Equity markets remain relatively more attractive to fixed-income markets as earnings yields are higher than expected fixed-income yields for 2019 and beyond
By SHERMAN TAM CHENG WEI
After an eventful 2018, both fixed-income and equity markets worldwide have seen a general improvement in valuations on aggregate and pockets of value and opportunity across market segments have appeared.
Equity markets remain relatively more attractive to fixed-income markets as earnings yields are higher than expected fixed-income yields for 2019 and beyond.
The global economy is projected to grow by 3.6% this year, and beyond 2019, emerging markets (EMs) are expected to do the heavy lifting once momentum stabilises next year.
Corporate earnings are projected to grow by 8.5% in 2019 and by 9.2% in 2020, supported by improving metrics such as return on equity.
Although Asia’s growth momentum has moderated this year, overall momentum may stabilise by the end of the first half of 2019 (1H19), which will enable a pickup and a recovery in corporate earnings growth across the region.
Investors should remain overweight on Asia ex-Japan and EMs with decent fundamentals and fairly attractive valuations ahead of an eventual recovery, which we believe could take place by the start of 2H19.
Equity market valuations have improved across Asia and we believe a large portion of the known negatives out already priced in.
Based on an optimistic scenario of a proper resolution, we think Asian markets will see a recovery of investor sentiment and an upward multiple rerating, which could result in a total return of at least 33% from current levels by end-2020 as growth improves.
Under the pessimistic scenario of continued escalation in the China-US trade relations, potential upside will be at the lower end of the range (about 20%) from the current levels.
To sum up, we target a price-earnings ratio of 13.5 times for the MSCI Asia Ex-Japan Index by end-2020, where Asia is poised for returns of 20% to 33% over the next two years.
Countries in South-East Asia will benefit from further deterioration in the US-China trade tensions as corporations may readjust their operations across the region as regional trade continues to increase.
Wages in countries such as Indonesia, Vietnam and Philippines remain competitive and serves as an incentive for multinational corporations to base their operations in this region.
Malaysia and Singapore are poised to benefit as regional hubs for trade and services due to their infrastructure and friendly business environment.
The technology sector should continue to outperform in 2019. Earnings momentum in the semiconductor industry is likely to remain healthy with expanding manufacturing capacity , thanks to the emergence of virtual reality (VR) and artificial intelligence (AI).
There remains strong demand for electronic chips and components from data centres and tech-reliant sectors such as communication, healthcare and industrial sector.
Cyclical sectors like industrial should be buoyed from stronger earnings and revenues if economic growth remains sturdy as we expect.
Given the high and still rising employment rates and accelerating wage growth, consumer spending should remain robust across the regions, which is a boon for the consumer segment.
A slower than expected economic growth in China could affect Asian and emerging economies.
An unexpected pickup in inflation and faster monetary policy tightening in the US could take a toll on investor confidence.
Country specific issues, such as Italy’s fiscal position might jeopardise Europe’s growth outlook, while a disorderly Brexit could weigh significantly on the European economies through exports and investment channels.
Although 2019 will be a more challenging year than 2018 as downside risks are mounting, there is room for upside surprises including a resolution on trade conflicts which would restore business confidence, investment spending and economic growth.
That said, fixed income or bonds are still the shield for long-term investors against volatility in equity markets.
In spite of a rising interest-rate environment, investors may consider local long duration bond funds as the interest-rate sensitivity for the local bonds is relatively lower.
By investing into a long duration bond fund, investors are poised to enjoy decent yields given positive domestic credit outlook, as well as benign inflation rate environment in Malaysia.
Local short duration bonds are also an alternative and provide an anchor of stability to a portfolio and are less susceptible to currency volatility.