Affin Hwang AM Investment Forum 2019: Geopolitical Flare-Ups Key Market Risk

Geopolitics will continue to be a fixture of markets for time to come as increasing polarisation and fractures appear in bilateral ties leading to more volatility in turbulent times. “We are entering an unprecedented period of geopolitical risk that investors have to price-in when making decisions in their portfolio,” Teng Chee Wai, Managing Director of Affin Hwang AM said at the company’s annual investment forum held at MITEC, Kuala Lumpur on the 20th July, Saturday.

Teng contends that there is a possibility of US President Donald Trump winning a second term in the White House due to a lack of strong candidates from the Democrats and also Trump’s own ability to rile up political support by tapping into populist sentiment.

“The reality is that investors may have to live with Trump for the next 4 to 5 years if he wins election next year. His penchant for Twitter diplomacy has the ability to influence market behaviour and also introduce policy uncertainty unlike anything we have tread before. Will he be a better president or continue to be reckless if he wins? Nobody knows the answer,” adds Teng.

Unresolved US-China trade tensions which has stretched into a year-long trade war is another key risk that could roil risk-assets. Markets enjoyed a temporary reprieve since Trump and Chinese President Xi Jinping reached a trade truce in June at the G-20 summit in Japan, where both sides agreed to hold off from imposing any new tariffs and resume negotiations. However, the apparent lull in the trade war could easily turn the other way, according to Teng.

“Trade talks between US and China are not going to be easy with many structural barriers at hand. And knowing Trump’s volatile nature, he could just as easily upend negotiations and decide to impose tariffs again. Or he may decide to be best friends (sic) once more with China. This makes investing in this environment very difficult,” said Teng.

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Looking Beyond the Yield Curve

If you’re a keen market observer, you would have read about the yield curve inverting which sent chills down the spine of investors globally. Financial and business news outlets were in a frenzy to point out that a key financial indicator was flashing warning signals that a recession is looming ahead.

Benchmark gauges surrendered gains back in March due to recessionary fears when the spread between the 3-month and 10-year Treasury note went negative for the first time this year since a decade ago. A pallid economic picture painted by the US Federal Reserve which downgraded its economic outlook and tilted its policy stance towards a more dovish approach also added to concerns.

But how accurate is the yield curve as a dark omen for markets that an imminent economic slump is coming for us all? Here is what you need to know about the yield curve and what bond markets are trying to tell investors.

Yield Curve Inversion, Explained…
Logically, people would demand higher interest rates for longer-term loans because the risk is higher over longer time horizons. Think about your fixed deposits (FD), where the longer your FD placement is with a bank, the higher your rate of return. So, a normal yield curve would have an upward slope indicating higher yields for longer-dated maturities.

A yield curve inverts when yields for longer-dated maturities fall below shorter-dated maturities. As mentioned earlier, the yield for the 10-year Treasury note dipped below the 3-month yield back in March’19 which is a rare occurrence in markets. This means that an investor is now getting paid more to hold shorter-dated maturities.

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Overcoming the Herd Instinct in Markets

Ever walked into a mall and saw heaps of people gathered into lines that stretch as far as the eye could see? You have no idea what’s going on, but for some inextricable reason you feel compelled to join the back of the line too and patiently await for this mysterious artefact to reveal itself. Hopefully something or someone turns up?

If you did, you just succumbed to the lure of the herd and fallen into perhaps one of the most common investor behavioural biases. Most daily examples of herding behaviour can be completely innocuous whether you’re strolling through your neighbourhood mall or adopting the latest trends. But as seen throughout history, extreme instances of herding in markets can significantly distort prices, lead to asset bubbles and even cause recessions.

From Tulipmania that gripped 17th century Netherlands, the dotcom bubble in the early 2000s as well as the subprime mortgage crisis during the 2008-GFC, history has shown that investors are willing to suspend disbelief when market euphoria swells to reach delirious highs. This is prevalent especially during bullish market conditions and when there is abundant liquidity in the system.

Go with the Flow? Not Really…

As social creatures, people have a sense of safety in numbers. There is just a collective reassurance that comes with conforming to the wisdom of the crowd especially when navigating the treacherous peaks and slopes of markets.

