Brighter outlook for Asian equities, but stock-picking is key

Sectors to focus on include commodities, upstream O&G segment and technology


ASIAN equities offer a better risk-to-reward trade off in 2020, as the seemingly de-escalating US-China trade spat is providing green shoots for economic activity.

For Malaysia, while external factors may influence the country’s equity and bond markets, these issues will be short-lived due to support from strong domestic activities, Manulife Investment Management (M) Bhd said in its 2020 outlook.

While the Malaysian sentiment could be cautious given the underperformance last year, there will be pockets of opportunity for stocks with earnings momentum and attractive valuation, Manulife Investment head of total solutions and equity investments Tock Chin Hui said.

“Valuations of Malaysian equities are attractive as the market is trading at the average level of its 10-year historical price-to-earnings (PE) valuation, while Asia, ex-Japan and US equities are trading at above their average level.

“We believe stock picking will be key to a good performance this year,” she said at the firm’s outlook briefing in Kuala Lumpur yesterday.

For investors, she advised a bottom-up approach focusing on companies’ fundamentals, while analysing their ability to deliver earnings.

Market confidence could be boosted by clarification, continuation and execution of reforms in domestic policies, as well as the ongoing rebound in crude palm oil (CPO) prices and a pickup in oil and gas (O&G) upstream activities.

Sectors to focus on include commodities, in view of the higher CPO price and increased spending by Petroliam Nasional Bhd in the upstream O&G segment, Tock said.

“The rollout of 5G also presents great investment opportunities as this means we are at the start of a multi-year capital expenditure cycle. “Malaysian technology companies, which are part of the global technology supply chain, are already seeing increasing orders as a result of 5G infrastructure rollout,” she stated.

Meanwhile, the positive and negative factors influencing the Malaysian bond market remain balanced at this juncture.

“We do not anticipate a repeat of 2019’s market movement given the improved growth outlook following the de-escalation of US-China

trade tensions, which implies fewer propensities for further monetary and financial easing going forward,” Manulife Investment head of fixed income Andy Luk said.

However, the potential exclusion of Malaysia from the FTSE Russell World Global Bond Index in March 2020, as well as the reduction of Malaysia’s weightage in the GBI-EM Global Diversified Index to make way for China’s inclusion, poses outflow risks.

“This casts an overhang on the bond market, though we expect the impact to be gradual and temporary as the Malaysian market has enough depth and size to absorb the impact. Coupled with geopolitical and events risks, we may see short-term weakness in the market,” Luk said.

Over time, the local bond market is expected to improve, with domestic liquidity underpinned by demand from pension funds and financial institutions.

“Despite lower likelihood of monetary easing going forward, central banks are still likely to keep their monetary policy stance accommodative and we do not rule out more Overnight Policy Rate (OPR) cuts by Bank Negara Malaysia should growth disappoints,” Luk said, adding that an OPR cut is likely to happen in the second half of 2020.