Global Funds Cut Equity Holdings but Up Cash and Alternative Investments

Global funds cut equity holdings to lowest in at least five years

Investors cut their holdings of stocks to the lowest in at least five years in March, despite a recovery in global equity markets, with euro zone and Japanese assets bearing the brunt as doubts grew about the effectiveness of central bank stimulus.

Equity allocations shrank month-on-month to 45.9 percent, a new five-year low, despite a global stock market rally that saw the MSCI World equity index .MIWD00000PUS climb over 7 percent in March.

Cash holdings rose to 5.8 percent from last month's 5.3 percent, but global fund managers also added to alternatives, lifting their allocation to 7.4 percent, the highest in at least five years. Alternatives include hedge funds, private equity, commodities and infrastructure.

Several managers said they were trying to avoid taking bets on markets rising or falling, preferring to maintain a neutral stance on risk assets, considering the volatility seen in markets in the first quarter.

"We think the environment is challenging for risk assets. We are underweight developed equities, particularly Europe," said Joost van Leenders, chief economist of multi-asset solutions at BNP Paribas Investment Partners.

Global stock markets sold off heavily in January and early February before rallying in March, but investors were reluctant to jump back into the fray.

Sacha Chorley, assistant portfolio manager for Old Mutual Global Investors' multi-asset range, said he saw the greatest risk in developed market stocks, where earnings were high and falling, margins were peaking and valuations had little room to widen.

The survey of 49 fund managers and chief investment officers in the United States, Europe, Britain and Japan was conducted between March 17 and 30.

Within their global equity portfolios, fund managers trimmed their euro zone holdings by one percentage point to 18.2 percent and their Japanese stock allocation to 18.9 percent from 20.2 percent in February.

Growing political risks also prompted investors to adopt a cautious stance, with the odds on Britain voting to leave the European Union shortening in March and Donald Trump taking the lead in the race to secure the Republican party's presidential nomination.

UNCERTAIN OUTCOME

While several investors said a British exit from the EU was not their central scenario, the uncertainty of the outcome was expected to weigh on domestic demand as businesses postponed investment decisions. The closeness of some voter polls has also weighed on the pound GBP=.

"Sterling seems to be pricing a high chance of Brexit given its weakness relative to economic data," said Trevor Greetham, head of multi-asset at Royal London Asset Management.

Poll respondents did not expect to see Trump go on to win the White House if he secures his party's nomination, but warned that the run-up to the U.S. presidential elections was likely to trigger bouts of heightened market volatility.

"Obviously, markets will begin to react as we draw ever closer to the presidential elections. At the moment it's more focused on the Fed," said Peter Lowman, chief investment officer at Investment Quorum, a UK-based wealth management firm.

Some managers also expressed concern that the low interest rate adopted by the European Central Bank and the Bank of Japan were having only a limited effect.

"Central banks are not able to stimulate growth in the long run just by implementing low or negative interest rates," said Jan Bopp, an asset allocation strategist at Bank J Safra Sarasin. "What is needed now are fiscal policy measures."

The BOJ adopted negative interest rates in January but the Nikkei .N225 is still down almost 12 percent for the first quarter.

European equities .FTEU3 are down 7.6 percent over the same period, despite a bold easing package from the ECB in March, which cut rates and expand asset purchases to corporate debt. However, it also signaled an end to further rate cuts, prompting a sell-off in European equities and eurozone bonds.

MORE HARM THAN GOOD?

In their global fixed income portfolios, investors cut their euro zone bond holdings by almost 3 percentage points to 25.7 percent, the lowest since September 2015.

They also cut their Japanese bond holdings by 2 percentage points to 12.8 percent, the lowest since June 2015.

In contrast, U.S. bond holdings rose to 39.8 percent from last month's 37.7 percent, while UK bond holdings rose 3 percentage points to 13.1 percent, the highest since December 2014.

Several poll participants wondered if the negative interest rate policies adopted by some central banks were doing more harm than good.

"I doubt they are of much practical benefit and instead reinforce the idea that the world is stuck in a deflationary spiral," said Rob Pemberton, investment director at UK-based HFM Columbus.

"They may also do a fair amount of damage to the profitability of commercial banks, raising fears that we would see a systemic financial crash similar to 2008."

Raphael Gallardo, a strategist at Natixis Asset Management, said the amount of stimulus needed had to keep getting bigger and bigger: "The more we prolong the stimulus, the deeper the potential downturn when monetary stimulus stops." - reuters

A Dozen Ways To Protect Your Portfolio From Losses

We are currently seven years into a 200% stock market recovery that began in 2009 - one of the longest recoveries on record - so it's natural to wonder how much further this bull can run. Additionally, we face unprecedented geopolitical and fiscal risks. In other words, most of us are justifiably concerned, but we don't want to miss out on future potential gains. I personally moved to defend way too early in 2011. That was an expensive move in both absolute and relative terms. I've lost money. Now I can't change my positions because it would likely be selling at the bottom. I'm locked for now, waiting for a correction. Timing is everything.

Fortunately, it's not too late for you. You have alternatives for protecting your investments, and you can decide when you want to start. Here are a dozen choices.