But if you take a closer look at just who is behind the trading desk, you may realise that that there isn’t anyone after all. The underlying reality of investing in stock markets today is that most trading are done by machine and algo traders who profit from short-term fluctuation in prices and ignore fundamental analysis. According to reports, 80% of daily moves in the US stock market are machine-led. In 2017, the global algorithmic trading market was valued at US$ 9,297.24 million and is projected to exhibit compound annual growth rate (CAGR) of 10.1% over the forecast period (2018 – 2026).

Behind each market plunge is a digital herd of trading bots programmed to buy and sell based on pre-determined formulas and models. This ignites a ‘flash crash’ like that seen in 2010 when the Dow Jones Index lost close to 1,000 points in mere minutes. The S&P 500, Dow Jones industrial average and Nasdaq collectively lost $1 trillion. But in 36 minutes, the rout was all over and markets rapidly recouped back its losses.

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Malaysia Baru, Where Art Thou?

It has been one year since the watershed 14th general elections (GE14), when the Pakatan Harapan (PH) government unexpectedly trumped Barisan Nasional (BN) 6 decade rule to wrest control of Putrajaya.  However, market reaction has not been kind with the benchmark KLCI plunging close to 12% since May 2018 as euphoria dissipates over lack of policy clarity and sluggish growth, making us the only regional market to be in the red this year. 

 One year on, where is Malaysia Baru headed? Is the local market really that short of zest to be considered ‘boring’?  In the following interview, Gan Eng Peng, Director of Equities Strategy & Advisory, Affin Hwang Asset Management offers some perspective and if the market has bottomed out.


  1. As we approach the one-year anniversary of PH government coming into power, what’s your assessment of the market so far and speed of reforms?

Malaysia is the only decent size market globally to be down this year.  We did not benefit from the liquidity driven risk-on rally.  Even Thailand, which had an inconclusive election has fared better than Malaysia.

It is fair to point that the speed and effectiveness of reforms has been lacking.   There has been a lot of own goals, flip-flops and policy risk coursing through corporate Malaysia.  Wholesale changes of top corporate personalities would grind down decision making.  To be clear, Malaysia is economically healthy – it’s just the animal spirits that has been taken down.  The velocity of money has slowed.  People are not driven to invest even though there is tremendous wealth on the side-lines.

  1. Are markets just too impatient or are there other external factors ailing the market?

Last year there were various external factors weighing down on markets, so we could hide behind these issues and said we were suffering together. But the performance this year has ended this debate of whether it is a global issue overhang or domestic underperformance.  It is clearly domestic underperformance.

Markets are always impatient.  It is a real-time measure of the performance and prospect of the country via its listed corporate.

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Much Ado About Deflation

This week will see the release of Malaysia’s March’19 inflation data due on Wednesday. After dipping into deflation in January this year, will we see price pressures picking up again? Gan Eng Peng, Director of Equities Strategy & Advisory of Affin Hwang Asset Management offers some perspective on the data and strategies for investing in a deflationary environment.

1) Malaysia has experienced its first deflation in January this year since 2009, according to news reports. Can you tell us what is the difference between the deflation in 2009 and today?

The 2009 deflation was caused by a meltdown of financial markets which choked off credit and created a global crisis. Malaysia was not spared.

The current deflation is a function of retail oil prices declining by 10%, following the reinstatement of the weekly retail fuel price mechanism from January 5. Retail oil prices had been held static after the last general election.

This adjustment should have a temporary effect – while the economy is slow we are clearly not in a crisis driven deflationary environment.

2) As deflation is a rare occasion in today’s world and investors are not familiar with such environment, could you tell us what does it means to you as a fund manager and investors? What signals does it send to you?

In theory, deflation means lower cost of living for Malaysians as price of goods and services are lowered – this is what the Rakyat has been asking for. But that is only half the equation, as in reality, it comes with a very slow or recessionary economy – which means wealth effect is poor, job insecurity and balance sheet erosion. If the government keeps focusing on lowering the cost of living without correspondingly driving economic growth, we can end up in such a situation.

