This article first appeared in Capital, The Edge Malaysia Weekly on August 5, 2024 - August 11, 2024

MALAYAN Banking Bhd’s (KL:MAYBANK) (Maybank) insurance and takaful arm Etiqa International Holdings Sdn Bhd (EIH) expects better traction in its investment portfolios in the second half amid optimism in the local capital markets and anticipation of a lower yield curve should the US Federal Reserve initiate a 25 basis-point cut in interest rates in September, as widely predicted.

“Our ringgit-based portfolios will continue to rely on domestic equity and bond investments to drive profitability in 2024,” Etiqa chief investment officer Lee Yuen Kuen tells The Edge. Lee was appointed to the position on Jan 8 this year, replacing Norlia Mat Yusof, who oversaw the investment portfolios as group chief investment officer of Maybank Ageas Holdings Bhd.

Maybank’s insurance and takaful subsidiaries in Malaysia and Singapore are parked under Maybank Ageas, in which the banking group owns a 69.05% stake through EIH. Brussels-based insurer Ageas Insurance International NV owns the remaining 30.95% of Maybank Ageas.

Etiqa Group (Etiqa) operates in Malaysia, Singapore, the Philippines, Indonesia and Cambodia, with more than 90% of its Malaysian operations’ investment portfolios being local-centric with ringgit-based assets and less than 10% invested overseas.

The vibrancy in the equity markets is very much welcomed by Etiqa, which told The Edge last year that it had hoped for an uplift from the equity markets but it did not materialise as the markets were struggling to cope with the effects of the Russia-Ukraine war and an economic environment of high inflation and increasing interest rates.

However, things have taken a turn for the better. Year to date, the FBM KLCI rose 12.5% to peak at 1,636.55 points on July 19 from 1,454.66 points on Dec 29 last year. The benchmark index closed lower at 1,622.19 points last Wednesday (July 31) as investors reacted to the tumbling of big technology stocks on Wall Street amid criticism that they had grown too expensive and valuations had run too high ahead of profits.

With better investment opportunities abounding this year, Etiqa has increased its equity exposure this year to a high single-digit percentage from about 5% previously as it “selectively rebalances between sectors such as property, construction, technology and financial to capture pockets of trading opportunities” on Bursa Malaysia.

“We continue to favour the construction sector due to accelerating public and private job flows, and the property sector because of strong demand in established locations. The utility sector is expected to benefit from growth under Malaysia’s National Energy Transition Roadmap programme, while the technology sector should see gains from a recovery in the semiconductor space and government support through the National Semiconductor Strategy,” says Lee, admitting that the glove sector disappointed in the first half largely due to “below-expectation earning results”.

“Besides avoiding sin stocks, we are open to investment opportunities in other sectors and increasingly incorporating environmental, social and governance factors into our investment assessments,” he adds.

If there should be any concerns about the local bond and equity markets amid the ongoing subsidy rationalisation measures, Lee assures that Etiqa will remain invested with the view that the measures will benefit the country’s economic structure in the longer term, helping to narrow the fiscal deficit and boosting foreign investors’ confidence in the local capital markets.

“However, we are cautious about the potential near-term negative impact on local consumer and corporate sentiment, and have adjusted our allocation accordingly, particularly in sectors that might be impacted, such as consumer and auto,” he says.

Where Etiqa’s overseas investments are concerned, note that it has pulled out of China, where it had built up significant investments in recent years, after the portfolio was adversely impacted by the downturn in the Chinese property market.

“We have since zerorised our exposure in this area and reallocated to higher-qual-ity assets including both government and corporate investment-grade bonds in Asia-Pacific countries such as Japan, South Korea, Australia, and Singapore, taking into account prevailing market views and risk assessments. Additionally, we are constantly exploring better opportunities across various markets, including Asia, for our portfolio,” Lee says.

“We view fixed income investments favourably this year amid anticipation of a lower yield curve and more accommodative global monetary policies. Our fixed income funds have shown robust performance, consistently ranking in the top three among peers. With a strategically preferred duration to capitalise on the expected lower yield curve and potential rate cuts in developed economies, our proactive allocation strategy underscores our commitment to maximising returns while managing risk effectively,” says Lee.

Etiqa concedes with broad views that the US elections and potential rate cuts will see markets poised for notable shifts in the second half. It expects investor sentiment to become more cautious due to concerns over a US-China-led global trade war post-election, although the continuation of the China-Plus-One strategy will likely benefit Asean economies as multinational corporations diversify their supply chains.

“For fixed income markets, the elections and potential rate cuts suggest a downward trend in yields, with investors favouring safe-haven securities amid policy uncertainty. Lower US yields could drive capital flows into emerging markets like Malaysia, reducing local bond yields and potentially strengthening the Malaysian ringgit, attracting further foreign investment,” says Lee.

He believes that despite expectations that Bank Negara Malaysia will maintain the overnight policy rate at 3%, the combined effect of US rate cuts and election-induced uncertainty may result in a lower yield curve for Malaysia.

“Overall, these developments present both risks and opportunities for markets, particularly in Asean economies and emerging markets including Malaysia,” he says.

“In 2022, part of our portfolio was impacted by the China property bond market. We have since zerorised our exposure in this area and reallocated to higher quality assets including both government and corporate investment-grade bonds in Asia-Pacific countries such as Japan, South Korea, Australia and Singapore,” says Lee.

“In recent months, my primary focus has been on leveraging the robust foundation established by our former CIO and the well-defined investment process developed over the years. We have built on this solid foundation by continually fostering a disciplined investment culture that rigorously identifies compelling risk-reward opportunities through holding regular weekly meetings to discuss potential investments and utilising information technology to identify leading indicators that can further enhance our investment decision process.

“Additionally, we believe that effectively leveraging technologies such as coding and quant modelling in our investment strategies is a critical differentiator. For instance, we have been developing new quant models with multiple factors tailored to our local equity market to deliver consistent results. These technological advancements not only enhance our decision-making processes but also help us stay ahead in a competitive market,” adds Lee.

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