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For many investors around the world, the onslaught of the Covid-19 pandemic wreaked havoc on their investment portfolios as stock markets tanked in late February and March. How does one start successfully investing in a pandemic? From the lows of late March, equity markets including Bursa Malaysia rebounded significantly in April though it remains to be seen whether this just a “dead cat bounce” or an unsustainable rally within a bear market.

Investors are understandably concerned the lockdown imposed in many countries, including Malaysia, will tip the global economy into a deep recession. In the event Malaysia falls into a recession, this will be the first time since 2009 that the economy has contracted.

In such a scenario, investors will be preoccupied with preserving their investments in case the markets drop further. Nevertheless, astute investors are licking their chops in anticipation of a market crash that will enable them to swoop in to snap up a host of quality assets at a steep discount.

Despite the volatility in the capital markets, FSMOne assistant research manager Tan Wei Yine thinks there are still opportunities residing within equity markets.

However, he cautions that while global equities have rebounded strongly from their March lows, there is still “a great deal of uncertainty” surrounding the containment progress of Covid-19 across the globe.

“In the coming weeks, macroeconomic data reflecting Covid-19’s impact on the economy are going to surface with more negative signs, which could inject an additional dose of volatility in stock markets.”

On whether the rebound from the March lows is just a rally within a bear market, Tan notes that from a historical perspective the S&P 500 Index has seen 16 bear markets (excluding the current one) over the past 90 years.

“With hindsight, four out of those bear markets have posted intermittent bull market rallies of more than 20% before trending lower later. Although counter-trend bulls may not appear as often, it would be unwise for one to rule out the possibility of it happening again completely,” he adds.

Rebalancing investment portfolios

What strategies should investors adopt during times of market stress such as now?

FSMOne advocates investors to have a mix of equities and fixed income that is aligned to their risk profiles, explains Tan (right).

“In market distressful periods, the fixed income portion of the portfolio could help provide stability and in decent times, the exposure to equity markets could help capture capital growth opportunities.

“Investors may find it easier to hold onto a risk-aligned portfolio in challenging times. An investment portfolio that has large, concentrated exposure to volatile assets may induce huge swings in emotions that could lead to poor investment decisions in market distressful periods,” he adds.

Tan advises that an investor should hold a portfolio that aligns with his risk profile. For instance, a balanced investor should have equal weights of 50:50 into equities and fixed income.

In a market downturn, the equity allocation is expected to decline along with the drawdown in stock markets’ movement, while the fixed income portion that is holding up relatively well should have a higher allocation (e.g. the portfolio now has <50% to equities and >50% to bonds), he explains.

Investors may take the opportunity to rebalance their portfolios by reducing their fixed income exposure and increasing equity exposure, bringing those allocations back to the neutral level of 50:50, he adds.

“Mainly, investors are selling high (fixed income prices that held up relatively well) and buying low (equity prices that have been battered heftily). As there is still a great amount of uncertainty surrounding Covid-19 over the near-term, we recommend investors to rebalance progressively when equity markets continue to decline,” he advises.

Preserving your capital

When markets turn bearish, investors will need to adopt a defensive stance when it comes to their portfolio.

Affin Hwang Asset Management chief marketing and distribution officer Chan Ai Mei says as a defensive measure, investors can diversify and opt to tilt their allocation towards fixed income and bond funds.

“Its more modest drawdowns can help ensure capital preservation as well as provide a measure of stability through a regular income stream,” she says.

To position their portfolios and navigate through volatility ahead, investors should first review their portfolios and assess if they are comfortable with the level of risk they are taking. Ideally, investors should also rebalance their asset allocation annually to correct any portfolio drifts, she adds.

“If liquidity is crucial, especially for conservative investors who have retired or are approaching retirement, we believe it is appropriate for them to reduce exposure in equities. This might forego some future upside, but is ideal to help preserve and protect capital.

