Technology drives future investment theme
Internet of Things and electric vehicles among areas of growth
ECONOMIC growth, cheap credit and technology stocks continue to boost the nine-year rally that has taken equities to record high prices.
But some investors remain concerned on the high valuations in selected tech stocks as well as a possible US tax cut.
The valuation of tech companies has reached dizzying heights, or at least that is how it is being viewed.
Last month, Tencent Holdings Ltd, the company that operates the most popular messaging application in China – WeChat, became China’s first US$500bil company, edging out Alibaba Group Holding Ltd.
One explanation of the high values of tech firms is the low interest rate regime in the United States, which makes it cheap to borrow to fund stock purchases.
Another factor is the aggressive investments by venture capitalists. These factors have driven the valuations of tech companies in a way that has never been seen before. The FBM KLCI has also done very well this year, despite having run out of stamina since last month.
The rally certainly has made it harder to identify undervalued stocks on Bursa Malaysia.
Can this momentum sustain in 2018 or should investors take a step back?
Lim Suet Ling, executive director and chief executive officer of UOB Asset Management reckons that the market would continue to grow in 2018, driven by sustainable economic growth.
Nonetheless, she points out the global equities market is currently on a consolidation mode.
Lim has more than 20 years of experience with particular expertise in Malaysian and Asian (ex-Japan) equities.
UOB Asset Management oversees about RM8bil fund in Malaysia. Below are excerpts of an interview with Lim:
What is the outlook for the US market now that the Federal Reserve is looking to reduce the size of its balance sheet and resume raising rates?
The United States had a nine-year rally since 2008. This has lasted longer than average. Historically, we have seen as long as 10 years, but on average has been between five and six years cycles.
However, we don’t find reasons to fear the market because companies’ earnings are supporting the growth.
In 2016, the US economy was the one that was growing and supporting global growth. But this year, we are seeing the European region recovering, and Japan and China also doing well economically.
So, after a nine-year period of growth, are we going to see a slowdown? The reality is that this expansion has been subpar, which means it is not as high as it used to be. The growth could last longer.
If you look at some of the indicators, for instance the yield curve, the 10-year vs two-year, 10-year is about 2.5%, whereas twoyear rate 1.8%. The yield curve is still positive.
Then we look at leading indicators such as IPI and consumer sentiment, everything is still on an upward revision.
All indicators are showing positivity and growth. Our view is that this is a mature economy and market. We are probably not going to get as good numbers as in 2017, but there will still be growth in 2018. 6 SR Do you think investors are concerned about high valuations in the market?
There is always this fear that the market valuation is too high. The US market’s price-earnings ratio is about 16 times and so yes it is on the higher end, but, it should be noted that the bond yield is now at all-time low. So relative valuation wise, the United States at 16 times earnings technically has an earnings yield (reverse of PE) of 6.5%, compared with bond yields of 2.5% for 10-year treasury.
Bonds are always considered a stable investment, but it should be noted that in terms of earnings yield, the spread between bond and equities is more than 3%. The risk return seems to favour the equity market. Whereas, the bond valuation is considered expensive.
The Malaysian market has done very poorly recently and is the worst performing index among its regional peers. This is partially because of the impending general election. Do you think this dampener will continue until the elections actually happen?
Our stock market is lagging behind. In terms of returns, it is the northern Asia markets such as South Korea and China that have done very well.
As of Nov 22, MSCI China had gone up almost 60% and South Korea increased 45%, whereas Malaysia’s MSCI was only up by 18%.
Additionally, if you look at the inflow of funds in the Asian region ex-China and Japan, there had been a net inflow of US$27bil up to Nov 22. Interestingly, the net inflow of foreign funds for the whole of last year was the same figure of US$27bil.
Yes, the market has gone up, but 06 S 0 RU U 3 5 R the foreigners are not here in a big way. The total net inflow only made up about 0.4% of the total market capitalisation of Asia ex-China and Japan. Most on the inflow in this part of the world has been going into Japan and China because of the technology driven companies there.
Tech companies are seeing a lot of interest and done very well this year. Do you think the growth will continue next year?
The tech sector is seeing longterm change. There would be corrections along the way because of several reasons such as results could be slower than expected or behind schedule, but in the longterm, it is changing because of trends in tech.
The Internet of Things and electric vehicles (EV) are the areas we are seeing growth. In the EV space, aside from entrepreneurs such as Elon Musk taking a lead, many countries are also pushing initiatives.
For instance China has set sales targets for EVs. Currently, the main challenges in EVs is cost of production as well as battery costs and lifespan. Additionally, there is a talk about autonomous driving.
Apparently in Rotterdam, they already have driverless containers, at one of the ports. For this to happen, you definitely need a lot of sensors and computerisation. Demand for cameras, sensors and powerful chips are expected to grow.
Technology would continue to be a driving investment theme in the coming years.
Equity markets have done very well for nine years running now. Where do you think we are in right now in this bull market? Are you worried that a correction will be happening soon?
The tax reform bill in the United States would be driving the market next year, which is estimated to add 5%-8% more in terms of earnings growth.
The tax reform would be positive for corporate earnings growth especially for US domestic companies. However it is slightly negative for the tech sector, because the big tech companies have been benefiting from the global taxation environment. The market is consolidating, although it is going up but not as fast. So, for the tech sector if there is a correction, it would be a good time to pick up good counters.
What is your strategy for Malaysian and Asian in the current market?
It is about stock picking, because the easy bets are off. Aside from valuations, we must look at companies with growth potential. On Malaysia, our view is that before the general election, usually the market will be directionless. Of course, there would be pockets of opportunities such as mid-cap stocks.
Due to the uncertainty in the market, we will not see foreign investors buying into Malaysia equities in a big way. So the market is expected to trade range bound.
We are most positive after the elections. At the current juncture we are neutral on the market, until after the elections. Our year-end target for the FBM KLCI this year is 1,750. In terms of valuation, the FBM KLCI is trading at fair value.
Which sectors would do well next year?
We prefer consumer, construction and tech sectors.
Although local tech companies have increased a lot this year, the growth was supported by earnings.
On the consumer sector, we expect the momentum to continue as people would still need to spend on their daily activities.
The construction sector will be driven by infrastructure projects such as the high speed rail, MRT and LRT.