By Poovenraj Kanagaraj
“One day the market’s up. Then next day, it’s down. Sometimes those ups and downs all happen in a single day and get entangled in news such as the spread of coronavirus to more than 50 nations,” says Patrick Chang, chief investment officer, Principal Asset Management.
According to Patrick, it is important to stay invested and it would be reasonable to expect a contraction in the country’s gross domestic product (GDP) especially in the 1H2020. This is in accordance to Bank Negara Malaysia’s forecast where Malaysia’s GDP growth is expected to range from +0.5 percent to -2.0 percent.
“We will likely see weak economic numbers coupled with policy support on both the monetary and fiscal side,” Patrick tells Business Today.
He urges investors to remember the bigger picture as market volatility now does not necessarily imply negative market returns by the end of the year. “Volatility is part of investing. Always have been. Markets aren’t more volatile than they’ve been in the past,” he points out.
The chief investment officer tells Business Today that what’s different now is how quickly risks can appear and affect investments however market fluctuation is not necessarily all negative.
“Volatility isn’t just market dropping. It’s movement. Markets can and have moved but they can move up too,”
However, as volatility is a short-term phenomenon, Patrick does not advocate short-term reactive investment decisions. He goes on to say that a practical investment approach is generally based on a long-term view and investor’s time horizon.
“Volatility may bring opportunity. Markets can overreact and sell of more than the economic fundamentals would suggest they should. When markets dip for this reason, investors can potentially buy more with the money they invest,” says Patrick.
He further urges investors to keep thinking about a broadly diversified portfolio, which may help during volatile periods.
Investing across diversified asset classes
“Diversification is definitely key here and a well-balanced income and dividend focus portfolio is recommended,” Patrick says as he believes it can help investors generate better risk-adjusted returns, even more so during this period of extreme uncertainty to capture growth spots.
Principal according to Patrick prefers high yield and growth sectors but under the current circumstances, they are looking at a tactical asset allocation strategy underlining preserving capital.
The investment firm is tweaking asset allocation to 50:50 between equities and fixed income on a short-term tactical basis.
“We favour large cap, high quality defensive stocks,”
As for conservative investors, Principal recommends Malaysia focus on bond funds and balanced funds that are income focused and Patrick further recommends investors with higher risk tolerance to focus on growth-oriented funds that offer exposure to growth areas in China, Asia-Pacific and Global Technology.
Investment opportunities during the Covid-19 crisis
“There’s a lot of noise out there, but two main sources of uncertainty that usually drive the market volatility are interest rates and the economic growth,” Patrick tells Business Today.
“Think of interest rates as the price of money. When the rates go up, businesses pay more to borrow money they need to expand and grow. And when the rates are lower, it’s cheaper for companies to get the money they need,” he says.
The interaction, Patrick says, makes interest rates an important factor for investments because of how investors perceive the impact on economic growth. As for the economic growth, according to Principal, it serves as the engine that drives most companies’ earnings, leading it to affect investments as well.
“When investors worry that economic growth is slowing for instance during the ongoing Covid-19 crisis, markets can move lower, expecting a period where the economy could shrink,” Patrick says.
The chief investment officer further points out that market volatility even in the face of coronavirus is nothing new. Patrick points out that what’s different now is how quickly risks can appear and affect investments, be it from an announcement from the government, a possible pandemic or simply a tweet.
“Volatility may bring opportunities. Keep thinking about a broadly diversified portfolio, which may help during volatile periods,” says Patrick.
Market sentiment post-MCO
Patrick expresses optimism in regards to the situation surrounding the Covid-19 pandemic in the country currently as the Health Ministry continues to report fewer positive cases time to time. However, he says that the country may not be able to see normalcy return soon and social distancing will continue to be implemented.
According to Principal, data on the real economy is expected to come in very weak in the coming quarter in accordance to BNM’s recent GDP revision.
On the other hand, the Fitch Ratings forecasts a 1 percent contraction in the country’s economic activity this year and a rebound to 5.8 percent growth in 2021. “Since investors can’t control market volatility, it’s better to spend their mental energy on factors they can control such as the mix of their investments,” says Patrick.
“A diversified mix of investment options may better align their account with their tolerance for risk and may help smooth out the ups and downs of the market. Not all investment options go up and down at the same time,” he tells Business Today.
For instance, having some funds in fixed income investment options may help dampen the volatility from one’s equity investments The investment mix may also need shifting occasionally to keep everything in balance with one’s long-term goals.