A Dozen Ways to Protect Your Portfolio from Losses

1. Become a student of Dr. Downside. Dr. Frank Sortino is the father of Post-Modern Portfolio Theory (PMPT) that redefines risk as the probability of failing to achieve an objective rather than the volatility measure used in Modern Portfolio Theory ( MPT ). So called "Absolute Return" strategies are an outgrowth of Dr. Sortino's work. Dr. Sortino has written two books on managing downside risk.
2. Buy insurance. Buy puts or other derivatives. The challenge is to buy before the correction, because the cost of insurance increases with risk, as it should.
3. Time the markets. Timing is very challenging, but a few providers have successful track records. Can they do it again? Most do not get it right twice in a row, namely getting out before the correction and then back in when the recovery starts. Look for the best crystal balls.
4. Exploit a theme. Being on the right side of a theme, like rising interest rates or high inflation, protects against associated losses, and profits from its realization.
5. Diversify. Most of the time asset class prices do not move in tandem, although this tends to be less true in big market declines.
6. Manage tail risk. By monitoring estimates of current semi-variance, asset allocations can be adjusted to maintain an acceptable level of loss exposure, plus derivatives can be employed as needed.
7. Buy "guaranteed" return products. "Cash and calls" are the mathematical equivalent of "stocks and puts." This is the basis for "structured products" that guarantee against loss by buying zero coupon bonds that mature with a face value of the amount invested, with the balance invested in stock market calls. Structured products work best in high interest-rate environments because zero coupon bonds cost less.
8. Place stop-loss orders. You can set floors on the losses of your security positions.
9. Common sense. We all "see" things that have to change, someday. For example, we all know interest rates are being manipulated to artificially low levels. Someday that manipulation will have to end. It's common sense to protect against the consequences of rising interest rates.
10. Buy volatility. Fear creates high volatility estimates, like the VIX index. It also generates panic selling. Buying indexes like the VIX can offset the losses of panic selling.
11. Buy low volatility funds. The seminal research of Dr. Robert Haugen has gone mainstream in recent years, prompted by both fear and greed. Dr. Haugen discovered a "free lunch" in low volatility stocks. They produce higher returns for their risks than theory predicts. High-dividend funds are a variant on this play.
12. Buy hedge funds that actually hedge. Hedge funds have the freedom and flexibility to use all of the techniques mentioned in the preceding, and more. But be careful. Some hedge funds are very risky, especially those employing high leverage.

Each of these protections comes with a cost, a cost that is usually wasted if markets continue to go up. Such is the nature of insurance. We hope the premium is wasted. - nasdaq

Ringgit Jumps Most Since 1973 to Defy Bears as Oil Eclipses 1MDB

• Dollar weakness plays part as U.S. tempers rate outlook
• Malaysian investment company's asset sale also a positive

Malaysia’s oil exports have turned the ringgit into Asia’s best-performing currency even as analysts say it’s the least attractive.

Forecasters are predicting the ringgit will weaken 8.4 percent this year for the biggest drop in the region, and some of them even see it falling beyond a 17-year low reached in September. The bearish calls peaked around the end of January, when Swiss investigators said a probe into state-owned 1Malaysia Development Bhd. revealed about $4 billion may have gone missing.

The ringgit has confounded those calls by surging 9.7 percent this quarter, the most in 43 years. Oil’s gains have been a big part of that -- crude accounts for 22 percent of Malaysian government revenue and the nation is Asia’s only major net exporter -- along with tax increases and spending cuts. Now 1MDB is adding to the upswing, with the state-investment fund agreeing to sell energy assets and pledging to repay 6 billion ringgit ($1.5 billion) of debt in the coming weeks.

“The ringgit is going to be one of the outperformers in the region in 2016,” said Divya Devesh, the Singapore-based foreign-exchange strategist for Asia at Standard Chartered Plc. “We are looking for a good rebound in oil prices. The market is still short ringgit so we might see continued covering of positions, which should also be supportive.”

As the Federal Reserve’s willingness to be gradual in raising interest rates drove emerging-market currencies toward their best month in 18 years, the ringgit came to the fore, reaching the highest in almost eight months of 3.9100 per dollar on Thursday.

Standard Chartered, with one of the most bullish of 27 forecasts compiled by Bloomberg, upgraded its second-quarter estimate to 4 per dollar from 4.30 on March 22. That’s based on projections Brent crude will rise above $60 a barrel by year-end and the Fed will keep interest rates on hold for 2016. And it compares with prognoses from three strategists for it to weaken past the level of 4.48 per dollar that it touched in September.

The ringgit’s climb has come even as Prime Minister Najib Razak faces calls from former leader Mahathir Mohamad to quit over $681 million that appeared in his accounts before the last election in 2013.

Strategists have trimmed their bearish ringgit forecasts by about 3.6 percent for the three months through June from the end of January, with the currency’s outlook largely resting on the sustainability of the rally in oil, gas and petrochemicals, which along with palm oil make up the biggest proportion of Malaysian shipments abroad after electronics. The nation’s exports grew at less than half the 10-year average in 2015, when the currency’s slide was compounded by the political scandal and 1MDB’s debt.

