Opportunity in adversity
How the Armed Forces Fund Board makes its investment decisions in challenging times such as these
THE bull market for equities that lasted for almost 11 years came to an end due to the coronavirus (Covid-19) pandemic that hit global economies.
The local equity market was already struggling to sustain gains as the global trade war exacerbated and the domestic political scene showed instability. When the uncertainties of Covid-19 hit the financial market, the sell-off on Bursa Malaysia stocks was intense.
Investors across all levels and especially institutional funds were mostly hurt by the fall in equity values, as they were heavily invested in the local stock market.
The rebound of the stock market happened just as fast, even when economists were crunching numbers on the economic impact of the Covid-19 crisis. However, can the rally last? Is the current crisis similar to the previous financial crisis?
Below are excerpts of an email interview with Armed Forces Fund Board (LTAT) chief investment officer Haniz Nazlan.
Do you think the market has hit the bottom and is now on a recovery path? What is your outlook for the market this year? Do you expect lasting damage to the economy or very fast recovery?
On a year-to-date (YTD) basis, the FBM KLCI dropped to its worst level of 1,220 points on March 19. It has recovered since then and was trading in a range-bound level of between 1,350 and 1,410 points since early April.
But despite the rebound, as of May 6, the local benchmark index closed at 1,376, which was a 13.4% drop YTD.
In comparison, the MSCI World Index which represents 23 of the largest developed markets globally had YTD dropped slightly more by -14.4%.
The index dropped 32% to its worst level on March 23.
The global markets seem to have so far recovered from their worst levels. This is in line with the resumption of economic activity in key economies including China, as well as the recovery in global crude oil prices (Brent) closer to the US$30 per barrel level.
However, the long-term impact of the Covid19 pandemic on the economy has yet to be fully ascertained.
The People’s Bank of China (PBOC) announced a 6.8% contraction of its gross domestic product (GDP) for the first quarter of 2020.
The International Monetary Fund (IMF), meanwhile, has forecast a 3% contraction in global GDP for this year, which is worse when compared to the financial crisis of 2008.
Bank Negara expects Malaysia’s GDP growth to be between -2.0% and 0.5%. It is worth noting that the overnight policy rate (OPR) has been cut to historically low levels.
In terms of the KLCI, many analysts have revised their earlier 2020 forecasts downwards in the range of between 1,400 and 1,500.
These are unprecedented times and capital markets remain highly volatile and challenging.
However, LTAT is in full support of the government’s Rm260bil economic stimulus package, which would definitely help to put the Malaysian economy on a solid footing towards recovery while providing much-needed aid to the many businesses and individuals that have been affected.
Would you describe the current downturn as different from the financial crisis?
It is a bit unfair to compare and too early to conclude at this stage, as the Covid-19 pandemic continues to spread globally with the full impact yet to manifest itself.
We are only a few months into the current downturn since the market began to drop.
We have meanwhile the benefit of hindsight in terms of historically analysing the extent and impact of the 2008 financial crisis, which resulted in key markets tumbling over a two-year period before recovery commencing towards the end of 2008.
There are, however, some aspects that are different and similar which could be highlighted. From an economic perspective, the 2008 crisis only impacted parts of the world, with economies like China and India continuing to record healthy economic growth.
At the same time, the crisis, which was triggered in the US, revolved mainly around the financial sector with the collapse of several established banks.
This is vastly different from the current Covid-19 pandemic which started in China but has impacted economies across the entire world and across many industries, with some countries having a total shutdown in terms of economic activity.
Governments of the world have this time around responded with much larger economic stimulus packages, particularly among European countries. China, meanwhile, has not reacted as strongly.
In terms of capital markets, most major markets have systematically been affected with heightened volatility. China’s market, on the other hand, dropped in tandem but remained relatively subdued.
In the current situation, what data might offer clues for a fund manager like you? What are the indicators to consider before making investment decisions?
In times of uncertainty, it’s best to fall back on the fundamentals of investing. Our investment decisions and tactical allocation continue to be highly driven by value-based investing, fundamental screening and research focusing on fundamentally strong names in defensive sectors which are relatively undervalued by the market.
In this regard, key considerations include both macro and micro-level factors. On the macroeconomic front, the team monitors key economic indicators, including trade and production figures, commodity prices, currency and interest rate movements and sector outlooks, among others.
At the company level, our analysts consider earnings potential and the strength and resilience of company balance sheets, as well as the strength of the operating cashflow, to name a few.
We would then look into the longer-term fair valuation of the stock relative to its market price to determine the potential upside from a valuation perspective. Dividend yields and the overall portfolio position and dynamics also play into our investment decisions.
For us, it is not just about ascertaining whether a certain opportunity is good, it is also about deciding on the right level of exposure to be had in a particular investment.
Global financial markets have been subject to significant stress and volatility of late. The spread of the coronavirus pandemic is causing economic and social disruptions, making it hard for investors to find a bright spot. What is your strategic investment direction for LTAT, particularly given these challenging times with the movement control order (MCO)?
Like most industries and businesses, LTAT has also been impacted by the Covid-19 pandemic and the MCO. Our focus remains on fulfilling the long-term objectives of LTAT as a pension fund.
We are committed to continuing with our transformation initiatives and our journey towards ensuring the delivery of sustainable returns to the soldiers.
In the face of the current heightened volatility and uncertainty, LTAT has not made any drastic change in terms of the overall broad level asset allocation across asset classes.
However, we have tactically rebalanced the public equity portfolio and have continued to do so progressively by taking advantage of the correction in stock prices. Our focus has been on purchasing oversold and undervalued stocks particularly in defensive sectors, and low beta and high-dividend yield stocks.
In terms of cash allocation, while capital continues to be progressively deployed in the market, we continue to maintain sufficient cash levels for liquidity purposes while adjusting tenures for money market placements to better suit our cash-flow needs. The idea is to achieve the right balance between maintaining liquidity and generating returns, taking into account the lower yields from keeping cash in money market instruments.
We have also taken this opportunity and period of working from home by focusing on tasks happening behind-the-scenes, such as reviewing our processes and SOPS, continuing with the development of our transformation plans and frameworks, as well as accelerating the adoption of technology to assist us with our daily activities. We believe that continuation of these efforts would bode well for us in the longer term. As an example, LTAT has been able to operate in the market remotely and fully online during the MCO period without any investment team member being physically required at the office.
Are you looking outside of Malaysia for investment opportunities?
It is an area that we are exploring and it is part of our long-term plan. Plans for this area would be clearer once the SAA Framework is finalised. We would likely be looking into the possibility of diversifying into international markets, with probably a small exposure and an initial focus on developed markets – given the lower volatility and risk as compared to emerging markets.
Investments abroad would require the requisite approval from the relevant authorities, including The Defence Ministry, the Finance Ministry and Bank Negara.
It is also imperative that LTAT does not rush into implementing its investment plans and strategies. We must first ensure that LTAT is fully equipped with the right investment plan, supported by the right infrastructure, processes and expertise.
We are committed to continuing with our transformation initiatives and our journey towards ensuring the delivery of sustainable returns to the soldiers.