5 mins read    I     Date: 20 February 2023

(In partnership with The Edge) 

The year 2022 was a period of continued uncertainty after two years of COVID-driven turbulence. For both new and seasoned investors, it has been a stormy period as they had to contend with a confluence of headwinds such as the surging cost of living, aggressive monetary tightening measures and geopolitical conflict.[1]

Patrick Chang, Principal Southeast Asia’s chief investment officer for equities, says he was very surprised by the developments of 2022 and that, in Principal’s view, investors ought to be mindful that the volatility is likely to persist in the coming year.

“I think 2023 looks like it could be a better year,” he says. “But the underlying message that I want to tell clients is that things are still going to be fairly volatile and, therefore, we need to think about how we want to diversify our assets in the very highly uncertain environment that we are still in today.”

How will the fixed-income and equity markets fare?

The unexpected surge in inflation saw central banks worldwide tightening policies to varying degrees,[2] which Chang says has led to different outcomes in different economies. In the US, the UK and the eurozone, for instance, the rate hikes have been more aggressive, leading to a much more volatile fixed-income market.[3]

In contrast, central banks in Asean have remained more dovish and, because of that, bond markets in the local currency have performed well.[4] On the domestic front, Chang says, Bank Negara Malaysia is expected to keep a milder pace of tightening. That should spell a more neutral performance for the local fixed-income market.

As for equities, Chang says that despite the threat of a global downturn, investors should not stay on the sidelines and risk losing out on potential gains.

“In our portfolios, we continue to invest in quality growth companies whether it is in Asia-Pacific, China, ASEAN, Malaysia and so forth. Quality is the name of the game today,” he says, adding that Principal likes long-term structural plays such as renewables and tourism, as well as certain technology companies across Asia.

Commenting on the US yield curve, which is currently at its most inverted since 1981,[5] Chang says it will start to correct once inflation comes off the boil or a recession takes place, prompting the US Federal Reserve to slow its interest rate hikes.

What lies ahead for Malaysia and Asia?

Malaysia’s general election is done, and all eyes are on Putrajaya as to what policies the new unity government will introduce to restore investor confidence and foreign direct investment (FDI).

Chang says, “Hopefully, the government will be stable compared to a couple of years ago and, with that, we should be able to revive the confidence and allow FDI to flow back to Malaysia because it has the best infrastructure in the region and is strategically located in the region as well. Malaysia has one of the best ports in the world,[6] as well as a pool of talent.[7] Hopefully, Malaysia will continue to be part of the China-plus-one policy in the future.”

As for the broader region, there are two major developments that Chang is watching for in Asia. The first is China’s recent pivot in its COVID and economic policies. Beijing has recently eased most of its strict guidelines,[8] which indicates that it is adopting a more dynamic approach. Chang says this means the Chinese government still perceives economic growth as imperative and, as it moves towards rolling back its strict policies, the region’s largest economy should rebound.

The second development Chang is looking out for is the property market. He says, “The property sector overseas has had a big overhang over the last year. Nevertheless, we saw liquidity being injected into the sector including a cut in reserve requirement ratio and that should help ease some of the pressures from developers out there in terms of balance sheet and liquidity issues.”

These two factors, he says, will translate into obvious improvements in terms of the Manufacturing Purchasing Managers’ Index numbers, and Principal is hopeful the economy will start to rebound in 2023.

Which direction should investors take next year?

The MSCI Asean Index has outperformed the MSCI Asia ex-Japan Index by close to 20% and the MSCI World Index by close to 10% in 2022.[9] That should come as no surprise. Generally, the ASEAN markets tend to outperform during fickle times.

Chang notes, “Potentially, the flow might rotate back to some of the leading economies in north Asia — notably, China — as the governments loosen the zero-COVID policy and lend support to the property sectors.” Nonetheless, ASEAN is still the place to be in the long term, he says, citing the young demographic, the anticipated growth in the next few years and the fact that it offers among the highest dividend yields in the MSCI universe.[10]

As for Principal, it remains committed to its asset allocation strategy, which is to be selective and focus on the themes of Quality Growth, Income and Sustainability. In Asia, Chang says a selective approach is still sensible for equities as things start looking up for risk assets. He is also positive on bonds as the yield differentials are still attractive. Additionally, valuations appear cheap, with Asian stocks trading at 11 times FY2023 price-earnings ratio, assuming earnings per share growth at 7% in 2023.

Within bonds, he says Principal would pick local and regional fixed-income markets over developed markets. The investment group continues to prefer high-quality corporate bonds over government bonds for its yield pick-up, though it would choose to participate in the primary market, which is more reflective of current market conditions rather than the secondary market, where spreads remain below its long-term averages.

“We will look for opportunities to re-enter government bonds for benchmarking purposes, as credit spreads have narrowed,” says Chang.

In the near term, his investment strategy is to be on the defence with a neutral duration stance.

[1] World Bank, Nov 30, 2022
[2] IMF, Nov 30, 2022
[3] IMF, Nov 30, 2022
[4] Bloomberg, Nov 30, 2022
[5] Bloomberg, Nov 30, 2022
[6] Port Technology International, Jan 22, 2022
[7] Chartered Institute of Personal and Development Survey, FY2021
[8] People’s Bank of China, Dec 12, 2022
[9] Bloomberg, Nov 30, 2022
[10] JPMorgan, Credit Suisse, Nov 30, 2022

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