Oil Bottoming

Macquarie Bank Ltd., the most accurate forecaster for the ringgit last year in Bloomberg rankings, has a June 30 estimate of 3.90 per dollar. Nizam Idris, the bank’s head of foreign-exchange and fixed-income strategy in Singapore, said that’s more to do with potential weakness in the greenback than Malaysia’s fundamentals. The projection compares with the 4.25 median estimate in Bloomberg’s survey.

“Broadly, we feel that oil prices have bottomed and that is the key indicator,” said Mirza Baig, Singapore-based head of Asia Pacific currency and interest-rate strategy at BNP Paribas SA, who sees the ringgit continuing to trade around 4 per dollar. “The other positive factor is the resumption of inflows to emerging markets.”

RBC Bearish

Even after analysts raised their expectations for the currency, almost all are still calling for it to drop by year-end. Royal Bank of Canada is projecting a slide to 4.60 per dollar by June 30. That would exceed the low reached in September, when the Swiss announced a freeze on assets linked to 1MDB and the New York Times reported that a federal grand jury in the U.S. was investigating allegations of corruption linked to Najib. The prime minister and the state firm have consistently denied any wrongdoing.

Najib introduced a 6 percent goods and services tax in 2015 and also maintained his deficit-reduction target in January. The growth forecast was cut to 4 percent to 4.5 percent from as much as 5 percent.

1MDB raised 9.83 billion ringgit via the sale of its energy assets to China General Nuclear Power Corp. in March. The state-investment company won’t have any more short-term debt and bank loans after the debt repayments, President Arul Kanda said in an interview in Kuala Lumpur on Wednesday.

Najib maintains that the funds he received as a donation from Saudi Arabia’s royal family weren’t used for private benefit. Malaysia’s Attorney General Mohamed Apandi Ali cleared the premier of any wrongdoing in January, saying Najib returned $620 million in August 2013 that wasn’t utilized, without specifying what the rest of the money was used for.

Former premier Mahathir and ex-deputy prime minister Muhyiddin Yassin were among those who addressed more than 2,000 people at a convention center in the capital Kuala Lumpur on Sunday as part of a campaign to oust Najib.

“I would think a lot of the stability in the political situation has already been priced in,” said Trang Thuy Le, a Hong Kong-based macro strategist at Credit Suisse Group AG, which raised its three-month ringgit forecast in March to 4 per dollar from 4.30. “Given the dovish tone of the Fed, we think that the dollar will likely continue to drift in the coming months and, because of the energy prices, Malaysian exports could be more resilient than we thought initially.” - bloomberg

Five Signs Your Investment Portfolio is Heading for A Fall

It is interesting how often lessons are learned the hard way in both life and the investment world.

Take for example my recent trip to the ski hill during which I underestimated my age and overestimated my skill level (having just switched to snowboarding last year). Needless to say, I was rewarded with a nice Ski-doo and ambulance ride before being retrofitted with two new titanium plates in my forearm.

It’s no different in the investment world where overconfidence and inexperience can result in a severely broken portfolio. While there are some great surgeons (and managers) out there who can help repair the damage, prevention is always the most prudent course of action.

To help determine if your portfolio is on solid footing or about to take a nasty fall here are five red flags to look for.

1. Your portfolio has a lot of non-transparent holdings

These can include private investments and exempt market funds such as mortgage investment corporations and real estate plays. Many are problematic due to a lack of transparency in the underlying holdings, excessively high management fees and limited liquidity, meaning you cannot get your money out without large penalties.

Also don’t be fooled by the pitch that they offer great diversification (non-correlation) to existing portfolios because of their apparently stagnant net asset values. The real reason these net asset values don’t move is because there is no market to price the underlying positions until liquidation, which is often at some unknown date in the future and at a big discount.

To be honest, we see no need for such investments in the average investor portfolio. That said, very high net worth individuals can use private markets effectively, as many have the experience and capital required to underwrite their own deals, giving them the control needed to monitor such investments.

2. You own a lot of deal flow

We’ve seen many portfolios comprised entirely of a firm’s deal flow with the transaction history showing nearly every equity deal underwritten being placed in the client’s account. This isn’t surprising as equity financings are very lucrative to the broker or adviser as they get paid a large sales commission to sell the deal, often as much as 5 per cent.

The golden rule to remember is that there is no such thing as a hot deal for regular investors as capital markets groups will relinquish the commission to retail brokers and advisers only if they are unable to sell it to large institutional money managers.

3. Your portfolio is too concentrated

We once saw an 80 year-old grandmother’s portfolio at a bank-owned brokerage contain a 40 per cent weighting to a diamond mine company that went bankrupt with little compensation being provided when she complained to the manager and the ombudsman.

We’ve also come across our fair share of portfolios here in Alberta comprised entirely of oil and gas companies many of which have since fallen 50 to 90 per cent.

A proper portfolio should be well-diversified between bonds and equities according to risk tolerance with not too large of a weighting in any one particular sector or geographical region.

