Global economic growth has been on a positive trajectory and financial markets have remained stable since the US Federal Reserve began raising interest rates last October. However, lingering geopolitical risks, uncertainty around US fiscal and tax policies and how these changes might affect global markets remain areas of concern. In light of this uncertainty, should investors be more cautious in 2018?
Ms Lim Suet Ling, Chief Executive Officer at UOB Asset Management (Malaysia) Berhad (UOBAM Malaysia), shares her investment outlook and explains why she believes flexible asset allocation and discerning global stock selection will help investors steer through the uncertainty in 2018.
Q: How do you expect markets to perform in 2018?
Ms Lim: The global economy is expected to maintain its growth momentum in 2018, supported by improving macroeconomic conditions across advanced and emerging markets. Global economies have remained resilient despite global central banks’ moves to increase interest rates. This resilience is largely due to steady flows of foreign investment into the US, Japan and the European Union, and higher private consumption. Given this resilience, we expect economic growth across the developed economies to become more entrenched and to continue on their growth trajectories.
We expect Malaysia’s Gross Domestic Product to expand in 2018 fuelled by private consumption and foreign direct investments. Malaysia is also likely to benefit from continued large-scale infrastructure spending, which will likely lift market confidence and attract more investment flows into the country.
Q: What are the top risks in 2018?
Ms Lim: The top risks in 2018 include inflation surprises, a slowdown in China’s growth and geopolitical tensions.
A quick rise in inflation may adversely affect the value of both equity and fixed income securities. For example, in the near-term, a sudden rise in inflation may heighten uncertainty about the economy, leading to lower earnings forecast for companies and lower equity prices. This is why it is important that investors remain vigilant, even in an equity bull market such as the one we are experiencing now.
Another consideration for investors is China’s moderating economic growth. Greater deceleration could trigger concerns of a stronger downturn for global growth given China’s position as an important export market for many countries.
Though a slower growth rate in China will not be destabilising for the world, geopolitical risks including the conflict over North Korea, tensions in the Middle East and upcoming elections across six European countries this year should be the events to watch in the year ahead.
As such, we advise investors to exercise caution in 2018 and not get carried away by the market’s strong investment performance in 2017.
Q: How can investors navigate the risks in the year ahead?
Ms Lim: As economies across the world continue to recover from the lows of 2016 and resume their growth momentum, investors can expect equities to perform well. Equity markets tend to outperform other asset classes under most economic conditions except during a period of recession. Therefore, in a healthy growth environment such as the present one, equities are likely to be an attractive asset class for investors. However, even in an equity bull market, investors should exercise caution and select stocks with sound fundamentals. Active stock selection based on a company’s fundamentals should be a keen focus for investors going into 2018.
Meanwhile, fixed income assets may face headwinds in 2018 as interest rates and yields begin to pick up. This could lead to a drop in bond prices, which will present challenges for the asset class, including government bonds which are usually of lower risk.
Given the difficulty in predicting with certainty when market conditions may change, investing in a broad spectrum of global asset classes that outperform the market in different economic environments – growth, weak growth, stagflation and inflation – may be prudent. In addition to greater asset class diversification, investors should adopt a dynamic asset allocation strategy that is flexible and nimble, enabling them to shift across asset classes and to manage their risk exposures as required in meeting their investment objectives.
Q: Given we are in a rising rate environment, should investors reduce their exposure to fixed income?
Ms Lim: As interest rates around the world rise, fixed income assets will face some headwinds, but in the current global environment of low inflation and modest growth, fixed income securities can still achieve steady positive returns. While some investors have the risk tolerance to take on equity risk to seek higher returns, other investors with a lower risk tolerance may want to consider maintaining their holdings in bonds, which are still expected to outperform cash in the near-to-medium term. However, exposure to fixed income securities should be part of a diversified portfolio to provide investors the flexibility to reduce their exposure to the asset class should there be a sudden uptick in inflation.
Q: How do you expect Malaysia’s financial markets to perform over the next 12 months?
Ms Lim: Based on historical trends, the local bourse tends to be flat leading up to the general elections, which is expected to happen in March this year. However, we think that much of the uncertainty has already played out with Malaysian equities lagging behind their regional peers in the last quarter of 2017. As such, we believe that any overhang from the upcoming general elections should be limited. Historical trends also show that investor confidence tends to rebound after the general elections.
We remain optimistic about Malaysia’s economic performance over the next 12 months given its positive earnings momentum, the recovery in oil prices, and expectations for a stronger Ringgit against the US Dollar.
Q: Which sectors or industries are you bullish on?
Ms Lim: For equities, we favour those from Asia, in particular China and South Korea. We also favour the technology sector including areas such as cloud computing. The increasing consumption of technology products and services such as streaming video services and augmented reality will lead to a greater demand for cloud infrastructure and related services. With technology being an increasingly integral part of life, we believe this sector would able to achieve growth even against the wider macroeconomic backdrop.
Innovative companies, particularly those in the technology sector, have the potential to offer greater value for investors as they are able to differentiate themselves and carve out a strong competitive advantage within their sector. Innovation is especially prevalent in cloud computing businesses, which are well-equipped to originate ideas and to provide solutions to existing and burgeoning industries. For example, the introduction of autonomous vehicles has inadvertently generated large amounts of data that may overwhelm current network bandwidth. This will in turn pave the way for fresher and better cloud computing technology.