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February 2019

Headwinds & Tailwinds:

Riding the Turbulence

Affin Hwang Asset Management Bhd

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Disclaimer

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Table of Contents

► Global market outlook

► Malaysia outlook

► Investment Strategy

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Global Market Outlook

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The Asset Class Quilt of Total Returns

Source: BofA Merrill Lynch, Bloomberg, as at Dec 2018

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Economic cycle showing signs of maturing

• Current economic expansion is now

116 months, making it the second

longest on record.

• Probability of recession is at 15% now,

way below the 40% level which

signals an imminent recession.

• Market expectation for the next

recession is now pushed to 2020.

Late Cycle

Source: US National Bureau of Economic Research, Bloomberg, Jan 2018

120

116

106

92

80

58

0 20 40 60 80 100 120 140

November 2001

June 2009

November 1970

March 1991

October 1945

July 1980

Month

US economic expansion (Duration, Trough-to-

Peak)

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Fault Lines: Geopolitics and polarised politics

Geopolitics

Photo credit: Matthew Absalom-Wong; Source: Financial Times, CNN, Jan 2019

Trade War

• Temporary truce to end by 1 Mar

2019

• Ceasefire / escalation in trade war

• Potential return of tit-for-tat tariff

battle

Politics

• Divided US politics

• Next focus: 2020 US Presidential

Election

• Good chance for Trump to get re-

elected

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Fault Lines: South China Sea

USD values denotes a ballpark estimates of imports and exports using

UNCTAD group statistics and BCA calculations

Source: BCA Research, UNCTAD, 2018, FAS, CRS, CSIS and US EIA.

Dispute

involving island, maritime and

economic claims between China,

Taiwan, Vietnam, Malaysia,

Philippines, Indonesia and Brunei

Busy Traffic Roundabout in South China Sea

$3.4 trillion

Global trade through the South

China Sea in 2016

40%

of global liquefied natural gas trade

transited through the South China

Sea in 2017

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Central Banks: Shrinking global liquidity

Source: BofA Merrill Lynch, Bloomberg, Jan 2019

G3 central bank balance sheet contraction

2019 marks the start of the net liquidity

withdrawal by global central banks.

Central banks are slowly turning off the

taps:

• US Fed embarks on balance sheet

reduction and successive rate hikes

• ECB has ended QE and switched to

reinvestments

• BoJ continues its monetary easing

• USD cash yield is rising

Overhang

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Interest Rate: How Fed tightening cycles end?

Source: BofA Merrill Lynch, Bloomberg, Jan 2019

• Raising interest rate too fast could

hurt the economy.

• Possibility of a policy mistake may

grow if the Fed misjudges the

strength of US economy.

• Any dovish remarks would give

market some breathing space to

adjust to new interest rate reality.

Policy

tighteningHow Fed tightening cycles end?

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Expect the Fed to pause and USD to peak in 2019

Projection by Federal Reserve seems

a bit too aggressive for the current

economic situation.

We expect to see downward revisions

in the rate projection:

• Core inflation to hover +/- 2%

• Narrowing growth divergence

between US and the rest of the

world

2.50

3.25

3.50 3.50

3.00

2018 2019 2020 2021 Longer Term

US Fed Fund Rate Projection by Federal Reserve

Downward

Revision

Source: US Federal Reserve, Bloomberg, Dec 2018

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Valuation is cheaper

Source: BofA Merrill Lynch, Datastream, IBES, MSCI, FactSet, Jan 2019

12-month trailing Price-to-Book

• Current valuation is about 17%

above the average low seen prior to

bear markets.

• Asia ex-Japan earnings have been

revised downward by 12%.

• With a slowing macro backdrop,

there is further earnings downside,

indicating cheaper valuation ahead.

Cheaper

Valuation

Global profit expectation remains high

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Negative market sentiment

Source: BofA Merrill Lynch, Jan 2019

Bull and

Bear

Indicator

Risk-Love

Sentiment

Heatmap

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China: Easing cycle is unfolding

• China’s monetary reflation could see

its economy bottom out in 2Q 2019.