4. You pay excessive hidden fees

Most investors do not realize the nature of the investment fees they are paying until they try to transfer their portfolio to another adviser. Suddenly they are hit with massive deferred sales charges or excessive trading commissions to liquidate the portfolio.

5. You don’t know what an IPS is

Since a fiduciary duty for retail advisers is likely years away, if at all, we recommend that all investors create their own formal investment policy statement (IPS) that outlines their overall risk tolerance and sets the rules around how their portfolio should be invested.

It is an immediate red flag if your adviser has never completed an IPS with you or has not updated it in over a year.

Taking a few proactive steps can go a long way to improving your portfolio’s durability especially when challenging those steep and at times icy markets. - business.financialpost

Foreigners Return to Malaysia Stocks After 2015 Exodus

Foreign money is returning to Malaysia at the fastest pace in Southeast Asia this year with about 4.4 billion ringgit ($1.1 billion) pumped into the nation’s equities after 2015 saw the biggest outflows since the global financial crisis. Inflows for March are at the highest since April 2013, according to MIDF Amanah Investment Bank Bhd., citing stock-exchange data. The FTSE Bursa Malaysia KLCI Index is headed for its best monthly performance in more than three years as stocks trade near the cheapest relative to global equities in almost a decade.

World's Longest Bull Market Endures Turmoil as Foreigners Return

• Overseas inflows into Malaysia are biggest in Southeast Asia
• Kuala Lumpur has lowest volatility among region's markets

Malaysia’s energy exports are tumbling, its prime minister is battling corruption allegations and corporate profits are weakening. With all that, the Southeast Asian nation is also home to the world’s most resilient bull market for stocks.

Overseas funds are piling in at the fastest pace in Southeast Asia. Kuala Lumpur’s benchmark equity gauge has more than doubled from its 2008 lows without succumbing to a 20 percent drop. Tan Ming Han says he knows its secret: the lowest volatility among the region’s markets. It’s an environment where a growing army of investors are willing to miss out on the highest highs if that means they also avoid the biggest crashes.

“Sometimes, too much excitement can cause a panic attack -- especially with volatile markets,” said Tan, senior investment manager at Amundi Malaysia. “Boring is sometimes beautiful.”

Sentiment remains stubbornly buoyant in Malaysia, home to some of the region’s highest dividends, as the country’s $166 billion pension fund underpins demand for equities with share purchases. Even after the FTSE Bursa Malaysia KLCI Index climbed 12 percent from a three-year low in August, it trades near the cheapest relative to global equities in almost a decade.

All that is boosting the appeal of the market for offshore investors, said Tan, who manages the KAF Vision Fund that has beaten 95 percent of peers over the past three years with a 21 percent return.

Foreign funds have poured about 4.4 billion ringgit ($1.1 billion) into Malaysian equities in 2016, topping South Korea and Southeast Asian markets, according to MIDF Amanah Investment Bank Bhd., citing stock-exchange data. Inflows for this month are at the highest level since April 2013, according to the report. The move comes after last year’s biggest outflow since the 2008 global financial crisis.

Money is returning amid a backdrop of rebounding equities across Southeast Asia, as accelerating economic growth and calmer currencies attract investors seeking refuge from the volatility rocking markets in China and Japan this year. Philippine shares entered a bull market this month. Indonesia’s benchmark index is up 16 percent from last year’s lows, while Thailand equities have jumped 14 percent from a January low.

“In terms of price to book, Malaysia definitely looks attractive, especially relative to its peers,” said Singapore-based RHB Asset Management Chief Investment Officer Lee Kai Yang, who helps oversee S$2 billion ($1.5 billion) of assets including the RHB Asean Fund, which has returned 5.5 percent annually in the past five years. “We have positioned ourselves in line with the structural story of Asean.”

The Malaysian gauge’s 100-day historical volatility is at a seven-month low at 11, versus 15 for the MSCI All Country World Index and 17 for the MSCI South East Asia Index, data compiled by Bloomberg show.

Global market turbulence last year almost ended Malaysia’s bull run as prospects for higher U.S. interest rates sent equities plunging. The benchmark Malaysian index fell as much as 18 percent, while a gauge of Southeast Asian stocks dropped more than 28 percent. The MSCI All-Country World Index entered a bear market in February. While the Standard & Poor’s 500 Index is still in a bull market, that run started in March 2009, four months after Malaysia’s.

“Malaysia’s bull-market run is primarily driven by institutional support, especially government-linked funds,” said Tan. From 2008 till now, the Employees Provident Fund has seen strong inflows, with assets growing by a compounded annual growth rate of almost 10 percent, he said. 

In February, domestic institutional funds accounted for almost half of the total market value of Malaysian stocks traded, compared with 29 percent for foreign funds, according to data compiled by the stock exchange. 

The investments are coming despite a political crisis. Prime Minister Najib Razak has weathered months of attacks over the $681 million that appeared in his private bank accounts before the 2013 general election. Troubled government investment company 1Malaysia Development Bhd., whose advisory board Najib chairs, is being investigated at home and overseas for alleged financial irregularities and money laundering. 

