FSM Buzz  
3 Key Investment Themes To Focus Now August 3, 2018
Arguably, some said that the Chinese characters of “danger” and “opportunity” form the word of “crisis”, meaning that there will always be some opportunities hidden within dangers. Hence, in this article, we would like to share with our investors the 3 main investment themes that they can consider for the rest of 2018.
Author : Jerry Lee Chee Yeong

3 Key Investment Themes To Focus Now

The increased volatility in the global equities and bond markets might have caught investors off guard so far this year. On top of that, some investors would have been distracted by the recent news headlines such as the escalating trade war tension between US and China, the faster than expected rate hike decision and the possible hard landing for Chinese economy. Arguably, some said that the Chinese characters of “danger” and “opportunity” form the word of “crisis”, meaning that there will always be some opportunities hidden within dangers. Hence, in this article, we would like to share with our investors the 3 main investment themes that they can consider for the rest of 2018.

1. Chinese Equity with Undemanding Valuation

The Chinese equity market be it the onshore (CSI 300) or the offshore (HSML 100) equity market has tumbled by more than -15% from its peak (see figure 1) this year amid the increasing concern on the Chinese hard landing due to the escalating US-China trade war tension as well as the continuation of deleveraging campaign.

Figure 1: Chinese Equity Performance

However, in late July, the Chinese government has announced a package of fiscal stimulus, which seems contradicting with the current continuing deleveraging campaign but it indicated that the Chinese government is now more emphasizing on a vigorous fiscal policy that could tackle the external uncertainties and to support the economic growth. As such, given that the new China’s economy is less reliant on export-led growth but more on the local private consumption, the newly announced fiscal stimulus is expected to offset the impact of trade war by boosting the private consumption in China.

On the valuation front, both the CSI 300 and HSML 100 indices are trading at an attractive valuation level (close to -1SD) (see figure 2 & 3), indicating lucrative upside potential from both the onshore and offshore China equity market.

Figure 2: Valuation for HSML 100 Index

Figure 3: Valuation for CSI 300 Index

2. Malaysia Small Cap

Back to the local front, investors might want to consider the local small cap sector as we see a higher upside potential for the small to mid-cap companies. At this juncture, we see no catalyst for Ringgit to trend higher as the foreign investors, be it the equity and bond investors or the foreign businesses are unlikely to pile into the Malaysia market due to the policy uncertainties. Hence, the short to mid-term weakness in Ringgit could be a blessing for the small cap sector as most of the local small to mid-cap companies tend to source a bigger portion of their revenue oversea. In addition, the zero-rated GST that could increase the liquidity or working capital is deemed to be more crucial for the smaller companies due to their limited access to favorable credit facility.

From the valuation perspective, Malaysia small cap sector as represented by the FBMSC Index is trading at an attractive level (close to -1 SD of its 5-year average) (see figure 4). Also, the spread between the forward P/E for FBMKLCI and FBMSC is currently close to the 5-year high level (see figure 5), indicating a more attractive valuation from the small cap sector in comparison with the big cap segment.

figure 4: Adjusted Best P/E for FBMSC Index

figure 5: P/E Spread for FBMKLCI and FBMSC

3. Longer Duration Bond for Higher Yield

On the fixed income side, although we are sitting at a rising interest rate environment where the longer duration bond generally tends to underperform the short duration bond due to its interest rate sensitivity, investors might want to consider the local long duration bond fund as the interest rate sensitivity for the local bonds are relatively lower due to the illiquidity issue. On top of that, given the current low inflation rate environment and the still strong local economic growth, we expect the Malaysia’s central bank (BNM) to hold the interest rate unchanged for the rest of 2018, hence, by investing into a long duration bond fund, investors poise to enjoy a higher potential return.

No doubt, there is risk of investing into the local long duration bond fund should the US Fed tighten their monetary policy faster than expected, thus, we might see increasing foreign capital outflow which could trigger a spike in the local bond yield. However, looking at the current foreign holdings in Malaysia Debt securities (close to 2.5 years low), we do not expect any further massive outflow from the local bond market given that the relatively attractive yield in the local debt securities as compared to the developed market bond yield.

figure 6: Foreign Holdings in Malaysia Debt Securities


All in all, for China equity exposure, investors can consider the CIMB Principal Greater China Equity Fund for mainly H-share exposure while the CIMB Principal China Direct Opportunities Fund will provide investors with the China A-share exposure.

For investors who want to gain exposure into the Malaysia small-cap space, they can consider Eastspring Invesment Small-cap Fund, Eastspring Invesment Islamic Small-cap Fund or KAF Tactical Fund.

Investors can consider Libra AsnitaBond Fund or RHB Bond Fund for the long duration bond exposure as both of the funds have an average duration of close to 5 years.

This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus, product highlight sheet (PHS), and if necessary, consulting with financial or other professional advisers. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Amongst others, investors should consider the fees and charges involved. The relevant prospectuses have been registered and lodged with the Securities Commission. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV. Where a unit split is declared, investors should be highlighted of the fact that the value of their investment will remain unchanged after the distribution of the additional units. All applications for unit trusts must be made on the application form accompanying the prospectus. The prospectuses and PHS can be obtained from Fundsupermart.com. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.