“Within fixed income, conservative investors should also tilt their allocation towards investment-grade bonds and avoid high-yield exposure.”

For investors sitting in the middle of the risk-profile spectrum and want some equity exposure, an important question they need to ask themselves is whether they can stomach the volatility for the next three to five years?

“If the answer is yes, then investors should average down and split your investment into a few tranches to ease your way into the market,” Chan advises.

Timing the Market

With equity markets rebounding from recent lows, should investors consider buying the dip? Is it even possible to know when the market’s bottom is reached?

Chan believes there is always an element of danger in timing the market. “Even the savviest investor can get it wrong. The ongoing Covid-19 episode has shown how sudden and vicious markets can turn, especially coupled with the presence of algo-traders that have exacerbated volatility.

“Instead of trying to time a market in a downturn, the ideal approach for investors to take may be to just do nothing at all.”

To illustrate, Chan examines how an investment of RM100,000 fares through different market cycles and how it would fare under two different scenarios:

* The investor cuts losses by selling in every market downturn; and

* The investors hold and does nothing in every market downturn.

As can be seen from the tables, the investor who does nothing would perform better overall. Thus, investors should endeavour to spend time in the market instead of trying to time the market, she says.

“Avoid making drastic shifts in one’s asset allocation, whether it is ploughing into the market or cashing-out all at once.”

The Value of Waiting

Chan also highlights what investing legend Charlie Munger – Warren Buffett’s right-hand man – once said: “It is waiting that helps you as an investor, and a lot of people just can’t stand to wait.”

In this type of market environment, she says investors’ nerves are bound to get frayed and they may start turning jittery whenever they see a new headline about new infection rates or whispers about a recession or layoffs.

“We believe investors stand to benefit more by doing less in 2020. Once the Covid-19 contagion recedes, there will be very little impact to long-term investment decisions and fundamentals. As such, we don’t advise doing much on your portfolios.

“It is crucial that investors stick to their asset allocation and stay prudent in this current volatile landscape. Investors who remain disciplined in their approach by investing consistently and sticking to their long-term asset allocation will eventually reap the benefits and fare better overall,” Chan concludes.

By Lee Min Keong

The spot price of gold touched US$1,700 in early March, a level last reached seven years ago. Though it has since dipped as global stock markets started to unravel, gold remains a safe haven for astute investors.

Gold has been on an upward trend over the past few years as demand for it continues to grow among individual investors, institutional funds, and gold-backed exchange-traded funds (ETFs).

Even national banks are getting into the act with the World Gold Council reporting that central banks bought a historic high of 374.1 tons of gold in the first half of 2019. The central banks of Russia, China, Turkey and Poland have been busy accumulating gold.

In Malaysia, the appetite for physical gold has also seen a significant rise in recent times with several gold bullion companies such as Public Gold and Silver Bullion Sdn Bhd, and gold trading digital platform HelloGold confirming a rise in gold purchases even before the equity market mayhem intensified in March.

Don’t Put All Your Eggs in One Basket

As one of Malaysia’s largest bullion dealers, Silver Bullion has seen an increase in orders for gold in its Malaysian operations recently. “Not just gold but silver and platinum too,” says its manager Bryan Teh.

He adds there has also been an increase in enquiries about its state-of-the-art storage facility in Singapore as investors start to realise the meaning of “do not put all your eggs in one basket”. “This relates to not putting all your assets in just one country as political instability and changes in monetary policy can easily restrict access to your assets.”

While demand for gold and silver, in general, has always been there, Teh says people are more aware of the economic situation around them compared to before.

“We strongly believe this increase in demand came from people noticing that not just Malaysia’s economy but the global economy is beginning to show cracks. Ever since the trade war between US and China started, it has taken a toll on the global economy.

“The final nail in the coffin was when the Covid-19 cases came to light and became a global pandemic which made people rush to gold and silver as they are safe-haven assets,” he says, explaining when there is a higher degree of fear in the market, investors will often rush to these safe-haven assets.

