5 min read I Date: 28 April 2023
Global Outlook1,2,3
The developed markets performed generally steadier than Asia which was mixed in March 2023. The S&P 500 and Japan stock markets rose by 3.5% and 2.2% respectively. In the North Asian markets, the H-Share index (a commonly used benchmark for the performance of the Chinese companies listed in Hong Kong) and Korea Stock Exchange (KRX) recorded positive returns of 5.9% and 2.7% respectively, while ASEAN markets dropped across board. Bond indices rebounded with gains between 1.0 – 3.2%.
On the monetary policy front, the US Federal Reserve (Fed) and European Central Bank (ECB) reiterated its resolve to bring inflation under control. The Fed increased its Fed Fund rate by 0.25% to 5.00% in March 2023. This increase was smaller than previous months, to which the capital markets reacted positively. The Fed’s balance sheet shrinkage continued at USD95 billion.
We have a slight preference for Asian equities over bonds due to Asian equities being under-owned, inexpensive, and having realistic earnings estimates. In addition, China’s reopening and pivot to friendlier policies is another key driver. Within bonds we prefer local and regional to global developed market fixed income.
We prefer equity markets in developed economies to their fixed income.
General outlook of the two capital markets: Fixed Income & Equity
Region: Developed economies4,5
- Our view – Neutral.
- Developed Markets economic growth continues to weaken as reflected by weaker manufacturing PMI (Purchasing Managers' Index). United States (U.S.) job openings however remained resilient.
- The Fed raised interest rate to 4.75%-5.00% in March 2023. The terminal rate is forecasted at the 5.25-5.50% range.
- Our view – positive.
- Developed Markets economic growth continues to weaken as reflected by weaker manufacturing PMI. U.S. job openings however remained resilient.
- We remain overweight on the U.S. including holdings in commodities. We are marginally overweight on Europe as their economy did better than expected. We remain neutral on Japan.
Region: Regional (Asia-Pacific ex-Japan)6,7
- Our view – neutral.
- Pockets of opportunities in local Asian currencies and Chinese credits as yields remain relatively attractive.
- We expect investment grade Asian bonds to provide a gross yield of 5.00% to 5.75% in 2023.
- Our view – positive.
- We added exposure to inexpensive valuation and China’s accelerated reopening and stimulus policy.
- We continue to focus on quality companies with earnings visibility, robust balance sheet, market share gainers and with pricing power.
Region: China7,8,9
- Our view – neutral.
- Net supply of bond in February 2023 increased by RMB388 billion from RMB36 billion the month before. State-Owned Enterprises (SOEs) saw an increase of RMB329 billion while the private sector recorded a net redemption of RMB3 billion.
- The default rate in February 2023 eased to 0.24% from 0.3% in January 2023. The property sector default declined to 4.44% from 5.4% over the same period.
- Our view – positive.
- China’s new leaders post the Chinese Communist Party (CCP) congress meeting & Central Economic Work Conference (CEWC) reiterated their stance to strengthen the economy coupled with accelerated reopening and greater support for the property sector.
- The manufacturing PMI for March 2023 decreased to 51.9 from 52.6 previously, while the Services PMI strengthened to 58.2 from 56.3. The continued uptrend data highlights the impact of the economic reopening.
Region: Domestic (Malaysia)
- Our view – neutral.
- Local markets are observing closely the upcoming re-tabling of Budget 2023. Our view is that the main catalyst for the bond market would be the updated projected deficit figure.
- Portfolio duration is maintained at medium. The move is to take advantage of potential yield falling in anticipation of stronger market support.
- We still prefer credits over government bonds..
- Our view – cautiously positive.
- We continue to focus on companies with firm fundamentals, strong cash flows and defensive.
- On balanced, our stock preferences lean towards consumer discretionary, industrials, and utilities, with a selective focus on technology names.
Our Strategy10
- On equity, we are positive on Asia underpinned by China’s economic recovery, and earnings growth in Asia which is expected to be stronger than developed markets.