A deflationary environment is bad. Asset prices are generally dropping. As a result, people have less propensity to invest as they can get assets cheaper later. Wealth might still be intact but the velocity of money is slowing. Animal spirits would be slaughtered. This creates a negative feedback loop towards a slower economy. Hence the need for government stimulus in the form of less restrictions or tax, more spending or easier monetary conditions (lower interest rates).

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KonMari Your Financial Life

Keeping it Simple

These days it’s all about minimalism. Tidiness and clean-up guru Marie Kondo has become a global phenomenon with her hit Netflix show, capturing the cultural zeitgeist with her philosophy on organising and decluttering. But can the same set of ethos also be applied to tidying up one’s financial life and money management skills?

As financial products become increasingly commoditised, consumers are bound to pick-up all sorts investment schemes or insurance policies that offer very little or almost no differentiation. Kenny Suen a licensed financial planner who is also Chief Marketing Officer of Bill Morrisons Wealth Management thinks one is more susceptible towards cluttering up their finances especially at the wealth accumulation stage of the financial life cycle.

“I think clients haven’t really put a thought to this because they’re so busy at this point working hard at their jobs and building their wealth. It’s like going shopping and you end up buying all sorts of products and policies along the way. If you don’t do a proper housekeeping, you won’t have a complete picture of your finances. Worse still you misplace them and end up forgetting all about it,” Kenny observes.

“It should all start from a clear financial blueprint that sets out key milestones and what you want to achieve. Ideally, this blueprint should have both long-term and short-term objectives. It needs to be practical and tailored to your own circumstances such as your current income, career and lifestyle that you have and desire. That way, you can ask yourself how these [financial products] fit into your needs, so you don’t make abrupt decisions from information that isn’t thorough to begin with from sales or agents.”

Categorising is a big part of the KonMari method which advocates tidying up and separating items by category. For someone who say owns over 10 different insurance policies, categorising may be a good way to start by digging up old term plans and organising them by the type of coverage it provides.

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China NPC: Pivot towards Quality Growth

China’s annual National People Congress (NPC) comes to a close soon after a 2-week parliamentary session. In the following interview Huang Juin Hao, Senior Portfolio Manager of Affin Hwang AM gives a rundown what happened in the NPC and market implications

1) What were the key takeaways of China’s NPC this year?

At the NPC, the government work report targets for 2019 have been announced and most of the targets have been largely in-line with market expectations. The keys numbers were for GDP growth to come in between 6% – 6.5%, which would represent a slowdown from 2018’s 6.6% growth.

The government has placed particular emphasis on creating 11 million new urban jobs and keep registered urban unemployment rate within 4.5%. Tax cuts in VAT (value-added tax), corporate and households would also provide relief amounting to RMB 2 trillion, which was the same as 2018’s prior announced business tax shift to VAT.

2)  Were there any surprises this year that went against market expectations?

There were 5 surprises which differed from market expectations

i.The fiscal deficit which the government expected to come to 2.8% of GDP. Market expectations were for the deficit to be at 3.0%, given tax cuts of RMB 2 trillion, planned fiscal spending of above RMB 23 trillion and a deficit of RMB 2.76 trillion. This implies fiscal revenue of RM 20 trillion, which is 10-12%, higher than 2018.

ii.China also plans to issue RMB 2.15 trillion of special local government bonds, compared to last year’s issuance of RMB 1.35 trillion.

iii.More discretion was given to local governments. For example, Premier Li called for more substantial cuts to the social security tax rates. Specifically, the employer’s contribution rate for pension insurance will now be allowed to be lowered to 16% at the local government’s discretion.

iv.There was no mention of targets for shantytown redevelopment targets and industry overcapacity reduction. However the government noted that both programs will continue.

v.Lastly, the phrasing of “promoting stable foreign investment growth” in last year’s report has been reworded to “increasing the attraction to foreign capital”; and Premier Li promised to further open the market to allow for the operation of wholly foreign-owned enterprises in more industries. This suggests China is determined to have a more open attitude towards foreign capital.