“Astute investors on the other hand purchase gold and silver no matter whether the markets are in greed or fear mode as they understand that the current global financial system is a ticking time bomb. Why? It’s simple – currently, the global debt is standing around US$255 trillion with the US leading at roughly US$23 trillion.”

Likewise, Public Gold has also seen demand for its gold products such as bars and coins increase from quarter to quarter at around 30%, says Datuk Wira Louis Ng, founder and executive chairman of PG Group of Companies.

“Yes, Public Gold has been seeing an increase in orders for its gold products recently compared to the previous quarter as the gold price is moving higher and higher. Gold, which used to be at US$1,300 to US$1,400 per ounce, is now around US$1,600,” says Ng.

On the driver for rising gold demand, he says the COVID-19 pandemic coupled with the current turmoil in the global financial markets, including in the US, means that gold products are seen as “safe haven assets”.

To add to that, many central banks in the world are slashing their interest rates due to the financial crisis. “This gives gold buyers more reasons to purchase gold, as gold always performs inversely compared to the other financial classes in the world,” says Ng.

HelloGold also confirmed it has seen “a significant uptick” in its gold transactions in the last three months, says its CEO and co-founder Robin Lee.

He says there are two key factors driving this increasing demand. This first is greater brand awareness of the HelloGold app amongst the investing public and greater recognition of the affordability of getting access to gold through its mobile app platform.

The second factor is the upward momentum in the gold price since its launch in 2015, and specifically over the last few months, he adds. “At a global level, the flight to safety as a result of the ongoing outbreak of Covid-19 has led to a general risk reassessment of the equities markets, as investors consider the possibility of lower global growth and higher global inflation. And, at a domestic level, the recent weakening of the ringgit since the new year,” he adds.

New High for Gold this Year?

What are some factors that could drive a further upward trend in gold prices?

Lee believes the chances of gold breaking its all-time high are increasing for a number of reasons. “Generally, the equities markets have enjoyed their longest bull run and most market commentators believe they are overdue a correction.

“Secondly, geopolitical risks remain high in many parts of the world – impact of Brexit on Europe, US/Rest of the World trade tensions remain largely unresolved and, at best, held in abeyance; and the US elections at year-end.

“More specifically, we believe that the longer the Covid-19 outbreak continues unabated, the bigger the impact it will have on the global economy – in the worst case, we see a 1970s-style recession,” he adds.

The extreme volatility in global markets recently has also affected the spot price of precious metals like gold and silver, which dropped just like it did during the 2008-09 global financial crisis.

Lee explains that a major correction in global equities is more likely to follow what happened during the 2008 global financial crisis. “Gold price initially dipped – by common consensus, that was driven by investors liquidating gold to meet margin calls in other positions and to generate liquidity.

“Thereafter, gold climbed as investors moved into gold as a safe haven asset. In short, we believe that a global equities crash will likely drive gold prices up rather than down,” he adds.

During the height of the 2008 crisis, the spot gold price fell from about US$1,000 an ounce to around US$730. It then started bouncing back and rising as stock markets bottomed out. Gold prices rose further as the economies recovered, peaking at its all-time high of just over US$1,900 (in US dollar terms) in 2011. So will this scenario play out again in the coming recession?

Getting the Allocation Right

So what percentage of their portfolio should ordinary investors be allocating to gold, especially in times of market turbulence?

“Generally speaking, we believe that everyone should hold gold – not so much to make money but more to mitigate the impact of losing money (like a hedge/insurance against inflation, currency weakness, market stress),” says Lee.

For this reason, he believes that an allocation between 5% and 15% in gold is something that everyone should consider, especially in these times of market uncertainty. That said, according to research by the World Gold Council, the amount of gold investors should have in their portfolio should be a function of how conservatively or aggressively they have constructed their portfolio, he adds.

“For example, at the aggressive end of the spectrum, where a portfolio only has 6% in fixed income and the rest in equities and alternative investments, their research indicates that a 10+% gold allocation optimises the highest risk-adjusted return.

