During each annual lookback, there are plenty of adjectives that can be used to describe the year that was. For Maybank’s Alice Tan, she is probably speaking for most when she rules out “normal” as the word for describing 2020.
The year started out in a frenzy as the first cases of the Covid-19 pandemic were detected in Wuhan, China. Given the highly infectious nature of the virus, it was not long before other countries were affected.
By the middle of the year, most countries had already instituted nation-wide lockdowns to contain the pandemic, ruining economies and sending equity markets into a tailspin. Now, with 2020 coming to an end, the world faces a new wave of infections despite having found a few vaccines.
“No one had anticipated the significant disruption that will be caused by the Covid-19 pandemic to the world,” says Tan, Maybank Singapore’s head of private wealth and head of products and investment solutions, in an interview with The Edge Singapore.
“To this end, our focus on building portfolio resilience and managing downside risks were highly relevant. In particular, our positive stance towards defensive Asia investment-grade credits as well as gold as a hedge against market volatility worked in our favour — even after the market doldrums in the early part of the year,” she adds.
“Nevertheless, we did turn more constructive towards risk assets as markets became more attractively valued after the Covid-19 sell-off. The support from unprecedented monetary and fiscal stimulus measures also helped,” says Tan.
China focus
While major economies were months away from returning to pre-pandemic levels, China had already turned the corner by mid-2020 as shown by a steep drop in the number of infections.
Notably, Maybank’s “overweight” call on China since 2Q2020 has proved prescient as the country led the rest of the world in recovery. It continues to rate the China market “overweight” as the economy is expected to strengthen after it effectively dealt with the Covid-19 pandemic.
Tan expects China’s economy to expand some 7.5% in 2021, posting the fastest expansion since 2013. China’s continued economic recovery, coupled with supportive fiscal and monetary policies, should provide a conducive environment for Chinese corporate earnings and the stock market.
Furthermore, FTSE Russell’s inclusion of Chinese government debt to its flagship World Government Bond Index (WGBI) highlights the growing importance of China bonds. Notably, FTSE Russell is the latest of three main index compilers to add Chinese debt after Bloomberg Barclays and JPMorgan Chase.
“The improving market access, expected increase in fund flows and diversification benefits point to China bonds becoming an important consideration for global investors,” says Tan.
Gloomy new year
Although Tan excepts global growth to rebound in 2021, she believes that it will not all be smooth sailing. In fact, according to Maybank’s November Investment Strategy report, the easy part of the economic recovery is over. The next few quarters will see a slower uptick.
“While it is a matter of time before we get an approved Covid-19 vaccine, there are still challenges in the mass distribution of the vaccine. In addition, not everyone will be prepared to take the vaccine,” says she, adding that the resurgence of infections remains a worry.
Nonetheless, accommodative monetary policy and the expectations of additional fiscal stimulus should support growth in the coming year. Interest rates are also likely to remain subdued even though inflation could see an uptick.
Hence, Tan remains positive on risky assets although some markets and sectors could perform better than others given the still uneven recovery.
On the back of that, Tan emphasised that it is crucial for investors to enter the new year with a well-diversified portfolio to manage potential downside risks.
“Fixed income will still play an important role in one’s investment portfolio apart from equities. From a total return perspective, we prefer credits over government bonds as the improving economy should lead to tighter credit spreads and enhance price returns. In particular, we favour credits in Asia given the relatively resilient fundamentals and attractive carry,” says Tan.
The benchmark 10-year US Treasury yield is also likely to grind higher. Hence, Maybank is keeping its underweight view on sovereign bonds and favours developed markets and Asia investment-grade credits for their defensive carry, as well as Asia high yield bonds given China’s economic recovery.
As global economies tackle the pandemic and shift towards a “new normal”, rising optimism from faster than expected recoveries have prompted talks of a sustained rotation away from technology leaders, which is enjoying strong global investor interests, into cyclical stocks that have thus far lagged.
“However, it would be premature to write off tech plays,” warns Tan as the pandemic hastened the digital transformation across businesses and consumers and accelerated the demand for new technology infrastructures. More significantly, the move into a more digitised world is here to stay in the post-pandemic era.