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Staying Defensive in Healthcare

Against a challenging backdrop, the healthcare space was one of the best performing sectors in 2018 due to its low sensitivity to global growth.  In the following interview, Erin Xie, Head of Health Sciences, Fundamental Active Equity of BlackRock shares her outlook for the healthcare sector and its late-cycle potential to outperform.


Q1)  How did the healthcare sector perform overall in 2018 as volatility jolts? Also, as the late-cycle approaches, how do you see the sector performing moving forward?

2018 was an eventful year for global equity markets, with significantly more volatility than in the past 10 years. Performance for the MSCI World Index was more than -5% negative and this was a stark reminder to investors that despite the experience of the last 9 years, equity markets don’t always go up and to the right.  One of the bright spots during the year was the healthcare sector, which delivered more than 2% outperformance over the full year and displayed relative stability in a volatile market.

Looking at the historical analysis of sector performance through market cycles in the past 25 years, healthcare has consistently outperformed other sectors during late cycle and recessionary periods. For example, the healthcare sector has on average outperformed by +7.0% during late cycle periods relative to broad equity markets1.

The analysis also concluded that the healthcare sector has displayed the least sensitivity to global growth historically. The sector displayed the lowest beta (4.3) versus the quarterly change in real GDP since 1995, compared with a median of 7.7 across the remaining Global Industry Classification Standard (GICS) sectors2.

With this in mind, we see today’s late cycle environment as being an attractive entry point. We continue to hold conviction on healthcare, not solely based on the current market cycle outlook, but also due to the secular growth and product innovation that are underpinning the sector.

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US-China Trade Talks: Down to the Wire

With just two weeks left until the trade truce deadline, will we finally see the US and China come around the negotiation table to strike up a deal and end a bitter trade conflict that has lasted over a year? In the following interview Huang Juin Hao, Senior Portfolio Manager shares the possible scenarios of the trade talks and market implications.

1) Trade negotiations between US and China are currently ongoing, but the 90-day truce period is set to end on 1 March 2019. What are your expectations of the talks and possible outcomes?

Our expectations have shifted. Towards the end of 2018, the market was expecting higher odds of an escalation or widening of trade tariffs against China. This was in part, due to the extremely short time period available for negotiations due to US Christmas holidays in December’18 and China’s Chinese New Year holidays in February’19.

However, the market has since moved their expectations towards a higher probability of a neutral or positive outcome for trade talks after more conciliatory signals from both China and US.

In latest news, US President Donald Trump has expressed willingness to extend the March 1st deadline, while Chinese President Xi Jinping and Vice Premier Liu He is reportedly scheduled to meet with key members of the US trade delegation including US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin in Beijing this Friday. We believe the meeting between the top trade envoys signals goodwill and firm efforts to come to a resolution that would be agreeable to both sides.

We are currently leaning towards a base case that sees the status quo remain (no further escalation or de-escalation of the current 25% tariffs imposed on USD$ 250bn worth of goods), and one where it would allow for the deadline to be extended and for talks to be stretched out towards the end of 2019.

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Fixed Income Outlook 2019: Asian Bonds Back in Vogue

In the following interview Esther Teo, Director of Fixed Income, Affin Hwang Asset Management shares her outlook for the Asian bond market as conditions start to ease after a turbulent 2018 and why credit selection is key in a late-cycle.

1) What are your expectations and outlook for the fixed income market in 2019?

The global fixed income space endured a challenging stretch over the past year as the US Federal Reserve continued to hike rates in 2018. Emerging market bonds sold off sharply due to a surge in the USD and specific EM country currency crisis such as in Turkey and Argentina, which prompted a reversal of flows from EMs back to the US. Heightened trade tensions between US and China also dampened sentiment in the region.

Looking forward to 2019, we expect to see some of these headwinds recede as we approach the end of the tightening cycle. More dovish comments from Fed Chair Jerome Powell suggests that the central bank would be more patient and accommodative in steering its rate-hike cycle and unwinding its balance sheet.

Currently, Fed funds futures are pointing towards zero rate hikes for 2019 and a chance of a rate cut in 2020. We expect fixed income to deliver positive returns in 2019 and we see attractive valuations in EM bonds. We also expect EM currencies to be more stable as USD strength is near its peak.

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