Attorney General Mohamed Apandi Ali concluded in January there was no evidence of wrongdoing. Najib and 1MDB have consistently denied any wrongdoing. On Sunday, opposition politicians and leading critics of Najib unveiled a fresh campaign aimed at ousting him.

Weakening Growth

Some investors are concerned that rising costs and slowing economic growth will weigh on company earnings. Inflation in January accelerated to the fastest pace since 2014, while crude exports have fallen for 12 straight months. A slump in oil has curbed government revenues and prompted Najib to trim the growth forecast for 2016. Analysts have lowered the 12-month projected earnings growth estimate for the KLCI by about 9 percent since May 2014.

“We are underweight Malaysia currently. General concerns on regional growth moderation, weak consumer and business sentiment have capped investment appetite,” said Constance Wong, Client Portfolio Manager of Emerging Markets and Asia Pacific Equities Team at J.P. Morgan Asset Management.

Yet amid the unflattering headlines from politics to the economy, the absence of wild swings in Malaysian equities remain an appealing characteristic for some investors. 

“The Malaysian market has a lower volatility,” Amundi’s Tan said. “That is why despite it being boring, Malaysia has been able to outperform its peers.” - bloomberg

Adding Alternative Investments

Alternative investments are not simple or inexpensive. However, if they work, your investment portfolio potentially has better returns with less volatility. And, the availability of these investment options is increasing. But, are they right for you?

In the past, alternative investments were utilized mainly by large institutions. However, because this investment option has been red hot in attracting assets since the 2008-2009 financial crisis, alternative investing has become more accessible to individual investors.  

According to the SEC, mutual funds using an alternative investment strategy held $365 million in total assets in 2005. Fast forward to 2014, that number ballooned to around $334 billion across 569 funds. Just between 2011 and 2014, total assets grew by a whopping 58 percent per year! Investors are clearly desperate for something that will hold up well the next time the stock market sinks.

What are Alternative Investments?

In general, these are investments which are not included in the traditional asset classes of equities, bonds, and cash. Examples of alternative investments are precious metals like gold and silver, real estate, private equity, hedge funds, and absolute return funds.

Alternative investments employ a different approach to investing compared to traditional investments. This approach may include holding private securities instead of publicly traded investments, shorting positions, or utilizing derivatives. As a result, these types of investments tend to act differently than stocks and bonds.

Why use Alternative Investments?

We live in a global world where economies are more intertwined than ever before. This has made it difficult to rely solely on investing in bonds and stocks to build a diversified portfolio that can withstand major swings in the markets without decreasing the return potential.

Since alternative investments act differently than stocks and bonds, adding them to your portfolio can provide broader diversification, which can reduce the potential ups and downs of your overall portfolio. How is this possible? If the performance of alternative investments, such as precious metals, does not follow the stock market, then potentially these investments may do better when the stock market is down. Additionally, with their ability to be more flexible by investing in a wider range of opportunities, alternative investments can increase the potential return of your investment portfolio.

Incorporating Alternative Investments into Your Portfolio

Let's take a look at factors you need to consider when incorporating alternative investments into your investment portfolio:

How much to invest: When determining how much to allocate to alternative investments, make sure it's large enough to make a difference, but not so large that it dominates your portfolio. Although the allocation can be higher in unique situations, typically allocating 10-20 percent of your total investment portfolio to alternative investments is considered appropriate.

Where to get the money: Not all alternative investments have the same objectives; as such, they should be funded differently. Strategies that are focused on an absolute level of return regardless of market conditions should be funded from the fixed income portion of your portfolio. On the other hand, strategies that are seeking enhanced returns like venture capital and private equity should be funded from your equity portion. Strategies that are looking for both better returns and lower volatility can be funded proportionately from the equity and fixed income allocations.

Picking the best: With so many new products popping up in this fast-growing space, it can be overwhelming to navigate through the sea of options.  Exercise caution by choosing strategies with a proven track record for at least 5 years, as well as a stable investment team and process. This is crucial because unlike traditional investments, in which much of the performance is driven by asset class exposure, performance in alternative investments is typically largely dependent on manager skill. Moreover, confirm that the performance has been demonstrated, meaning it actually happened as opposed to back-tested track records which are also referred to as "paper" portfolios. Lastly, make sure you review the costs. Some strategies have layers of embedded fees in their vehicle structure that can quickly add up.    

Summary

While alternative investment strategies can potentially enhance your investment return or reduce the overall risk of your portfolio, it is a complicated area.  Understanding the investment strategy being used, the fees you will be charged, and the appropriate allocation within your portfolio is paramount to being a successful investor. It may be wise to seek the counsel of a financial advisor or investment professional who is active in this area before committing your hard-earned money. - insideindianabusiness

S&P Reaffirms Malaysia's Currency Rating, Outlook Stable

KUALA LUMPUR: Standard and Poor's Rating Service has reaffirmed the  A-/A-2' foreign currency and 'A/A-1' local currency ratings of Malaysia's foreign and local currency with a stable outlook.

It also affirmed its 'axAAA/axA-1+' Asean regional scale rating on Malaysia.