To that end, she continues to see investment opportunities from a number of key themes such as e-commerce, over-the-top (OTT) services, FinTech, electric vehicles (EVs), and cloud computing that would drive changes and disruptions in the next decade.
Maybank Kim Eng also has a “positive” outlook on the Asean technology sector, with a focus on the Malaysia and Singapore markets.
In its Nov 21 report, analysts Kevin Wong and Gene Lih Lai write, “We adopt a positive growth outlook for the tech sector due to rollout of 5G networks; ramp-up of semiconductor components and equipment; development of subsectors such as Internet of Things (IoT), artificial intelligence (AI) and EVs; and Industry 4.0. These should bode well for outsourced semiconductor assembly and test (OSAT) providers, automated test equipment suppliers/automation manufacturers, and engineering manufacturing services/ precision engineering companies.”
Top Singapore stocks in the technology universe include Frencken Group, Venture Corporation, UMS Holdings, and AEM Holdings.
Tan also points out the potential in the roll-out of related infrastructures such as 5G networks and data centres to support consumers and businesses in their connected digital transformation.
“No doubt, there could be recovery opportunities in cyclical sectors such as industrial and materials that are still attractively valued. Still, we remain selective until there is a broader and more even growth recovery. In addition, the upside performance of certain cyclicals such as airlines, banks and energy may also be limited by the lingering structural headwinds,” she adds.
Geopolitical turbulence
Covid-19 may have been an unprecedented event that shook the world this year, but several geopolitical events that took place also rumbled the markets.
The recent US elections saw Donald Trump losing his re-election campaign and former vice-president Joe Biden winning the race. Although Trump says he is not going to give up his position without a fight, Maybank believes whatever political turbulence there is in the US is likely to be short-lived.
“We believe that investors should think long term and opportunistically build exposure to benefit from the eventual growth normalisation, as well as beneficiaries of secular growth. The trough in corporate earnings growth is likely behind us with global earnings expected to grow by 27% in 2021,” according to Maybank’s report.
As the US is also experiencing a spike in Covid-19 cases, Maybank predicts corporate earnings of American firms to decline by 16.5% y-o-y in 3Q2020, an improvement from a 32.1% y-o-y decline in 2Q2020.
As the US makes way for its new president, Trump has left some rubble behind that Biden might have some issues cleaning up, one such is the still ongoing US-China trade war.
“The strategic competition between China and US is not going away anytime soon — even when Biden becomes the US President. While the risks from trade or tariff conflicts may be reduced, there could be escalation in other areas, such as a technology war,” adds Tan, who also notes that renewed tensions in the Middle-East as witnessed in January this year could also add to market volatility.
“In addition, the widening gap between the ‘haves’ and ‘have-nots’, partly exacerbated by the Covid-19 pandemic, could also lead to increased social unrests and domestic protests that could affect investor sentiment,” adds Tan.
Furthermore, the sustainable agenda is fast proliferating in the society with the pandemic serving only to heighten awareness on Environmental, Social and Governance (ESG) issues on multiple fronts.
Notably, Biden has vowed to return US to the Paris Climate Change Accord, while China has pledged to achieve carbon neutrality by 2060. In the European Union (EU), the launch of its first social bonds attracted local demand.
“In view of the above, we expect the growing appetite for sustainable investing to continue, which will lead to investing opportunities across different asset classes,” says Tan.
Meanwhile, Malaysia, Maybank’s home market, is somewhat stuck in a rut. The country is now seeing a new wave of infections with thousands of new cases emerging daily. Malaysian Prime Minister Muhyiddin Yassin has admitted that this latest round wave of infection was caused by the Sept 26 polls in Sabah.
“Malaysia is currently facing multiple headwinds including a resurgence of Covid-19 cases and a fragile coalition government. Still, we maintain out neutral stance on Malaysia as we believe the downside risks could be mitigated by the outperformances of glove manufacturers, which are witnessing strong demand for their products amid the Covid-19 pandemic,” says Maybank.
