Saturday December 29, 2012
The general election factor
StarBizWeek speaks to six fund managers and it's pretty unanimous that the 13th General Election (GE) is the stumbling block hanging over everyone's portfolio and investment choices. Until the election saga is completely over, fund managers will still be adopting their cautious stance and sticking to higher cash allocations and defensive stocks.
Nonetheless there is light at the end of the tunnel.
Growth sectors include the oil & gas and construction sectors, which are two primary beneficiaries of the Economic Transformation Programme (ETP)-led pump-priming programmes by the Government.
Value has also started to emerge in consumer food & beverage, following recent price corrections. The fund managers think that the right stock picks will be key to outperforming the market. Hence, they will look at stocks that will benefit from an improving external environment and avoid stocks exposed to government policy changes.
For more insights, read the outlooks of the fund managers below:
1. Danny Wong
Chief Executive Officer
The FBM KLCI has underperformed regional markets this year although there are still a few more trading days before we close for the year at the time of wrting. Most regional markets delivered a double-digit growth but the local index has only gained 5% in the past 11 months. The MSCI Asia ex Japan index posted a 16% gain for the same period.
In my opinion, this relative under-performance was attributed to partly the “defensive” nature of Bursa as the flow of equity funds rushed to high beta markets when the US and Europe risks started to subside. The other reason could be the “uncertainty” over the possible outcome of the coming general election (GE).
Based on the abov e I believe that Bursa being a laggard is temporary, as the Malaysian market will eventually start trending up when there is more clarity on the outcome of the GE. Unless the local funds' strong buying interest is b ack , our market will be range-bound prior to the GE, the timing of which is still subject to much speculation.
If the global economic outlook continues to improve and the regional markets sustain or keep the bullish tr end, I believe that Malaysian equiti es will become “the star”, provided there is no major surprises from the GE.
This is more so if the US is on track to economic recovery, having avoided the negative impact of the fiscal cliff and continues its quantitative easing policies.
China's new central committee is now focusing on lining-up its leadership personnel nationwide, but over the next few months, focus may be shifted to economic policy action and stimulus to ensure its GDP for the next decade doubles (or grows at a yearly rate higher than 7% over the next 10 years).
Emerging markets would definitely benefit from positive signs from the two world's biggest economies, which would lift corporate earnings, and hence the listed share prices.
My major concerns for 2013 are an unfavourable GE outcome (such as a smaller majority government), a full-blown EU crisis and high inflationary pressures caused by governments' “spending” or excessive quantitative easing.
Sector and stock picks:
I prefer large-cap defensive high-yield stocks until the GE is over and I will allocate some money for cash/short-term fixed income for opportunity. I would pick up index-linked s tocks whose prices slump during this period. When the certainty of th e GE becomes clearer, I would switch to high-growth stocks, in particular higher beta names.
In view of a potentially better equity outlook on a clear catalyst, and potential better economic growth, I will allocate lesser assets in long term fixed income securities to minimise interest rate risk (hike). In general, my top three sectors are banking, plantation and telcos and mid-smallcaps names like Can-One Bhd, Kumpulan Fima Bhd and Hartalega Holdings Bhd.
2. Thomas Yong
Chief executive officer
During the year, the Malaysian equity market has gained about 9%. Despite reaching all-timehigh levels on several occasions, the KLCI has under-performed regional markets. Singapore's Straits Times Index has gained 20%, while Indonesia's Jakarta Composite Index and the Stock Exchange of Thailand Index have gained 11% and 34% respectively.
Apart from comparatively higher valuations, the impending GE has also deterred investors from over-weighing the Malaysian market.
Having said that, the successful listings of several mega IPOs such as Felda Global Ventures Holdings Bhd and IHH Healthcare Bhd have lifted market sentiments and brought the KLCI to international limelight. Although volatility was higher than desired, it has been a fruitful year for equity investors. With equity returns of almost 20%, client portfolios have gained 13% to 16% in 2012.
Going forward into 2013, the main uncertainty in the near term is the timing and concerns over the outcome of the GE. Observations from recent releases of economic data from the US and China indicate an improving external environment.
Barring any unforeseen circumstances, the Asian economies and equity markets are likely to fare better in 2013. Global monetary policies and interest rate environments are likely to remain accommodating. However, in the event of a cyclical upturn, Malaysia which has been viewed by foreign investors as a defensive market is likely to under-perform markets such as Hong Kong and China.
We have maintained minimum exposure to the Malaysia market, and this posture will be kept until after the GE. Within a less volatile market, we believe stock picks would be the key to outperform the market. In this context, we prefer stocks that will benefit from an improving external environment and avoid stocks exposed to government policy changes risk, such as subsidies, etc. In the early part of the year, our client portfolios will continue to posture towards the positive re-rating in Chinese and Hong Kong equities.