It said on Monday it expected the 1Malaysia Development Bhd (1MDB) issues and the upcoming change in Bank Negara Malaysia leadership will not  diminish the effectiveness of policymaking either in the executive branch  or at the central bank.

“The stable outlook is based on our expectation that Malaysia's strong external asset position and high monetary flexibility reduce the likelihood of a downgrade to less than one-in-three over the next 24 months,” it said.

S&P also believed Malaysia's credit fundamentals can withstand some stress in the oil and gas sector during that period. 

It also doesn't expect to raise the sovereign ratings on Malaysia this year or next. 

“We may lower the ratings (or eliminate the gap between the foreign and local currency ratings) if we assess Malaysia's public finances or institutional settings have weakened,” it said. 

S&P said such a change could come about, for example, should the government dilute its recent fiscal measures or the incoming leadership at the central bank lead us to believe the conduct of monetary policy will be less effective than it has been in the past. 

It may also lower the ratings if contingent liabilities crystalise on the government's balance sheet materially or if it perceives that their future loss content has increased markedly from current levels.

Below is the statement released by S&P:

The affirmation is predicated on our expectations that the 1MDB issues and the upcoming change in Bank Negara Malaysia leadership will not diminish the effectiveness of policymaking either in the executive branch or at the central bank

We believe the government has taken sufficient offsetting measures to compensate for lost hydrocarbon-related fiscal revenue. In addition, the country's strong external position and fairly diverse economy can absorb some weakness in the oil and gas sector

We are affirming our 'A-/A-2' foreign currency and 'A/A-1' local currency sovereign credit ratings on Malaysia. We are also affirming our 'axAAA/axA-1+' ASEAN regional scale rating on Malaysia


The outlook remains stable, reflecting our view that Malaysia's strong external asset position and high monetary flexibility would reduce the likelihood of a downgrade to less than one-in-three over the next 24  months.

RATING ACTION

On March 28, 2016, Standard & Poor's Ratings Services affirmed its 'A-' long-term and 'A-2' short-term foreign currency sovereign credit ratings on Malaysia. 

At the same time, we affirmed our 'A' long-term and 'A-1' short-term local currency sovereign credit ratings on Malaysia. The outlook on the long-term ratings remains stable. We also affirmed our 'axAAA/axA-1+' ASEAN 
regional scale rating on Malaysia.


RATIONALE

The sovereign credit ratings on Malaysia reflect the country's strong external position and considerable monetary flexibility. 

We weigh these strengths against Malaysia's less strong public finances. In affirming the ratings, we assume that corruption allegations in relation to 1Malaysia Development Bhd (1MDB) will not impede the ability of the executive branch to promote  sustainable public finances and balanced economic growth. 

Similarly, we expect that the credibility of monetary policy and operational independence of Bank Negara Malaysia (BNM, the central bank) will not diminish upon the retirement of long-standing Governor (Tan Sri) Dr. Zeti Akhtar Aziz in April. 

The BNM has an established track record in controlling inflation and supervising closely its banking system. Malaysia also has a deep domestic bond market, compared with its peers', which reduces its reliance on external financing and provides domestic corporations with alternative means of finance.

Malaysia's external position, a result of years of current account surpluses, is a key rating strength. We believe this position can withstand the slump in the oil and gas sector over the next two years. 

Our assumptions for Brent oil price per barrel (bbl) is US$40 for the remainder of 2016, US$45/bbl in 2017, and US$50/bbl thereafter (see Related Research section below). 

We envisage Malaysia's external indicators will remain broadly unchanged, given our projection that Malaysia's current account will remain in surplus. 

For 2016, the depreciation of the ringgit should help the competitiveness of manufactured goods exports, offsetting some of the impact of weaker terms of trade for Malaysia's energy exports.

Malaysia's fiscal performance has consolidated after weakening to accommodate the shock of the global financial crisis. The annual increase in general government debt had averaged 6% of GDP over 2009-2012. Deficits have since narrowed, and we project the average annual increase in debt at 2.8% of GDP over 2016-2019. 

The administration still aspires to balance the budget by 2020 despite the sharp decline in oil-related fiscal revenues--a task that we believe will be challenging.

High subsidy spending and dependence on energy-related revenues had weighed on Malaysia's fiscal position. The removal of oil subsidies in December 2014 and the introduction of a 6% goods and services tax (GST) in April 2015 alleviated some of those pressures. 

In response to lower-than-expected crude oil prices,  the government revised the budget in 2015 and 2016 to maintain its fiscal deficit targets. 

We view these measures as signs that Malaysia's budgetary policy is proactive. We expect public finances to remain in check as recent political leadership challenges play out. 

Specifically, we estimate that net general government debt peaked at about 49% of GDP in 2015 and we project the ratio to decline modestly as growth remains buoyant. 

Malaysia's general government fiscal position also carries contingent risks from its public enterprises and financial sector.

These contingent risks include guarantees on debts and letters of support (including the US$3 billion letter of support for 1MDB, which we regard as a direct financial obligation of the government). 

Malaysia's public enterprises have diverse financial profiles--some with strong free cash flows and sizable liquid assets that, at times, have been used to support other parts of the public sector and engage in quasi-fiscal activities. 

