This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 11 - 17, 2016.
There are few positive catalysts in the country and the FBM KLCI’s valuation is relatively high. Fund managers say investors with a long-term horizon can look at regional-focused equity unit trust funds for possibly higher returns.
Unit trust investors with a three to five-year investment horizon should consider Asian and Asean equity funds, looking at the attractive valuations in these markets. These funds are suitable for those with a higher risk appetite and can stomach short-term volatility, says Eastspring Investments Bhd chief investment officer for retail and institutional business Chen Fan Fai.
“Going overseas will give fund managers a wider choice and more opportunities to generate higher returns for investors in the long term. If your investment horizon is three to five years, regional equity funds should be preferred over single country funds such as Malaysia. Currently, there are cheaper markets in terms of valuations, especially in North [East] Asia,” he says.
Eastspring Investments is one of the largest asset management companies in Asia.
According to Bloomberg, the market valuations in Northeast Asia, which includes South Korea, Taiwan China and Hong Kong, look relatively attractive compared with the local market’s.
The price-earnings ratio (PER) of the FBM KLCI stood at 18.67 times as at April 4. This compared with the 15.19 times of South Korea’s Kospi and 14.35 times of Taiwan’s Taiex. The Shanghai Composite Index and Hong Kong’s Hang Seng Index stood at 15.76 times and 10.02 times respectively.
“Besides the fact that investing abroad provides you with more opportunities in the long run, you are also able to diversify across economies at different phases of their cycle, including exposure to various underlying currencies. Diversification should be one of the main tenets of every investor,” says Chen. In the short to medium term, he adds, Malaysia is a safer market because there is a lot of trapped liquidity created by government-linked companies here.
Chen’s views resonate with those of Libra Invest Bhd CEO Jason Lee Wei Chung, who says the regional market — particularly Asean — is expected to have more upside than the domestic market for investors with a three to five-year horizon. “Most of the Asean markets are cheaper than Malaysia, excluding the Philippines,” he points out.
By looking for opportunities in the region, fund managers will have a wider universe to invest in, says Lee. “Different markets have different dynamics though. For instance, the Philippines — even though its valuation is higher than ours, its GDP growth is higher than that of Malaysia, at about 6% to 6.5%.
“There are investment opportunities that you don’t find in Malaysia. Fund managers will have more space to select high-growth stocks by looking regionally.”
Lee says investors can also diversify their investments into different currencies by investing regionally. This could be a benefit for investors as the global economy remains uncertain and the ringgit has been volatile over the past year.
According to him, the valuation of the Malaysian market is expensive compared with that of its regional peers despite being more defensive during a downturn. “Historical data has proved that the Malaysian market tends to outperform when the regional market is down, and vice versa,” he says.
“Nothing is cheap. If you compare large capitalisation crude palm oil companies and banks listed in Malaysia with those in Singapore and Indonesia, ours is always more expensive. However, it depends on the risk you want to take.”
Fewer positive catalysts in Malaysia
The Malaysian economy is expected to have fewer positive catalysts this year. Growth is expected to decelerate on the back of low commodity prices, softer domestic consumption and macroeconomic factors.
China, which is Malaysia’s largest trading partner (with exports to the republic accounting for 12% of its GDP), is experiencing slow growth amid an economic transition. The recovery of the US economy is uncertain and any future reversal could further impact the weak ringgit and hurt local exports.
All this has made it more challenging for unit trust funds investing in the local market to generate higher returns over the next few years. As at March 25, the Lipper Fund Table showed that the Equity Malaysia Small and Mid-Cap category had generated an average return of 1.99% and 32.22% in the past one and three years respectively. By comparison, the Equity Malaysia category had an average return of -0.81% and 18.56% during the same period.
Moreover, local small and mid-cap equities, which have contributed positively to the performance of local funds over the past 2½ years, have seen their valuations go through the roof.
“The small and mid-cap stocks have done tremendously well against the big caps, but that part of the market is pretty crowded now. The [bull cycle] is already quite long and the valuation gap between the small and big caps has narrowed a lot. Smaller companies are generally more vulnerable [to economic headwinds],” says Chen.
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