3. Tan Teng Boo
After a generally decent 2012, the global equity markets are approaching 2013 with hesitant optimism. While the optimism springs from recent reassuring economic data, primarily from China and the US, the hesitancy arises from unresolved ideological differences in dealing with the American fiscal cliff. While the KLCI will end 2012 positively, 2013 brings an unusual dilemma as investors ponder over the possibility of Malaysia facing a political cliff in the coming election.
In his book, Marxism and Literature, Raymond Williams, a brilliant cultural theorist, argued that a culture is composed of a set of relations between the dominant, residual, and emergent forms.
A residual relationship denotes something that has been “formed in the past, but is still active in the cultural process, not only and often not at all as an element of the past, but as an effective element of the present”.
The dominant dimension refers to the mainstream culture, “a central, effective, and dominant system of meanings and values.” In referring to the emergent dimension, Williams signified that “new meanings and values, new practices, new relationships and kinds of relationships are continually being created.”
In Williams' terms, in the coming election, over-depending on the residual dimension or the traditional support bases may be suicidal for Malaysia's ruling and opposition political parties.
The emergent dimension will soon be the dominant relationship in Malaysia's culture. With the advent of the Internet and new social media, understanding and grasping the emergent dimension can be as dicey as grabbing a slippery eel. The emergent dimension or the three million new Malaysian voters are the new meanings, values, practices and relationships that are being created.
Given the shifting dynamic forces within Malaysia, which aspects of the current dominant system of meanings and values pertaining to Malaysia's society, economy and politics should be retained or discarded?
What does the emergent dimension want Malaysia's society, politics and economy to be like in the coming years? As Williams asserted, there is always, in any society, a basis for social alternatives or oppositional elements to the dominant ones, which in Malaysia's case, is in a critical transitional stage. Thus, if the dominant ignores, excludes or fails to recognize the emergent, which is the would-be dominant dimension, the current dominant forces may quickly become the forgotten dimension. While investors in the local stock market may not think within the above theoretical framework, it is a political reality that they have to unfortunately grapple with as 2013 unfolds. Globally, in contrast to the consensus view, Capital Dynamics is optimistic. Locally, in contrast to the popularly held view, it is timid.
4. Geoffrey Ng,
CEO and Executive Director
It has been a mixed market for us in 2012, where our domestic equity allocations fared relatively better than our international allocations during the first half of 2012, only to reverse during the second half when regional and international markets outperformed the Malaysian market. The rationale behind this is explained by Malaysia's position as a more defensive market during times of uncertainty which we witnessed during the second quarter of 2012. However, money then moved to higher growth markets once risk appetites started to pick up in September.
Sentiment for equity is improving due to expectations for a rebound in macroeconomic and policy-led conditions, not just in the US, but more importantly for us - China and India. We expect investor attention to once again gravitate towards fundamentals, where growth in the North Asian region and India will be faster than South-East Asia (SEA), but with valuations in North Asia remaining cheaper relative to SEA.
That said however, macro risks abound with the impending US fiscal cliff still unresolved and a European region whose economic fundamentals continue to deteriorate despite a near exhaustion of European government policy tools. Although outcomes from these macro risks may directly determine our sector and stock selection decisions, the greater risk to Asian (and Malaysian) markets is a flight of portfolio capital from Asia back to the source of this capital the developed markets of the US and Europe, as witnessed with grea ter frequency the past few years. Realising that policy makers have recently succeeded in convincing investors that “time heals all wounds,” we expect equity marke ts to perform better in 2013 since market stability normally encourages the risk appetite of retur ning investors.
The Malaysian market faces a large political- r isk-driven event during the early part of 2013 with the impending GE. Investor sentiment will remain guarded during this time.
Added to this are expectations for a slower domestic economy and export sector from 2012 which will limit significant upside in the Malaysian market.
Our strategy going into 2013 is to remain defensive and with a fairly high cash allocation.
We, however, will hold conservative exposure to cyclical growth sectors such as oil & gas and construction, two primary beneficiaries of the continued ETP-led pump-priming programmes by the Government.
5. Chan Ken Yew
2 012 in general went fairly well. Despite the unce rtainties in economic growth prospect in the US and Europe, the Malaysian equity market benchmark index, the FBM KLCI, has registered a year-to-date gain of approximately 9%. We also saw a number of mega initial public offerings. For example, Felda, IHH & Astro Malaysia. Privatisations and corporate restructuring exercises involved TWS Corp and the Tradewinds Group. However, the market could have done better if concerns over the GE were removed.
The long-awaited 13th GE has somewhat overshadowed market sentiment. This can be seen from the declining FBM Small Cap Index. The small-cap index has been trending down to 11,425.02 from its two-year high of 13,356.97 on Dec 13, 2012.