Within our forecast horizon, we do not expect  contingent liabilities of the weaker public enterprises to crystalize in a material manner on the central government balance sheet.

Although Malaysia's high household debt poses some risks, we believe that risks to the government are contained by the buffer of high banking sector capitalization and the BNM's regulatory record. 

Our Bank Industry Country Risk Assessment for Malaysia is '4', with '1' being the strongest assessment and '10' the weakest (see Banking Industry Country Risk Assessment: Malaysia, published to RatingsDirect, Nov. 26, 2015).

Just over a quarter of Malaysia's ringgit-denominated government bonds are held by nonresidents. Although the foreign ownership could reduce if–-contrary to our expectations--Malaysia's institutional settings worsen, we believe the country's sound budgeting, a deep local capital market, the BNM's floating exchange rate regime, and its 6.4 months of foreign exchange reserve coverage of current account payments attenuate the risks.

We project Malaysia's GDP per capita to be just under US$10,000 as of the end of 2016, lower than that of most peers in the same rating category. 

The economy is diversified with a large manufacturing and services base. However, the declining percentage of non-energy exports to GDP suggests that the  government's efforts to improve competitiveness and move toward higher-margin exports have yet to bear fruit.

We do not expect the weak energy prices to reduce real economic growth materially over the next 24 months, given that production of crude oil and liquefied natural gas account for only about 10% of GDP. 

We project Malaysia's average annual growth in real GDP per capita to be 3.7% over 2016-2019. 

Exports of manufactured goods and growth in private consumption and investment are likely to drive this expansion. - thestar

Investing overseas: What you need to know

WITH the ringgit weakening over the past year or so, those of you who haven’t already, are probably starting to toy with the idea of investing overseas.

Diversification across markets, asset classes and currencies is one of the basic tenets of investing. Those who follow this strategy religiously would likely have seen their investment portfolios perform better than those who remained entrenched in the local market.

What used to be considered fairly robust returns – such as ASB dividends of 8% per annum and EPF dividends of 6.5% per annum – now seem menial if you take into account the 30% drop in the value of our ringgit.

It is no surprise then that by now, many Malaysians have accepted the fact that the ringgit may not bounce back to RM3.20 to US$1 anytime soon, and that it is time to diversify their assets by means of foreign investments.

This is good. But before putting your money into foreign investments, you need to know what you are getting yourself into, and carefully consider your decisions before making your moves.

Firstly, how much of your investable assets should you allocate to foreign investments?

The rule of thumb is to allocate not more than 30% of your investable assets into foreign currency investments. The reason for this is that your daily life still revolves around the Malaysian currency, and your foreign investment is merely a means of bolstering your net worth.

Besides, if the US currency weakens, you run the risk of losing a significant amount of money if your primary invested assets were in US dollars. In recent months, anyone who bought into the pessimistic view out of fear that the ringgit would touch RM5 to US$1 would have seen the value of their foreign investment shrink owing to the strengthening of the Malaysian currency. Therefore, putting more than 30% of investable assets into foreign investments would be over-investing, not to mention highly risky.

The second point to consider is, how do foreign investment markets fare in comparison to Malaysia?

If you have not had any experience investing overseas, you may be in for a big surprise. Many Malaysians assume that the investment market overseas works more or less the same way as it does locally. However, this is not the case.

Unlike Malaysia, foreign investment markets such as US, Singapore and Hong Kong are far more open and have fewer regulatory restrictions. There’s also less government support for their market. As such, while these markets enjoy higher levels of global portfolio fund flows, they also experience higher levels of volatility and price fluctuations.

Let us take the example of bonds. In Malaysia, bond investments behave almost like a fixed deposit type of investment – steadily up and predictable (partly due to the accreting value of bond coupons recognised by the fund over time). However, the same can’t be said in other countries.

In the graph, you can see that a Malaysian bond fund (Fund A) moved up steadily over the period of comparison whereas the US (Fund B) and European (Fund C) bond funds experienced higher levels of price volatility and underperformed Fund A. All three funds invest in somewhat similar investment grade papers, only that they invest in different markets. This is mind blowing for most Malaysian investors.

In fact, I had a client who once lost up to 20% of his investment in an Asian bond fund domiciled in Singapore. What made him very upset was that he wasn’t properly advised by the banker of the risk exposure of such a fund. Had he done a little more due diligence or consulted an independent financial advisor before investing into the fund, he would not have been caught off-guard and suffered such a significant loss.

The same applies to equity investment overseas. Many investors would have a hard time trying to adapt to markets that are more volatile than our FTSE Bursa Malaysia KL Composite Index.

The next point to consider is this: How safe is your capital when investing in foreign products? If things are not going well, will you be able to retain your capital at the least?

Let me highlight the example of an offshore commodity product that I once came across. This product focused on physical trading of commodities like timber, metals, aquaculture, rice, plant-based oil, crude oil and biofuel. It supposedly had an attractive track record, yielding double-digit annualised returns for more than two years since its inception. It targets to provide investors with a fixed 2.25% quarterly distribution (i.e. a total of 9% per year).

