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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FUNDamentals - February 2018

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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