Avoid speculative, low liquidity investments for now, say analysts

Investors will need to switch their asset allocation to more protective asset classes like cash, bonds, gold and consumer staples


INVESTORS should avoid speculative, low liquidity investments and switch to more protective asset classes, besides lowering their expectation of low single-digit returns, until an economic recovery becomes a more distinct possibility, fund management experts observed.

This comes after Bank Negara Malaysia (BNM) last Friday stated that Malaysia’s GDP may contract by as much as 2% this year due to the impact of the Covid-19 pandemic and the ongoing Movement Control Order (MCO) which has pressured local economic activities.

Independent financial consultant and investment analyst Leong Hoe Kit said BNM is naturally cautious with the current turn of events involving Covid-19 and the oil price war, therefore, reducing the GDP growth estimates for 2020.

“It looks like BNM expects GDP to contract very sharply in the first half of 2020 (1H20) and probably a gradual recovery in 2H20. BNM has definitely grown more cautious compared to when they had their last Monetary Policy Committee meeting in March.

“While BNM’s revised GDP growth estimates of -2% to 0.5% look more pessimistic, this is still premised on the fact that the coronavirus infections will peak in 1H20, whether this holds true or not, only time will tell,” he told The Malaysian Reserve (TMR).

The former fund manager opined a recession is very likely now as the central bank seems to indicate a sharp contraction in the first quarter of this year (1Q20), with a theoretical possibility of growth in 2Q, although bad, would be better than 1Q since the 1Q GDP would be at a very low base, hence, avoid fulfilling the two consecutive quarters contraction definition of a recession.

“However, we are already in April now and the Covid-19 cases have yet been proven to have peaked, so chances are the disruption to the economy would probably affect 2Q more than 1Q, notwithstanding the various government stimulus packages,” he said.

He expects investors to be look- ing for bargain buys in the next few weeks, but will not rush as the FTSE Bursa Malaysia KLCI performance has been bad for some time.

Leong added that the huge uncertainties pertaining to the impact of Covid 19 and the oil price war have caused an aversion in investors towards risky assets.

“Cash is king for the moment as the said uncertainties persist, despite the slew of stimulus packages announced by the government. “Investors who hold a diversified portfolio may pursue strategic asset rebalancing periodically and add on some risky assets into their portfolio, but in the current situation, they are well-advised to avoid speculative investments or those investments with low liquidity,” he said.

StashAway Malaysia Sdn Bhd country manager Wong Wai Ken said, while a drop in the GDP is to be expected given the headwinds the country is facing including the collapse in oil prices and Covid-19, things would have been worse if not for the government’s stimulus measures.

“Every nation needs to make a choice between public health and safety versus the economic impact of the virus, and it’s clear that public health is now the primary concern for Malaysian policymakers.

“An encouraging fact is that inflation is still under control. So a technical recession may be tolerable given that inflation will not run rampant in a stagflation environment,” he told TMR.

Wong opined at this point, a recession is practically unavoidable, however, it is not something that investors should necessarily fear.

“To stay invested, investors will need to switch their asset allocation to more protective asset classes like cash, bonds, gold and consumer staples. Their expectations should also shift to expect low single-digit returns, until a recovery becomes a more distinct possibility.

“The last thing investors should do is panic and realise their losses. If they have both capital and time on their hands, they could even look to slowly and gradually add to their positions in this market, as it’s impossible to pick the bottom,” he said.

Wong noted large public institutional investors have been adding to their positions given their mandate, thus effectively supporting the market.

“Private investors may be maintaining high cash positions for now. For the foreseeable future, there are more economic headwinds for Malaysia given our reliance on oil prices and trading partners like China,” he said.

Wong added that government bonds are an obvious choice for capital preservation, given event lowering yields.

For corporate bonds, investors really need to assess them on a case-by-case basis given how each business will benefit or suffer from this crisis and have different capital structures, he added.

“For investors looking for value in stocks, they’ll have to have strict criteria for buying, which include whether these companies are recession-proof, have low leverage, healthy cash positions and positive cashflow,” he said.