- As uncertainties continue to prevail, our recommendation is to focus on income assets to mitigate against potential market volatility. These assets generate a steady income stream, providing investors with a stable source of cash flow during market downturns. Moreover, income assets have historically performed well during periods of market uncertainty, making them a reliable option for investors looking to minimise risks
- The projected medium-term improvement in the country's fiscal position is expected to increase the appeal of the domestic bond market.
- For diversification and long-term growth trend, investors can consider funds that focusses on ESG related investments for long term exposure.
- For our investment strategy for the first half of 2023, we recommend that investor:
- Focus on income with exposure to growth to ride out volatilities arising from financial market turbulence, inflationary issues and recessionary concerns. The growth element for the portfolio will emanate from tapping into Asia and China’s economic recovery as they gradually reopen.
- Position for sustainability themes including renewables, alternative energy, and food sustainability.
1. Universal Funds
| Risk Scale | Fund Options | |
|
Low |
Conservative |
• Principal Islamic Money Market Fund |
| Mildly conservative |
• Principal Lifetime Bond Fund |
|
| Moderate |
• Principal Lifetime Balanced Income Fund |
|
| Mildly Aggressive |
• Principal DALI Global Equity Fund |
|
| Aggressive |
• Principal Global Titans Fund |
2. Islamic Funds
| Risk Scale | Fund Options | |
Low High |
Conservative |
• Principal Islamic Money Market Fund |
| Mildly conservative |
• Principal Islamic Lifetime Sukuk Fund |
|
| Moderate |
• Principal Islamic Lifetime Balanced Fund |
|
| Mildly Aggressive |
• Principal DALI Global Equity Fund MYR |
|
| Aggressive |
• Principal Islamic Asia Pacific Dynamic Equity Fund |
3. EPFMIS Universal Funds
| Risk Scale | Fund Options | |
| Low High |
Conservative |
• Principal Islamic Money Market Fund |
| Mildly conservative |
• Principal Islamic Lifetime Lifetime Enhanced Sukuk Fund • Principal Islamic Lifetime Sukuk Fund |
|
| Moderate |
• Principal Islamic Lifetime Balanced Fund |
|
| Mildly Aggressive |
• Principal Asia Pacific Dynamic Income Fund |
|
| Aggressive |
• Principal Asian Titans Fund |
4. EPFMIS Islamic Funds
| Risk Scale | Fund Options | |
| Low High |
Conservative |
• Principal Islamic Money Market Fund |
| Mildly conservative |
• Principal Islamic Lifetime Enhanced Sukuk Fund • Principal Islamic Lifetime Sukuk Fund |
|
| Moderate |
• Principal Islamic Lifetime Balanced Fund |
|
| Mildly Aggressive |
• Principal DALI Asia Pacific Equity Growth Fund |
|
| Aggressive |
• Principal Islamic Asia Pacific Dynamic Equity Fund |
You may obtain a copy of the Prospectus/Information Memorandum/Disclosure Document and its Product Highlight Sheet (if any) for the above-mentioned funds at our offices, distributors or our website at www.principal.com.my.
Click here to download the PDF format
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 only and are subject to change without notice. This document should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell Principal Asset Management Berhad’s investment products. The data presented is for information purposes only and is not a recommendation to buy or sell any securities or adopt any investment strategy. This material is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. We recommend that investors read and understand the contents of the funds’ prospectus and product highlights sheet available on the Principal website, which have been duly registered with the Securities Commission Malaysia (SC). Registration of these documents does not amount to nor indicate that the SC has recommended or endorsed the product or service. There are risks, fees and charges involved in investing in the funds. You should understand the risks involved, compare, and consider the fees, charges and costs involved, make your own risk assessment and seek professional advice, where necessary. Past performance is not an indication of future performance. This article has not been reviewed by the SC.
Sources
1Bloomberg, 31 March 2023
2Federal Reserve Board, 31 March 2023
3Principal, 31 March 2023
4U.S. Bureau of Labor Statistics, 31 March 2023
5Federal Open Market Committee (FOMC), 31 March 2023
6UBS, JP Morgan Research, 31 March 2023
7Bloomberg, 31 March 2023
8BofA Securities, 31 March 2023
9National Bureau of Statistics of China, 31 March 2023
10Principal, 31 March 2023
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