Equities still investors’ top pick for higher yields, possible market recovery

The reset in investor sentiment levels is a boon for risk assets in 2019 and adds fuel for a recovery, says Tan of Fundsupermart.com


Equities remain the top pick for investors going into 2019, despite the rollercoaster ride last year that saw many re-allocating assets into safer havens such as real estate investment trusts (REITs) and bonds as the opportunity cost of holding cash increased.

Volatility on global financial markets rose last year due to trade tensions, geopolitical concerns, contagion fears in emerging markets and a growing expectations of a growth slowdown on the horizon.

Fundsupermart.com Malaysia research analyst Tan Wei Yine said 2018 was one of the most challenging years in financial markets history, with cash being the best performing assets across the globe.

“On average, equity funds on our platform posted an average loss of 14.4% in 2018 amid a rising interest-rate environment. The increased opportunity cost of holding cash has led to the increase in sensitivity of asset prices, which helped explain a large part of the volatility picture as economic events unfold on the global front,” he told The Malaysian Reserve (TMR) via email.

The Kenanga Growth Fund posted a one-year return of -18.08% for 2018, while the Eastspring Investments Small-cap Fund recorded -18.97% in the same year.

The RHB Smart Treasure Fund posted -22.99% in returns for 2018, after posting a 1.92% return in 2017 and a massive 40.04% in 2015.

The MSCI Emerging Markets Index posted a -8.92% return in 2018, after hitting one-year highs of 25.83% in 2017 and 33.12% in 2016, while the MSCI World Index had similar returns of -8.2% in 2018.

Post-2018, however, both fixed-income and equity markets worldwide have seen a general improvement in valuations on aggregate, thus opening up pockets of value and opportunities across market segments.

“Relative to fixed-income markets, equity markets remain more attractive as earnings yields are higher than where we expect fixed-income markets to trade at in 2019 and beyond. As such, we remain ‘Overweight’ on equities vis-a-vis fixed income for our asset allocation in 2019,” Tan said.

He added that the high levels of investor confidence and rising asset prices seen at the start of 2018 have been revised lower as sentiment weakened on the sell-offs across global equities.

Tan said the reset in investor sentiment levels is a boon for risk assets in 2019 and adds fuel for a recovery.

Many investors last year chose to withdraw from risky assets and into income-generating vehicles such as REITs, dividend-oriented funds and bonds. Funds with exposure to income-generating avenues such as REITs were able to outperform other equity funds during the market downturn, Tan noted.

In times of heightened volatility, allocating REITs into an investment portfolio can help cushion some of the downside risks via the income generated by property rentals and operations.

Cautious investors may continue looking at these “safer” asset classes, as the local equity market remains a difficult one to predict in terms of high-yielding segments.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew said, while small caps appear to be performing for now, he still expects it to be somewhat difficult for small caps to outperform going forward.

“Lembaga Tabung Haji said last year they’re going to trim their portfolio in equities, which means a substantial sell-down, so it’s quite natural small caps will underperform. Small caps also had a dismal showing last year,” he told TMR.

Unit trusts remain attractive to pockets of investors as they allow investors to tap into the expertise of investment professionals at a fraction of their investment capital, which is understandably assuring during bear market cycles.

“As opposed to direct stock investments, this allows investors to have access to a basket of securities without committing too much of capital. Unit trusts are favourable to investors who have less disposable cash, but still wish to put their money to work,” Tan explained.

Pong added that in general, investors with more experience and capital would lean towards investing directly in equities.

“Most young investors prefer to go through funds like unit trusts. Only those who feel they have sufficient knowledge and experience would invest individually,” he said.