This article first appeared in Capital, The Edge Malaysia Weekly on March 27, 2023 - April 2, 2023

IT has been three years since the massive global rout in March 2020, sparked by the outbreak of the Covid-19 virus as the world entered into uncharted waters.

Since then, there have been fresh challenges, until the present time, although the swift moves made by policymakers to loosen the belt and raise public spending appear to have managed to steer the world away from falling into recession.

Instead, the world has to battle inflation by aggressively lifting interest rates from a record-low levels — something that has not happened since 2008.

As the world had taken low interest rates for granted, some were caught by surprise by the rapid rate hikes.

The latest bolt from the blue is the banking crisis in the US and the collapse of Credit Suisse, which needed a bailout by the Swiss government as liquidity started to dry up and bond prices plummeted when interest rates continued to climb.

Despite concerns about the repercussions of the bank run in the US and the financial stress in Switzerland, the US Federal Reserve stuck to its plan with a 25-basis-point hike last Wednesday, leading to a policy rate of 4.75% to 5%, in a bid to tame inflationary pressures. It is the highest level in the US since October 2007.

The US rate hike did not go down well with investors, sending the Dow Jones Industrial Average to the cusp of the 32,000 level, diving 530 points, or 1.6%, in a day. The Nasdaq Composite Index shed 1.6% and the Standard & Poor’s 500 index fell 1.66%. Yet, the sell-down was far less than the global rout of three years ago, indicating that investors did not panic as much — at least for now.

In Malaysia, the FBM KLCI broke the 1,400 level to end the week at 1,399.7 points, down 3.7% since the beginning of this month.

Risk-averse fund managers and heads of research warn that investors should be more cautious in making investment decisions against the current backdrop, as more consequences of the reversal of the interest trend are likely to rear their ugly heads sooner or later. However, others see a window of opportunity to snap up fundamentally strong stocks when sentiment turns sour.

Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng says: “When things fall apart, there is definitely a reason. Risk has gone up, meaning there is opportunity to buy into some of the investments that you like.

“When you invest, you invest in the business model, the client of the companies, the management, growth outlook and so on. When these kinds of things happen, and prices come down, it is a window of opportunity, because fundamentally [these stocks] are still intact, but sentiment is weak.” Ang does not expect strong spillover effects from the West.

Areca Capital CEO Danny Wong advises investors to be less aggressive while waiting for the dust to settle. He points out that while there are concerns in the market of a potential multiplier effect of the current banking woes, it is too early to gauge at this juncture.

“Apart from external factors, investors were concerned about internal issues such as political uncertainty and change of policies. Recent development has provided a silver lining, although investor confidence is still fragile.

“Now, with more events on the global stage, we need a longer time for the recovery [to pre-pandemic levels],” Wong tells The Edge.

“Investors should look at their portfolios and adjust on the risk side temporarily, and not go too aggressive. Some who have exposure to global bonds may have to study whether there is an impact on their investment.”

Nonetheless, Wong suggests there are pockets of opportunity in Asian equities, as he expects the banking fallout in the US to have no significant impact on this part of the world.

Among his top picks are healthcare stocks such as glove manufacturers, and the consumer-related and industrial sectors, including semiconductors.

Nonetheless, MIDF Research head Imran Yusof is optimistic that the market will end higher this year, as he believes the Fed will pause its rate hikes. So, investors should get ready to ride the upside potential.

“We believe now may be a good opportunity to start accumulating because, when the eventual Fed hike pause comes, the rally we are expecting may have already started,” he says.

Imran points out that the aggressive rate hikes by the Fed have been the main factor that has dampened market sentiment.

“So, we recommend that investors look for companies that still have growth potential but good dividend yields to limit any downside [risk],” he says.

Rakuten Trade head of equity sales Vincent Lau points out that the Malaysian market is trading at a discount to its peers in the region.

Lau says the FBM KLCI is currently trading at a price-earnings ratio (PER) of 12.85 times, lower than those of regional peers such as Singapore’s Straits Times Index, at 18.7 times; the Stock Exchange of Thailand, 19.1 times; the Jakarta Stock Exchange Composite Index, 14.25 times; and the Philippine Stock Exchange Composite Index, 13.91 times.

Prior to the Covid-19 pandemic, the historical average PE valuation of the FBM KLCI was 17.68 times between 2015 and 1Q2020. Some see this, however, as a political risk premium on the Malaysian market.

Lau believes the stock market has already priced in the bad news. “Corporate earnings are expected to do better this year, given the absence of the one-off prosperity tax, and that the Fed’s interest rate hike is expected to peak this year and political uncertainties have ebbed,” he tells The Edge.

Lau says that, before the pandemic, the local stock market had been trading at a premium to its regional peers, owing to the presence of government-linked investment companies such as the EPF, the Retirement Fund (Inc) (KWAP) and Permodalan Nasional Bhd. The EPF had offloaded some shares to raise cash for its four withdrawal schemes during the pandemic.

On top of that, there has been foreign selling, he notes. This year alone, foreign investors sold RM1.8 billion net of Malaysian stocks.

“There is also foreign investor flight from the Malaysian market. But, overall, we remain optimistic about the local market, as employment remains intact, interest rates are stable and economic growth is strong.

“We believe many funds and investors are taking a ‘wait-and-see’ approach before making any commitments, owing to weak market sentiment,” Lau says, adding that Rakuten Trade’s year-end forecast for the KLCI is 1,630 points.

Despite the weakness in the KLCI, Lau says small- to mid-cap companies have done well over the past two years, as evidenced by the oversubscription and share price performance of new listings.

“Overall, if you include the initial public offering performance, the ACE Market index and some of the mid-sized companies, the Malaysian market has actually done well despite the uncertainties in the global market,” he says.

One thing is certain: The days of cheap money are over.

Morgan Stanley Research estimates that the interest rate hike will peak in May with another 25bps, to bring it to between 5% and 5.25%. It says in a report: “Thereafter, we expect the Fed to remain on hold before making the first 25bps cut in March 2024.”

In the current high interest rate regime, former investment banker Ian Yoong Kah Yin suggests a “wait-and-see” approach and raising one’s cash position until there is better clarity in the market.

“We are in the midst of a global polycrisis. The Russia-Ukraine war is still in progress, the US-China trade war is unresolved, global interest rates are at a 16-year high and there is rampant global inflation.

“It is a confluence of negatives, with a strong indication of global interest rates peaking. The next [Federal Open Market Committee] meeting is in May 2023,” Yoong says.

On the domestic front, he believes there is still uncertainty in the political landscape and there will be more clarity in the second half of the year after the state elections.

“Major policy moves by the unity government will ultimately bear fruit. The fragility of the government, however, has led to investor uncertainty in the short term. There will be greater clarity after the six state elections,” he says.

Questions continue to linger as to whether the reopening of China — the world’s second largest economy and the largest importer of crude oil — still has legs.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.