Market Insights from Principal - Helping you navigate today's markets

We realize that we’re weathering a market storm. But, we believe in the fundamentals and know there are opportunities in every market condition. We’re here to help you navigate this ride through portfolio diversification that align with your risk tolerance. Our perspectives and recommendations below.

Wave of worry  

Investors began 2020 with high hopes for strengthening global growth, but soon expectations were dashed by over extended valuations and pockets of geopolitical risk. They began to re-evaluate risk, preparing for elevated volatility and lower returns.

In early February, worries quickly turned to COVID-19 (coronavirus), which was spreading through China leading to quarantine measures. Yet, while Asian markets dropped, United States and European markets shrugged off concerns, allocating the problem squarely on Asia’s shoulders and continuing their vertigo-inducing climb, culminating in new record market highs by mid-February.

Coronavirus fears grow

In late-February, COVID-19 fears took a firm grasp of markets as investors realized the risk wouldn’t be isolated to Asia. The shock-originally expected to weigh on global growth through a hit to China’s 1Q GDP growth figure - was likely to impact activity across the global economy as governments began to consider mimicking China’s “Draconian measures” in their own countries. In turn, earnings forecasts dropped from positive to negative. Worry about emptying grocery shelves, school closures, and travel bans weighed on markets, and pushed them convincingly into correction territory.
 

What next?

What do we think?


While policymakers can’t stop the spread of coronavirus, they still have an important role to play. The U.S. Federal Reserve (Fed) delivered a second inter-meeting cut on 15 March, lowering the target range for the federal funds rate to 0% - 0.25%, a level unseen since 2015.

They accompanied this move with a decision to increase its holdings of Treasury securities by at least USD500 billion and its holdings of agency mortgage-backed securities by at least USD200 billion. The Fed also introduced several liquidity and funding measures, including lowering the spread at the discount window and encouraging banks to use their capital and liquidity buffers.

The Fed’s move is a 4-pronged strategy to:

  1. Mitigate the potential slowdown in U.S. economic activities;
  2. Supply liquidity to the economy to allow continuity and transactions to be executed;
  3. Ensure the credit market continue to function properly and corporates can source funding at reasonable cost; and
  4. Lastly, sustain consumer confidence and mitigate job losses.

After the coordinated monetary policy actions by the U.S. and other major economies’ central banks; we would be looking for a global fiscal response. This would target parts of the economy that need it most.

When can investors expect the bleeding to stop?

Market timing has generally proven difficult for investors; the timing of events such as those caused by the spread of COVID-19 can be erratic. Within Principal’s multi-asset investment capability, we have universal agreement on the key indicator to a more stable investment market: Investors need to believe the virus is behind us. Once this proves true, we believe global markets will begin to recover.

Our investment recommendation

We recommended split strategy encompassing 60% Equity and 40% Fixed income. We would progressively buy into equities during corrections, while Fixed Income provides stability through the storm.

Equity: Large cap, high quality defensive growth stocks are favoured.

  • Domestic-driven stocks would benefit from fiscal stimulus and are less exposed to external demand risks.
  • Prefer Asian equities to developed markets as new cases of COVID-19 have peaked in Asia (especially Greater China) as compared to Western developed markets which are experiencing acceleration in new cases.
  • Valuations of Asian equities are also cheaper (Price-to-Earnings Ratio at 11.8x vs 15.5x, Price-to-Book Ratio at 1.35x vs 3.0x) and has been lagging developed markets’ performance since 2011.


Fixed Income: Central banks of Malaysia, Indonesia and Thailand are expected to cut interest rates further. 

  • Prefer Investment Grade to High Yield. 
  • Prefer corporate credits with strong balance sheet and cashflow. 
  • Duration is at Neutral for Indonesian and Thai portfolios while Malaysia is slightly above.

Our thoughts by region

Region

Strategy

Global


Assume the viral outbreak in developed markets is contained, with new confirmed cases peaking in a matter of months. We are Neutral on a global basis. 

  1. Slight overweight of U.S. owing to relatively better economic condition and a more favourable valuation. 
  2. Underweight Europe and Japan because of weak economic momentum and poor earnings.
     

Asia Pacific ex Japan

 

  1. Rate Asia Pacific equities as a BUY on a 12-month horizon.
  2. Pull-back on COVID-19 fears should be seen as buying opportunities. Stock in China to benefit from credit and fiscal stimulus.
  3. Chinese market has outperformed YTD as China has successfully prevented the spread of COVID-19 and allowed economic activities to recover.
  4. Defensive portfolio positioning – buy more REITs and cut exposure to financials. Move towards large cap, high quality, defensive growth and domestic companies in the tech space.
  5. In ASEAN, prefer Singapore and Indonesia. Sector-wise, overweight technology, industrials and selected financials.
     

Malaysia


For Equities

  1. We are tilting the barbell approach from growth bias to capital preservation mode.
  2. Sector in focus will be those with defensive and high yielding qualities.

For Fixed Income

  1. Malaysia’s bond market supported by expectations of lower interest rate and ample liquidity in the system.
  2. Defensive portfolio, focusing on high-grade names for credit protection as well as a neutral duration stance.
  3. Take the opportunity to invest in government bonds and government related bonds, in view of the recent correction.
  4. Credit selection remains the key for portfolio returns and will continue to “cherry-pick” issuers with stronger and more resilient credit metrics.
     
Disclaimer:
We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of Principal Asset Management Berhad (formerly known as CIMB-Principal Asset Management Berhad) only and are subject to change without notice. This document should not be constructed as an offer or a solicitation of an offer to purchase or subscribe or sell Principal Asset Management Berhad’s investment products.


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