“At the other end, a conservative portfolio that is two third in fixed income and the rest in equities and alternative investments is optimised with a 2+% allocation in gold,” says Lee.

To Public Gold’s Ng, ordinary investors’ portfolios should contain 8% to 15% of gold. “This will help them to manoeuvre their way through the crisis that we are seeing in the stock markets currently. Gold should be in every portfolio to protect them from unexpected events.”

By Lee Min Keong

This article appeared in the April 2020 print issue of Smart Investor.

The domestic capital market continued to play an important role in financing the Malaysian economy during 2019, says the Securities Commission Malaysia (SC).

The total size of the capital market expanded to RM3.2 trillion in 2019 from RM3.1 trillion the year before, with debt securities outstanding and equity market capitalisation of RM1.5 trillion and RM1.7 trillion respectively (2018: RM1.4 trillion and RM1.7 trillion respectively), according to the SC Annual Report 2019.

Notwithstanding the challenging global backdrop and ongoing domestic policy reforms, the Malaysian capital market witnessed a higher level of fundraising activities during the year, with total funds raised in the bond and equity market amounting to RM139.4 bil in 2019 compared to RM114.6 bil in 2018.

Alternative fundraising avenues have also continued to gain traction, especially in equity crowdfunding (ECF)  and peer-to-peer (P2P) financing, with total funds raised more than doubled to RM443.8 mil (2018: RM195.9 mi).

A total of RM132.8 bil was raised in the corporate bond and sukuk market compared to RM105.4 bil in 2018, with issuances mainly in utilities and financial services. Sukuk made up 77.1% of total bond issuances in 2019.

Meanwhile, RM6.6 bil was raised via the equity market (2018: RM9.2 bil), of which RM2 bil was through new equity listings with a total of 30 IPOs and RM4.6 bil raised via secondary fundraising. In 2019, four companies were listed on the Main Market, 11 companies on the ACE Market, and the remaining on the LEAP Market.

Notably, the size of issuances via the LEAP Market grew by 60.6% y-o-y to RM92.2 mil in 2019 (2018: RM57.4 mil). In the fund management industry, total assets under management (AUM) rose to RM823.2 bil (2018: RM743.6 bil) amidst an increase in market value, driven by robust performance of small and mid-cap equities and higher net injection from dividend reinvestment.

Total net sales for the unit trust segment amounted to RM30.5 bil in 2019, a decrease of 19.5% y-o-y (2018: RM37.9 bil). In terms of portfolio flows, total non-resident inflows amounted to RM8.7 bil in 2019 (2018: portfolio outflows of -RM33.6 bil), mirroring regional trends.

The bond market recorded total inflows of RM19.9 bil (2018: outflows of -RM21.9 bil) while the equity market recorded total outflows of -RM11.1 bil (2018: outflows of -RM11.7 bil). In the bond market, non-residents accounted for 13.7% of total outstanding ringgit bonds as at end December (end-2018: 13.1%) – most of which were Malaysian Government Securities (MGS) at 80.1% of total foreign holdings (end-2018: 79.1%).

Orderly Market Adjustments of Fund Flows

In the equity market, foreign holdings remained stable at 22.4% of total market capitalisation in 2019, in line with its five-year average. The high level of domestic liquidity in the capital market continued to allow for orderly market adjustments of fund flows between non-residents and local investors.

The Malaysian bond market grew 7.1% from RM1.4 trillion in 2018 to RM1.5 trillion as at end 2019. This was supported by higher levels of debt fundraising, sustained demand by domestic institutional investors, and favourable domestic macroeconomic conditions.

Despite the challenging environment, Malaysia was also among the emerging East Asian economies that saw local currency bond markets expand in 2019. In 2019, as a percentage of GDP, Malaysia remained the third largest local currency bond market in Asia after Japan and South Korea.

