CEO Morning Brief

Investors Walking Tightrope Amid Fed Rate and Banking Crisis Could Seek Solace in Asia Equities

Publish date: Fri, 24 Mar 2023, 08:37 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (March 23): The recent collapse of banks in the US and Europe has sent shockwaves and roiled financial markets globally. With the Federal Reserve not seeming to be taking a breather in raising its interest rates, there are few options for investors in the equity markets.

However, economists and heads of research alike believe that Asian equities, including Malaysian, could provide a reprieve for global investors searching for a stable market to bank on. When it comes to banks, especially, Asian financial institutions are a less risky option.

“Asian banks are generally less risky with minimal exposure to the US and Europe financial sector. Having said that, market sentiment would be affected if more US and EU banks run into trouble,” said Fortress Capital Asset Management’s CEO Thomas Yong when contacted by The Edge.

Global investors haven't had much of a breather since the collapse of several banks in the US in mid March, followed by the Credit Suisse crisis in Europe, which sent markets tumbling all around the world. While regulators had stepped in to backstop depositors, offered lifelines and helped broker deals to stem a wider panic selldown, sentiments continued to be wobbly.

On the home front, the FBM KLCI suffered its largest single day decline of 1.97% on March 14 to 1.393.83 points. It was the first time the index fell below the 1,400 mark this year, signalling investors’ shaky confidence.

Amid lingering fears about the contagion of US regional banks and the hawkish stance of the Fed to combat inflation, the question that springs to mind is, will retail investors have to nurse losses this year?

Areca Capital Sdn Bhd CEO Danny Wong advised investors to calm their nerves, since the risk of another financial crisis have been contained by the regulators in the US and Europe.

He also said market interest could swing to Asian equities, including Malaysia, as investors needing assurance of safety and portfolio diversity may turn to this region, to get away from the turbulence of the US market until the dust settles following the bank closure crisis there.

“Asia’s equities including Malaysia’s look attractive for investors for their relatively cheaper valuation with potential upside.

“Last year Malaysia experienced outflow to the US due to higher interest rates and the strength of the dollar. However, investors may come back here to areas where there is growth,” he told The Edge.

China’s reopening to buoy market sentiment

As monetary tightening is at near-end in many countries in Asia including Malaysia, investors' optimism will warm up to this part of the world. China’s reopening is a catalyst to a rebound in Asian economies, fuelling positive sentiments among investors for the prospects of the continent.

“The catalysts are probably a greater spill over effect from China’s reopening and the return of foreign investors to Southeast Asia as market valuations are considered attractive comparatively.

“For the Malaysian market, the growth driver would be domestic demand as commodity prices have come off while exports are likely to be affected by external demand from the West,” said Yong.

Meanwhile, Rakuten Trade Sdn Bhd head of research Kenny Yee said valuation in the Asian markets is currently at a discount compared to its historical average.

“The expensive valuation in the US market is also a reason for fund managers to shy away from that market and look at the Asia market,” Yee added.

The US market is trading at a premium to its historical average, with the Dow Jones Industrial Average (DJIA) at a price-earnings (PE) of 19.9 times versus the historical average PE of 15.5 times.

Similarly, the Nasdaq is trading at a PE of 34.3 times versus the historical average PE of 20 times, while the S&P 500 is trading at a premium of 19.4 times versus its historical average PE of 15 times.

On the local market front, Yee estimates that the FBM KLCI's PE range would hover around 13.6 times this year, about 30% below its historical five-year average of 17.5 times.

Elsewhere in the region, Singapore’s Strait Times Index PE is also looking attractive, with PE estimated at 10.8 times versus the five-year average PE of 16.6 times, while the Stock Exchange of Thailand's PE is projected at 15.5 times versus the five-year average PE of 22.1 times.

However, AHAM Asset Management in note on Thursday said that it is conscious of the rising risk of a recession and financial dislocation in the US.

“As such, while we are positioned for China's recovery, we are taking a cautious stance by holding a cash buffer for our Asian equity funds,” the firm said in a client note.

Where to look for the next leg of growth?

For investors with a longer-term investment horizon, there are still many fundamentally strong companies to pick up, said Yong, adding if valuation is not demanding, companies with quality earnings growth should provide decent returns.

“It does not seem like we are heading into a recession during this slowdown in economic growth, we think that investors can continue to stay invested in the equity market as the valuations are considered attractive with the end of the tightening cycle in sight,” he said.

Some of the bright sectors looking promising are consumer sectors, Real Estate Investment Trusts (REITs), industrial, and healthcare sectors which previously took the brunt of higher interest rates, said Areca’s Danny.

“These sectors that were previously impacted by higher rate hikes will come back to investors' radar once again, because these sectors have strong fundamentals. Coupled with China’s reopening, it will act as a catalyst for growth for consumer and tourism-related sectors,” he added.

Over the longer term, Danny said the technology sector's prospects are expected to shine in the next four to five years.

“Chip manufacturers, equipment manufacturers have bright prospects. Chipmakers involved in Electric Vehicle (EV) components may have upside potential,” he added.

The banking sector may not benefit from previous higher interest rates that pushed its Net Interest Margin (NIM) previously, and will see their earnings normalise, he added.

Malacca Securities Sdn Bhd head of research Loui Low Ley Yee advocates investors to look for companies with net cash position or companies with lower borrowings, in view of the current high interest rate environment.

“Investors can look at poultry counters for their potential valuation as the price ceiling for chicken and eggs would be lifted in the second quarter to mitigate the higher prices of chicken feed imports,” he said.

Source: TheEdge - 24 Mar 2023

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