From the macro economic point of view, despite the better than expected third quarter (Q3) gross domestic product (GDP) growth rate of 5.2%, after a revised 5.6% 2Q12 (5.4% previously), we are still concerned over the Malaysian GDP growth trajectory for 2013.
The weaknesses of the global economy could spill over into the first half of 2013 as the resolution for the Eurozone debt crisis remains uncertain. However, with a high probability that the US fiscal cliff would be resolved, and further signs of improvement in the US economy as reflected mainly in the housing and manufacturing sectors, we believe the global economy will have a fair chance to stabilise.
Furthermore, China's main economic indicators also showed steady improvement during the second half of 2012, which confirms that it is nearing the end of its two-year down cycle. On the domestic front, should all the Economic Transformation Programme (ETP) projects be implemented smoothly; there cou ld be a positive surprise in the Malaysian economic growth.
In fact, the Government is projecting a GDP growth of 5.0% to 5.5%. This is in-line with our corporate earnings forecast. Based on our earnings universe, the 2013 net earnings growth is estimated at 11.1%. Historically, the corporate earnings growth is 1.5 times (x) to 2.0x to the real GDP growth.
We are neutral for 2013. While the market could see an upward bias as per our Simulation, Seasonal (for 1Q) and Statistical studies, we see signs of weaknesses and risk of corrections potentially capping any significant upsides from here. Before the GE, we believe the FBM KLCI is likely to trade in a rangebound mode. Besides, we also agree that any rallies in the index may not translate into broad-based rallies. Our 12-month index target is pegged at 1,700, implying 16.3x to our 2013 net earnings estimates based on both Top-Down and Bottom-Up Approaches.
We prefer to adopt a trading stance - Buying-on-Weakness' below 1,610 and Selling-on-Strength' above 1,710 in a rangebound market environment. We also reckon that consistent performer, defensive and high-yield stocks will still be the mainstream investment choices. Selective stocks with thematic angles (such as favourable corporate exercises) could potentially come under the limelight too. As for sector selection, we are generally bullish on Banking, Non-Bank Financials, Oil & Gas and Power Utilities. We are also optimistic on Consumer F&B as we believe that value has emerged following the recent price corrections here.
6. Mark Mobius
We are generally positive on the long-term prospects for emerging and frontier market equities. In our opinion, the economic background for many emerging and frontier markets is stronger than that prevailing in many developed markets.
Although estimates for emerging-market economic growth in 2012 have fallen in recent months, they generally remain well in excess of those for developed markets. Moreover, unlike developed markets, many emerging and frontier markets still have ample room for fiscal and monetary stimulus. Although weak growth in developed markets could be transmitted to emerging markets, notably through declines in world trade, this influence could continue to be offset in emerging markets by higher investment spending and increased domestic demand.
We would expect the key Chinese economy to likely show somewhat stronger growth in 2013 than was seen in 2012 as stimulus measures work through the system.
Following the leadership transition in late 2012, we anticipate the authorities will continue to reposition the Chinese economy to depend less on export and investment spending and more on domestic demand.
Efforts to tilt activity away from low valueadded and labour-intensive industries toward higher-technology activities will likely continue as wage levels move up and as the labour force in China becomes ever more educated.
Turning to other major emerging and frontier markets around the world, economic reforms announced in India, if carried through, could free the Indian economy from some of the administrative bottlenecks that have hampered activity.
Brazil has been showing signs of adopting policies designed to put more money in the hands of the lower income population segment, which should improve consumer-oriented industries. Also, the country's resources industry could benefit from increasing Chinese activity and demand for raw materials. In Russia, plans to develop abundant natural resources in the eastern provinces in order to service the Chinese market could stimulate growth in both countries. Not to be left behind, some frontier markets, notably in sub-Saharan Africa, have seen progress in economic reform and market liberalization, which has been providing additional sources of growth.
We believe that the strong prospects for growth in many emerging markets are not currently recognised in equity valuations that lagged those of world markets, in some cases by a considerable margin, near year-end.
Our fundamentals-based, company-by-company investment research metrics have led us to identify many companies that we believe can offer attractive long-term investment prospects.
Two particular investment themes stand out to us: consumers and commodities.
The consumer theme arises from consumers in many emerging markets becoming increasingly wealthy while macroeconomic policy has increasingly been aimed at moving from export-based models toward ones fueled by domestic demand.
The commodity theme reflects our expectation for strong growth in demand for hard and soft commodities as many emerging markets industrialise, likely grow wealthier and increase spending on infrastructure, which tends to tilt the balance between supply and demand for such products in favor of producers.
In regional terms, we have been finding opportunities in many markets, but we are particularly excited by the potential that we are discovering in frontier markets, notably in Africa.