However, ongoing trade tensions, the shift in global monetary policy expectations, and general concern over slower global growth continued to drive volatility in the bond market throughout the year. MGS yields experienced downward pressure across tenures, tracking global trends, on the back of major central banks’ shift in monetary policy stance and overall higher global risk aversion.

It also reflected the lower domestic growth and inflation expectations alongside the Overnight Policy Rate (OPR) cut by Bank Negara Malaysia (BNM) in May 2019. As such, yields reduced across the board while the overall curve was relatively flatter for the year.

Double-digit Growth for Mid- and Small-caps

For the Malaysian equity market, overall market capitalisation ended the year marginally higher by 0.7% to RM1.71 trillion in 2019 from RM1.70 trillion in 2018. This was despite the challenging external environment with heightened headwinds mainly from the ongoing US-China trade tensions and weaker global growth.

Overall, while the FBMKLCI moderated in 2019, some segments in the broader domestic equity market gained significant traction, partly reflecting a shift in investors’ preferences. This occurred as sentiments swayed in favour of constituents with better valuation and corporate earnings prospects, particularly in the small and mid-cap segments.

The FBMKLCI declined by 6% y-o-y to close the year at 1,588.76 points (2018: -5.9% y-o-y to 1,690.58 points), influenced by a year of event-driven volatility in sentiments as well as subdued corporate earnings, which continued to be a pressure point on the benchmark index.

Additionally, the FBMKLCI was also weighed down by major counters subjected to key policy adjustments in 2019, aimed at longer-term improvement.

Nevertheless, the non-FBMKLCI components in the Malaysian equity market performed favourably in 2019. It registered higher growth despite the challenging external headwinds, as improved earnings outlook garnered investor interest into this segment.

The FBM MidS, FBM Small Cap and FBM ACE indices increased at robust double-digit rates of 32% y-o-y, 25.4% y-o-y, and 21.1% y-o-y respectively in 2019.

The significant growth in small and mid-cap indices was mainly driven by the energy, construction, and technology sectors, which benefitted from stronger fundamentals and better valuation prospects of their key companies during the year.
Excluding the FBMKLCI components, the energy sector specifically recorded the largest increase, rising by 50.7% y-o-y (2018: -17.3% y-o-y4), while the construction sector increased by 47.9% y-o-y (2018: -46.0% y-o-y), owing partly to the revival of public projects by the government.

The technology sector, in turn, rose by 37.5% y-o-y (2018: -9.32% y-o-y), benefitting from the 5G network rollout, higher global smartphone shipments, and potential trade diversion stemming from the ongoing US-China trade war.

Robust Fund Management Industry

Meanwhile, in the fund management industry, the unit trust segment remained the largest source of funds towards the AUM, with net asset value (NAV) amounting to RM482.1 bil in 2019 (2018: RM426.2 bil).

Overall, 75.3% of the fund management industry’s AUM was invested locally, of which 44.2% was in domestic equities, followed by 26.1% in money market placements, and 24.6% in fixed income.

Compared to 2018, investment in local equities and fixed income rose in value by RM12.9 bil and RM19 bil respectively, while the domestic money market placements decreased by RM6.1 bil.

Are you a value investor?

Value investing motto is buying what’s undervalue in the market and then make money from it  when the price goes up in a long run. As such, stock valuation strategies will have a great impact on investment returns.

Learn Smart Way of Investment Stock Valuation Strategies from Mr. Alex Bryan, CFA, the director of passive fund research with Morningstar.

Valuations aren’t great for timing investments

Stock Valuations are helpful for gauging expected returns, so it wouldn’t be wise to completely ignore them. However, valuations don’t appear to be very helpful for tactical adjustments across regions, sectors, and factors, or for timing exposure to credit risk. If valuations are unusually high, future returns will likely be lower than normal, and vice versa.

