Press Release 2019

INVESTMENT INSIGHTS

18 January 2019

We expect global economic growth to moderate in 2019 while market volatility is likely to remain heightened in the months ahead. Lingering geopolitical risks, including trade tensions between the US and China, and lower commodity prices, are posing challenges to the world's financial markets. Against such a backdrop, how should investors, who want to generate sustainable income while managing risk and volatility, manage their investments? Ahead of UOB Malaysia's Market Outlook Seminar on 19 January 2019, Mr Ronnie Lim, Managing Director and Country Head, Personal Financial Services, UOB Malaysia, explains what investors should expect and where there might still be opportunities for risk-adjusted returns in the coming months.

Q: What can investors expect from global financial markets in 2019?

Mr. Lim: The start to 2019 comes with a mixed outlook. The key risks including rising global interest rates, volatile commodity prices and the global equity market rout that were previously weighing down on markets, are improving. Yet Gross Domestic Product (GDP) numbers and corporate earnings growth figures are moderating. Even as interest rate increases are expected to slow in the year ahead, the overall environment of quantitative tightening, low private sector loan growth and trade conflicts are contributing to expectations of slower global growth. This is causing estimates of lower investment returns in 2019.

Against such a backdrop, investors with a medium to low tolerance for risk and with a long-term investment horizon should stay defensive and prudent throughout 2019. These investors should consider anchoring their investment portfolios in low volatility investments that can generate sustainable income while mitigating wider market risks.

Building a portfolio that is diversified across asset classes and includes an allocation to bonds can offer greater stability to an overall investment portfolio. Bonds have a valuable role to play in a portfolio as they provide an added measure of stability by providing regular income streams. They also display lower volatility compared with other asset classes such as equities.

Q: What is your outlook for the Malaysian economy in the year ahead?

Mr. Lim: Despite our expectations for moderate global growth in 2019, we expect Malaysia's GDP to expand by 4.9 per cent, albeit at a slower rate than last year. Domestic growth is likely to be supported by strong demand from private consumption and steady inflow of foreign investments and exports. The new administration's efforts to build a more transparent government, steady growth, low unemployment and a surplus current account will help support the domestic economy in the year ahead.

Malaysia is also likely to benefit from regional and multilateral trade initiatives, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which will help boost trade and investment across ASEAN. Stronger connectivity and closer trade links with our regional partners will help enhance the country's resilience against rising global trade protectionism.

Over the medium term, we expect the economy to continue on its growth trajectory given its strong fundamentals and ongoing policy reforms to stimulate growth through labour productivity, capital spending and technology.

Q: What do you foresee being key risks for investors in 2019?

Mr. Lim: Uncertainty will continue to dominate trade relations between China and the US in the year ahead. We believe that the worst-case scenario would be the imposition of tariffs on a wider range of Chinese goods. This could escalate trade tensions should China retaliate and ultimately divert trade and investment away from China and the US. Continued trade woes could also affect Asian economies that are plugged into global value chains. Meanwhile, the US Federal Reserve (US Fed)'s increasing of interest rates on the back of low unemployment could give rise to a stronger dollar and add further pressure to Asian economies.

European politics stand to face another turbulent year, adding further pressure to global markets. The UK's Prime Minister, Theresa May has lost her parliament’s vote on her crucial Brexit deal. There remains a wide and complicated range of Brexit outcomes, including the possibility of a no-deal Brexit. Financial markets could see more volatility in the run-up to the March 2019 Brexit deadline.

Meanwhile, key political events such as the European Parliament election in May, as well as the Portuguese and Greek elections in October could result in additional uncertainty for the financial markets.

Q: In light of the risks ahead, how should retail investors with less tolerance for risk position their investment portfolios in 2019?

Mr. Lim: Given the market uncertainty in 2019, investors should remain discerning when it comes to choosing their investments. They must distinguish between market noise and investment fundamentals. For example, equity investors should focus on the fundamentals of the security when making a stock selection. This means paying close attention to what a company does, its balance sheet and how it is positioned to compete with other players in its industry. Investors should be less driven by the supply and demand for a security based on its last market price.

Investors should maintain a focus on ensuring their investment risks are well-managed so they meet their overall financial goals. Continue to focus on achieving core financial goals such as planning for children's education and preparing for retirement. Achieving these goals requires time and planning. It is therefore important for investors to think about rebalancing and optimising their investment portfolios to safeguard their assets, to build sustainable income and to meet their long-term financial goals.

Q: Given the challenges ahead, are there still opportunities for investors?

Mr. Lim: Slowing interest rate rises favour fixed income and balanced income strategies. While we expect equities to achieve good returns in 2019, the asset class is expected to remain volatile and may be less suitable for investors with lower risk tolerance levels.

Based on UOB's house view, the outlook for fixed income should improve in 2019 given that yields may be more attractive as the US Fed slows its pace in raising interest rates in 2019. Additionally, we think the current widening of credit spreads makes valuations¹ of global corporate bonds quite attractive at current levels. As such, we are overweight on investment grade credits and prefer short to medium duration high-grade bonds that are positioned defensively to weather the heightened volatile environment.

Our positive outlook for corporate credit bonds is underpinned by strong security selection in which we look at corporates with strong balance sheets, sound management structures and business plans. Our approach to security selection is informed by fundamental indicators such as global economic growth, corporate earnings, bond yields and recession risks. These securities, underpinned by strong fundamentals, have the potential to offer added stability to an overall investment portfolio by mitigating risks and generating income.

For global equities, we believe they have the potential to generate positive returns, especially based on current valuations following the market correction in the fourth quarter of 2018. Nevertheless, investors still need to be cautious amid a volatile, market sentiment-driven environment. In developed markets, we are neutral on US and Japanese equities, and slightly negative on European equities. With the sell-down in late 2018, the absolute valuations of US equities look reasonable, but relative valuations to other regional equities remain elevated.

We are also positive on emerging market equities. We favour Asia (ex-Japan) in light of the region's healthy economic growth and compelling valuations. Within the region, China equities offer better return potential as valuations have fallen following the recent market sell-off.

 

1 Source: Bloomberg, 16 January 2019.