Valuation of equity markets stable if inflation under 4%


THE valuation for the local equity market will remain stable as long as the inflation rate remains below 4%, as historically, the valuation for equity markets will reduce when inflation increases from the level.

UOB Asset Management (M) Bhd CIO Francis Eng cited the US as an example where its market valuation based on an average price-earnings ratio generally ranges between 18 and 20 times when inflation rate stays below 4%.

“As long as the inflation rate does not rise above 4%, historically, the equity market’s valuation can hold.

“It is only when you go above 4% that markets start to react quite negatively and when that happens, you see markets coming down. This trend is likely to hold going forward,” Eng said at UOB’s Global Markets Update 2021 virtual briefing yesterday.

While many economies went into recession last year, Eng said financial markets did relatively well, helped by government policies, both in terms of fiscal as well as monetary stimulus, which paved the way for a sharp rebound in asset prices.

Another factor that will contribute positively on the markets would be the rollout of Covid-19 vaccine globally.

Once the vaccination programme worldwide picks up speed, Eng said this will assist many economies to get back to normalcy due to a boost in economic activities.

As Malaysia is poised to record gradual recovery this year, Eng said among the sectors that would benefit in the period include financial institutions, property segments and consumers.

Improvement in the country’s economic condition will also reflect on the prices of commodities, such as crude palm oil and Brent crude.

The firm is also advocating a barbell approach in terms of investment between growth and value sectors.

The group’s preference is currently leaning towards equities compared to fixed income instruments, as equities generally would perform “far better” amid the initial stages of economic recovery that the country is experiencing.

“Based on historical trends, equity markets are better able to absorb this increase in interest rates as long as it is moderate,” Eng said.

He also expects the FTSE Bursa Malaysia KLCI’s performance to rise by another 5% from its current level.

“We should not be too fixated on the index target levels because what we try to do is outperform the market. Whether the market moves up or down, as investors, we would want to do better than how the market is performing,” he said.

UOB Asset Management’s CEO Lim Suet Ling said to drive economic recovery and to keep it on a safe trajectory, central banks globally are expected to maintain easy monetary policy and are unlikely to increase interest rates.

“By investing in a diversified multi-asset portfolio, retail investors can benefit from the yield of fixed income assets and the potential for capital returns on equities,” she said.

To that end, the asset management firm recently launched the United UWealth Pop Fund to assist retail investors to diversify their portfolio to include equities, fixed income funds and exchange-traded funds.

The fund is available in ringgit with an initial minimum investment of RM1,000.