Valuations are only a moderate predictor of performance

Based on a study, from January 1970 through January 2019, a one-point increase in the MSCI USA Index’s price/earnings (P/E) ratio was associated with a 0.72% decrease in returns over the next year, while lower valuations had the opposite effect. Valuations could explain only a small part of the variation in stock returns over this period – 6% to be exact. So, the market’s current valuation says little about what its return over the next year will likely be.

Case Study #1: MSCI USA Index

It can take valuations a long time to revert to the mean, so it’s not surprising they appear to have greater explanatory power of returns over longer holding periods – though it’s still low. For example, with a three-year holding period, starting P/E ratios could explain 15% of the variation in the MSCI USA Index’s returns. The explanatory power was slightly higher over a five-year holding period, as shown in Exhibit 1.

So, why aren’t valuations a better predictor of returns?

They aren’t the only variable that matters. Differences in expected growth rates can justify differences in valuations.

As investors’ growth expectations increase, so do current valuations and stock returns. If they are realised, higher valuations don’t necessarily hurt returns going forward. And there are lots of surprises along the way (both good and bad), as business conditions change, that weaken the relationship between valuations and future returns.

It’s also more challenging for value investing to work for tactical adjustments across regions, sectors, and factors than it is for stock selection because portfolios aren’t static.

So, portfolio valuations are less comparable over time.

Stock valuation strategy

Using P/E ratios is not enough

To test the efficacy of value-driven tactical adjustments, Alex created a strategy that compared the P/E ratios of the MSCI USA and MSCI World ex USA indexes once every three years (as it can take a long time for valuations to rebound). Whichever index had the lower valuation would receive a 60% weighting in the portfolio for the start of the three-year holding period, while the other would receive 40%. He chose to limit these tilts because it is always important to be diversified across both US and foreign stocks, regardless of valuations.

This strategy didn’t help much. From the end of December 1974 through January 2019, it returned 11.15% annualised, while a static 50/50% split between the two indexes would have returned 11.04%. (The MSCI World Index returned 10.74% over this time.) This weak performance likely stems from the tenuous relationship between valuations and future returns.

The results of valuation timing were even worse when applied to sectors and factors, though there is less data here. Certain sectors (and factors) persistently trade at lower valuations than others, so without any adjustments, using valuations to select sectors would lead to long-term sector biases. However, Morningstar research shows that value-driven sector tilts are a form of active risk that historically hasn’t been well-compensated.

To mitigate persistent sector and factor tilts, Alex modified the strategy to measure the attractiveness of each sector and factor index based on how its current P/E compared with its average over the past five years, favouring those trading at the lowest levels relative to their own history.

The sector strategy ranked the 10 sector indexes listed in Exhibit 2 on this metric and selected the three with the lowest values. It assigned an equal weighting to the indexes that made the cut and held them for three years before rebalancing. The factor strategy followed this same approach using the indexes listed in Exhibit 3. However, it selected the two indexes with the lowest valuations relative to their history.

The results for the sector and factor strategies are shown in Exhibits 4 and 5. The performance measurement periods start in November 2004 and December 2003, respectively, and run through January 2019.

In both cases, the results were disappointing. The sector strategy lagged a static equal sector allocation by 1.19 percentage points annually. Similarly, the factor strategy lagged an equal allocation across the factor indexes by 43 basis points annually (though it beat the MSCI USA Index by 18 basis points).

As with the regional indexes, this largely owes to the weak relationship between relative valuations at the portfolio level and returns. However, it’s worth noting the value investment style was out of favour during much of this time.

In practice

Valuations are helpful for gauging expected returns, so it isn’t prudent to completely ignore them. If they’re unusually high, future returns will likely be lower than normal, and vice versa.

However, it probably isn’t a good idea to use them to make big tactical adjustments among fund investments. The benefit will likely be modest at best and can easily be outweighed by lost diversification and tax efficiency.

Consider using other methods when you evaluate stocks.

Some popular stock valuation methods that professional analysts use are below.

Take time to learn and see if it helps you to grow your wealth!