Where to invest as rates fall?

Equities are a better option compared to gold, with O&G and manufacturing exporter stocks seen as a much easier trade


WHILE market experts would suggest a well-diversified portfolio is the best defence against increased uncertainty, a lower interest-rate environment is supportive of the equity market which, in turn, would make valuations of equities more attractive.

Several central banks around the world, including Bank Negara Malaysia (BNM) and the US Federal Reserve, lowered interest rates this week in a bid to fight the economic damage from the coronavirus.

BNM on Tuesday slashed its Overnight Policy Rate (OPR) by 25 basis points (bps) for the second time in two months, bringing the OPR to its lowest in almost a decade.

Lower interest rates mean lower borrowing costs and are thus aimed to boost investments and private consumption.

Equities can generate higher returns albeit at a higher degree of risk, said Fundsupermart research senior analyst Jerry Lee Chee Yeong.

“We always encourage our investors to adopt a portfolio approach for their investment. It is very important to have a well- diversified portfolio regardless of any market environment.

“However, between bonds and equities, we like the latter. Bond yields have compressed significantly over the past one year, while the recent sell-off in global equity would have presented a good buying opportunity to investors,” he told The Malaysian Reserve (TMR).

Lee prefers the fastest-growing Asia ex-Japan (AxJ) and China equities, as these markets are trading at attractive valuation levels.

While the recent global health issue would have impacted the AxJ and China economic growth, the impact is expected to be short-lived as global macro policymakers have begun implementing stimulus packages to support economic activity.

“From the monetary policy point of view, we believe the AxJ and emerging-market countries would have more bullets to support the disrupted economy compared to the developed peers,” he added.

On the local front, small- to mid-cap stocks are preferred, with sectors like technology, construction and export-oriented counters anticipated to outperform this year.

“The recent political scene in Malaysia might affect the local equity market and foreign investors’ confidence. We believe the recent volatility and the pull back in share prices offer investors a chance to grab counters with strong fundamentals,” Lee said.

Sharing his stance is Rakuten Trade Sdn Bhd research VP Vincent Lau, who believes that Malaysian equities have proven to provide better returns over time.

“(In terms of sectors), tech-related is prime as 5G is at the centre with our daily lives becoming more digital,” he told TMR.

Real estate investment trusts (REITs) are also a defensive pick and with rates trending lower, REITs could be sought-after by investors.

Sector-wise, an OPR cut is negative for banks but positive for REITs, Hong Leong Investment Bank Bhd wrote in a note following the January 2020 rate reduction.

“High dividend yielders should remain in favour in light of this cut,” it said.

A dovish setting should generally spur interest in REITs, which the research house said it was overweight on.

Open economies like Malaysia bore the brunt of the initial sell-off over the central bank’s move, AxiTrader Ltd chief Asia market strategist Stephen Innes said.

“I’m not going to suggest at this point a green light to back up the truck and load up on equities, it’s just general that market conditions are just looking much better in Asia, as a quicker return to pre-Covid-19 state of affairs seems a lot more probable than it did only a week ago,” he said.

Equities are a better option compared to gold, with oil and gas (O&G), as well as manufacturing exporter stocks seen as a much easier trade, he added.

“I have been advising cash as the cheapest and less stress-free hedge against the unknown, but the pent-up rebound in China demand is just too big of a story to ignore, so I think equities over bonds,” Innes said.

He added that lower rates depress equity market volatility even in a Covid-19 fear environment. This view is based on what is known and that containment efforts in Asia are effective, assuming the virus will explode in a full-on super-spreader disease type of scenario, he added.

StashAway Malaysia Sdn Bhd country manager Wong Wai Ken advised investors to retain three to six months requirement of cash and fixed deposits (FD) for personal emergencies.

For conservative investors looking for yield, a money market fund is also a good option as it offers a return very close to FD rates at around 2.5% to 3%, but without the need to lock up one’s money for six to 12 months.

“There are other protective assets like Malaysian REITs which would give you a higher yield, 5% to 6%, for taking on slightly more risk,” he noted in an email.

He added that combining different asset classes together using low-cost exchange-traded funds allows investors’ portfolios to withstand economic, political and interest-rate risks.

“Having portfolios that are less volatile and are protected in volatile markets allows customers to focus on the long term and stay invested,” Wong stated.