• Market expects more policy support:

• Tax cuts

• RRR / interest rate cuts

• Local government special

bond issuances

Monetary

reflation

Source: BofA Merrill Lynch, Bloomberg, Jan 2019

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Malaysia Outlook

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Malaysia equity underperforming in a rising market

• FBM KLCI was the only ASEAN

market to post a negative return in

January 2019.

• However, the FBM SmallCap index

had a nice run (YTD 2019 11.6% vs

2018: -32.2%).

• Foreigners bought RM1 billion worth

of equities in January 2019, after

withdrawing RM11.9 billion in 2018.

Laggard

Source: Maybank IB Research, as at 4 Feb 2019

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Exports surprised on the upside despite moderating growth

• 2018 GDP slowed to 4.7%

compared to 5.9% in 2017.

• Moderation trends in both private

and public consumption.

• Private investment slowed while

public investment was further

curtailed.

• External demand (i.e. Malaysia

exports) held up well in December,

especially compared to the negative

data seen among regional peers.

Growth

moderation

Source: Maybank IB Research, as at 15 Feb 2019

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New Government: Reset, Reform and Reposition

• Divestment exercise to pare down

stakes in non-strategic assets

• Market perception: Increase in

regulatory risk (i.e. Telekom, Tenaga,

MAHB, etc.)

• Government to expedite the RM35

billion tax refund to encourage

private investments

• Repositioning Malaysia to attract FDI

Pressing the

reset button

Source: Hong Leong Research

Company Changes in

top

personnel

Company Changes in

top

personnel

TM 12 CIMB 1

Axiata 4 MAHB 1

Malakoff 3 Tenaga 1

Petronas 2 KLCCSS 1

TH Plantation 2 FGV 1

BHIC 2 UEM Sunrise 1

TH Heavy 2 MRCB 1

Star Media 1 CCM 1

Pos Malaysia 1 Sime Darby

Plantation

1

Pharmaniaga 1 Sime Darby

Property

1

Bursa 1 Boustead 1

BIMB 1

Change in GLC top management

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2019 Earnings: Downside risk

• 2019 growth estimate of 5% may

need to be revised downwards.

• Bank profitability (single digit growth)

becomes the main driver to the

overall market earnings.

• With comfortable capital ratios,

banks do have the capacity to

increase dividends.

Tepid

earnings

Source: Macquarie, CLSA Research, Dec 2018

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Keep faith in Malaysia Baru

Transition2019/20 is a year in

transition

PoliticsToo much politics in

the mainstream

media

ExperienceExperience matters

in the new dawn

PolicyClearer policy

actions to engage

with private sector

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Investment Strategy

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Asian Equity Strategy – Keep an open mind

What could go wrong?

• Further downside if recession

is imminent

• Broadening trade-inflicted

damage

• High debt levels in US and

China

• Geopolitical / Policy mistakes

USD demand as safe haven to

increase could see further fund

outflows from EMs

Investment Strategy

Tilt toward large-cap and high-quality stocks

What would reverse the tide?

• Yield curve reverts back to its

normal shape

• Fed to maintain neutral rate

• Temporary trade truce leads to

eventual compromise

• Stronger China stimulus

The return of risk appetite would

reflate the confidence toward EM /

Asia

Photo credit: Associated Press

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Malaysia Equity Strategy: Investing in a slower growth environment

Defensive

Remain defensive

with 25% cash

buffer

Dividend

Like dividend

yielders (REITS)

and banks

Bargain

Small caps worth

monitoring due to

last year's sell-down

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Drawing up an action plan for a better 2019

How to invest?

► Focus on quality and liquidity

► Diversify – asset classes, geographic

region, cash

► Be aware of risks

► Be prepared to be patient and to

scale in

Fundamentals

Uncertain

Valuations

Attractive

Positioning

Favourable

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Thank you