as the Malacca port and the east coast railway project – will continue to be funded; although some form of delay can be expected due to the tedious process in place.

The positive implication however, is on the additional liquidity that remains stuck within China. Given the measures aforementioned, Chinese investors will likely opt to participate in the equity market, which will support Chinese stock prices for the near- term. In addition, trading via the Shanghai-Hong Kong Stock Connect has seen an increase in volume as well; further reinforcing optimism within the HK/ China space.

Asian equity and portfolio positioning

The Trump administration’s failure to repeal the Obamacare bill has slightly hindered the stock market’s performance last week; although movements weren’t too apparent. The bigger factor in play remains on the underlying growth of the US economy and improving labour data. However, if growth does slows down in the roads ahead, then bigger risk and downsides may be seen for the US equity market. Nonetheless, a period of softness is to be expected for the near-term given the strong rally seen in 1Q2017.

On the domestic front, we remain heavily invested at this current point of time; with optimism on the restructuring theme, yield play, and banking turnaround among others. Plenty of consolidation and cost-cutting have been done across the banking space in the past few years, and we are starting to see a recovery in terms of asset quality. In addition, the overall economy that has been picking up may translate into better interest income for banking names in the foreseeable future.

Moreover, we are currently building some position within the domestic property market with expectation for a mid-cycle recovery. We believe that the wealth effect from the stock market will likely drive the revival of Malaysian properties, and we expect to see volumes trend higher moving forward.

REITs and infrastructure space

Resilience continues to be seen within the S-REITs space albeit the current interest rate environment; jotting a fair 7% average from yields alone. By combining with the projected growth of 1-2% for REITs in general, we are looking at a decent 8-9% return. While it has been a mellow start for the REITs space this year, we believe that things will normalise – in terms of potential gains – moving forward.

On the infrastructure side, our main exposure remains within China, where some of our participation have done relatively well. In addition, we have also previously built some positions within the Indonesian infrastructure space. While not broad-based yet, Indonesia are starting to see some inflows in the past 2 weeks. Nonetheless, our optimism remains and we expect more foreign interest to shift towards the Indonesian infrastructure sector post the Jakarta elections end of April.

Fixed income positioning

Performance on the Asian credit space has been decent on a year-to-date basis, and demand continues to be very strong – especially for several issuances from China. Positioning wise, our portfolios have benefitted from the rally in UST seen earlier this year. In addition, our participation into Investment Grade and High Yield papers have both done well, especially so for High Yield bonds given the recent rally in interest rates.

On the domestic front, yields moved down by about 4-5bps across the curve last week. The drop was however halted by the strong Consumer Price Index (CPI) number for February 2017 – which saw a growth of 4.5% year-on-year; largely exceeding consensus expectation of 3.9%. Transportation due to the rising fuel price is one of the main aspect which contributed to the high CPI figure. Moving forward, CPI numbers may continue to inch higher in the coming months due to higher fuel prices, and the low base effect.

On the other hand, the Malaysian corporate bond space remained fairly quiet in the past week. We believe that majority of investors are looking to participate in new primary issuances that are expected to come in the months ahead. Although foreign interest has been somewhat lacklustre, we expect the domestic bond space to be stable and well- supported on the back of local investors. Currently, duration across our regional and domestic portfolios are kept in a range of 4-5 years and 5-6 years respectively.

Disclaimer: This content has been prepared by Affin Hwang Asset Management Berhad (hereinafter referred to as “Affin Hwang AM”) specific for its use, a specific target audience, and for discussion purposes only. All information contained within this presentation belongs to Affin Hwang AM and may not be copied, distributed or otherwise disseminated in whole or in part without written consent of Affin Hwang AM. The information contained in this presentation may include, but is not limited to opinions, analysis, forecasts, projections and expectations (collectively referred to as “Opinions”). Such information has been obtained from various sources including those in the public domain, are merely expressions of belief. Although this presentation has been prepared on the basis of information and/or Opinions that are believed to be correct at the time the presentation was prepared, Affin Hwang AM makes no expressed or implied warranty as to the accuracy and completeness of any such information and/or Opinions. As with any forms of financial products, the financial product mentioned herein (if any) carries with it various risks. Although attempts have been made to disclose all possible risks involved, the financial product may still be subject to inherent risk that may arise beyond our reasonable contemplation. The financial product may be wholly unsuited for you, if you are adverse to the risk arising out of and/ or in connection with the financial product. Affin Hwang AM is not acting as an advisor or agent to any person to whom this presentation is directed. Such persons must make their own independent assessments of the contents of this presentation, should not treat such content as advice relating to legal, accounting, taxation or investment matters and should consult their own advisers. Affin Hwang AM and its affiliates may act as a principal and agent in any transaction contemplated by this presentation, or any other transaction connected with any such transaction, and may as a result earn brokerage, commission or other income. Nothing in this presentation is intended to be, or should be construed as an offer to buy or sell, or invitation to subscribe for, any securities. Neither Affin Hwang AM nor any of its directors, employees or representatives are to have any liability (including liability to any person by reason of negligence or negligent misstatement) from any statement, opinion, information or matter (expressed or implied) arising out of, contained in or derived from or any omission from this presentation, except liability under statute that cannot be excluded.