This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 21 - June 27, 2016.

It is important that investors look beyond companies’ earnings in challenging times and take into account the management’s long-term vision and execution capabilities, says Eastspring Investments Bhd CEO Raymond Tang. 

“Profits are a reflection of how management is responding to the market. If you only look at a company’s earnings, you are already two steps behind. Knowing what managers focus on and their execution style is important,” he says. 

Tang looks at companies with long-term, sustainable business models that can provide profit certainty in any economic cycle — those with relatively conservative expansion plans and very low debt levels. He cites the example of an oil and gas company that appeared on his radar screen before the 2008 global financial crisis.

“I asked management why its competitors were borrowing a lot of money to expand their offshore facilities, and why hadn’t the company? They told me that they didn’t believe in borrowing, as the best time to borrow could turn out to be the worst — if credit tightened again and cash flow was squeezed, it would hurt the company.

“I also asked why the company was not competing with those going offshore and had a lot of projects. They said were not doing so because the weather was not something they could control. If you have an offshore platform and the weather condition does not allow it to operate, you will still have to pay the rental cost of the equipment. So, it is not about your ability but the weather. And the management would rather make plans in areas where it had more certainty. 

“This is a very different philosophy and business approach. Knowing how they run the company, I know it will never go bankrupt. The company was cash-rich at the time. This was in 2006 or 2007 when many exploration and production companies saw their share price double or triple. This company is doing very well now while others have seen their valuations fall.

“We look at certainty in terms of outcome or profits. This means these companies have to be consistent in delivering profit and have less volatile profit levels and share prices.” 

Tang says his team will continue to look at companies in Asia because despite the challenging global economy, the region is still expected to have an average growth of 6% this year. “Asia is still a growing market. Although its growth is slower than the 8% to 10% of the past few years, it is 2% to 2.5% higher than the US.

“We continue to look at growth and are identifying the sectors and companies that are adapting [to the new economic cycle]. These companies have to be nimble to rejig their product offerings so they can gain market share.” 

Refining portfolios in a new cycle

Tang, who has been chairman of the Malaysian Association of Asset Managers since 2008, has more than 20 years’ experience in managing funds. He spent 11 years at CIMB-Principal Asset Management and served as chief investment officer for Asean from 2011 to 2015. 

One of his main tasks since taking the helm at Eastspring has been to refine its portfolio of local funds to make it relevant to the current investment cycle. “What worked in the previous cycle may not work in the next. Thus, we are refining and enhancing the investment models of our funds,” says Tang. 

“Small-cap stocks have outperformed in the last three years. Before that it was the large caps that outperformed. That means the risks and returns can be very different in each cycle.”

He says refining the company’s balanced funds is one way of making them more relevant to investors. This includes adding more real estate investment trusts (REITs) to its portfolio. 

“REITs are becoming popular. It is an asset class that provides investors with a strong and stable income stream. For our balanced funds, we will have a heavier REIT component in the equity portion of the portfolio. This is one way of enhancing yield while having low volatility,” says Tang. 

He and his team plan to make more company visits to look for those that can grow market share in challenging times like these. “You need to be one or two steps ahead to find these companies. It is important to spot opportunities and execute before the others find out about them. So, this means going to the ground more often, making more company visits to find good companies,” he says.

“In every cycle, there are companies that benefit from that cycle. For instance, when the ringgit is weak, the importers suffer. But exporters are able to capitalise on the weaker currency to grow global market share such as the rubber glove companies.”

Tang also plans to offer investors more regional and global products. “There aren’t enough global offerings here. Some of them are managed by non-related external parties. By having internally managed [regional and global products], we can offer our retail and institutional investors more options,” he says. 

Eastspring has a proven track record. It has won the award for Best Equity Group at The Edge-Thomson Reuters Lipper Fund Awards for the last three consecutive years. However, most of its regional and global funds had underperformed their benchmark (as at April). 

Tang says his team will work more closely with its regional partners and the managers of those funds to address this issue. “There will be continuous engagement with our colleagues in Singapore on how our regional and global products are doing — what we have done right and how we can do better.” 

Property sector looking attractive

Eastspring Investments Bhd CEO Raymond Tang says the Malaysian stock market’s performance is expected to be capped, owing to macroeconomic headwinds. “Malaysia’s equity performance will be capped in the near term as the market is focusing on external headwinds such as a potential US Federal Reserve interest rate hike.” 

Corporate earnings are expected to be lower in the second half of the year, in line with slowing global growth. “Analysts tend to start the year on a more bullish note because it is a new year and everything looks rosy and they feel more confident. But earnings expectations will get cut moving forward compared with what we have seen in the last two years. The environment is very challenging and it is hard to see earnings move upwards in the short term,” says Tang.

Meanwhile, he does not foresee oil prices rising above US$50 per barrel this year owing to the huge supply that is expected to come into the market. Green technology is another factor that will keep oil prices low. 

“As oil prices edged up, everybody said that at US$50 per barrel, US shale oil producers will begin to pump again. But because of the tenuous financial situation in Venezuela, Nigeria and Russia, these countries will also pump out as much oil as they can. So, there is a bias towards higher supply [than demand] and oil prices will remain weak,” says Tang.

“Also, everybody is more eco-conscious today and green technology is gaining traction. There is anecdotal evidence that Tesla Motors [which produces electric cars] is having its best year.” 

Crude palm oil (CPO) stocks, he says, have limited upside. Meanwhile, the valuations of property stocks are cheap but sales will not be picking up in short term.

“The CPO sector has cooled in terms of share price over the past year and we have not had any newsflow coming out of the sector. When CPO prices fell, the [share] prices of these companies did not come down much. They are relatively more expensive than normal and the upside could be limited,” says Tang.

“The prices of property stocks are beginning to look attractive. But when we talk to the people on the ground, we found that property companies are scaling back their projects. The question is, has this been factored into their share prices? Forward sales will be lower than this year. Nobody has seen much clarity in the short term, but we will start accumulating property stocks again when we think the cycle is near its bottom.”

Tang is “underweight” on the telecoms sector because telcos have been facing intense competition lately, which is largely reflected in the larger data packages being given out to users for free.

In challenging times like these, Tang’s advice to investors is to stretch their investment view to three years instead of the next 6 to 12 months. Some sectors or companies would only look attractive with a longer investment horizon. 

He also says investors could pay attention to equity income funds or high-dividend-yield stocks this year. “Given the low interest rate environment and negative policy rate for some countries such as Japan, the income-oriented strategy and yield type of funds may continue to attract buying interest. Investors should pay attention to equity income funds or high-yield stocks.”