One of the most common mistakes made by Malaysian investors, however, is the tendency to look at foreign investments through the lenses of their local perspective and experience. At first glance, you might think this investment is no different than any other equity unit trust funds available in Malaysia – a credible alternative investment with good diversification credentials worthy of consideration.

However, the product turned out to be a scam and the investors lost all their money. This is not an isolated case. Due to their limited knowledge and experience, many Malaysian investors fail to differentiate genuine investments from scams. That costs them a lot of money.

Cashflow needs

Thus when investing in foreign markets, it is always better to stick to licensed and reputable fund managers that invest in regulated investments and markets. Lastly, before putting your money into foreign investments, you should thoroughly assess your cashflow needs in order to maximise the holding power of your investments.

A good cashflow management practice is to establish one’s ideal cash reserve before dabbling in investments. For working adults, this emergency fund should be able to cover six months of one’s cashflow needs such as living expenses, loan repayments and any other lump sum cash requirements over the next three years. I recall an incident where a client of mine underestimated the amount of cash he would need to execute his plans of building a bungalow on a plot of land he owned.

Only midway through the construction process did he realise that he was short of cash, after having invested the remainder of his liquid assets in foreign investments. In the end, in order to complete his dream home, he was forced to withdraw his foreign investments at a loss.

A situation like this could have been easily avoided with a little bit more cashflow planning and foresight. Make the necessary provisions for your short-term cashflow needs and you will position yourself to better withstand any unexpected investment market volatility.

Diversification of investments across markets, asset classes and currencies is a recommended risk management strategy for any investor and should be diligently pursued. However, never assume that investing overseas is similar to investing in your home ground. In the case of Malaysia’s relatively stable investment environment, entering into foreign investment markets could be akin to stepping into rough sea from a calm bay – it might come as a shock if you are unprepared.

Conduct your research thoroughly – find out more about the investment environment, the country’s regulations, and study the investment product carefully. Consult a professional if required, such as an independent financial advisor, to address any concerns you may have. Once you’ve considered the above and decided to invest, make sure that you monitor the performance of your investment closely.

The more volatile a market, the faster you’ll need to take action on your profits or losses. Park your profits somewhere safe to prevent losing it to the fluctuating market. If your investment is making a loss, then act fast with a contingency plan at hand.

Remember, the more prepared you are, the more likely you are to succeed. All the best! - thestar

After An Epic Decline, Is It Time To Invest In Malaysia?

Summary

• Malaysia’s economy continue to face multiple headwinds in the near future but the direction of its stock market is somewhat predictable hence easing the entry into the market.
• Target level of 1800 for the main benchmark implies 5% return but could be higher once oil stabilizes. Investors could use MSCI Malaysia ETF to amplify the gain.
• At current level, long term investment in Malaysia is a sound idea.

Malaysia has been in spotlight recently, but not for good reasons. The news regarding its state owned investment fund company 1 Malaysia Development Berhad (1MDB) is the most recent example. The company, chaired by the prime minister is bleeding money and the prime minister himself is accused to be in a corruption scandal. So, what should investors expect from Malaysia this year?

What You Have To Know

There are several factors, both internal and external that contributed to the decline of Malaysian equity as represented by MSCI Malaysia ETF (NYSEARCA:EWM). The index ETF took a 50% dive since mid 2014 putting Malaysia in true bear market. Keep in mind that these factors are still in play and will determine the market direction in 2016. However, EWM is outperforming regional peers YTD with 10% gain.

Source: Tradingview

1) Co-movement With Oil Price

As a net exporter of oil, sentiment towards Malaysian equity inevitably depends on oil price. The government's coffer is filled mainly by payment from the national oil company, Petronas. With the decline in oil price, the sentiment towards Malaysian equity turned sour. The government was even forced to revise their 2016's budget when the oil price continued to drop in January this year. The earlier version of the budget was made based on the assumption that oil price would be around $48 per barrel.

The co-movement of EWM with price of crude oil is quite stunning. As in the chart below, the pattern of movement of EWM (in blue) is almost identical to that of crude oil (orange).

In fact, since the price of oil started to decline in mid 2014, the rolling 60 days correlation between EWM and US Oil Fund (NYSEARCA:USO) increased steadily. As such, I think investors could use oil price as the main gauge to identify suitable entry into EWM.

Source:ETF Replay

2) It's Always About China

The slowdown in China, which is Malaysia's top trading partner, translates into earnings recession for Malaysian companies. This earnings recession started in 2014 and continued throughout 2015 as shown below. In fact, corporate earnings in Malaysia was down 6% in 2015 compared to the previous year.

Source:MIDF Research

3) US Interest Rate Hike

Last but not least, Malaysia has also been the victim of the potential interest rate hike in the US. Since the talk of rate hike started in 2013, foreign funds has been net seller in the local exchange. However, the flow of foreign fund is quite predictable too. Foreign fund seems to "sell the news" as shown during the taper tantrum of 2013. But when the news is confirmed, they flow back into Malaysia's equity as buyer.

The rapid outflow of foreign funds has luckily been partly absorbed by purchase from local funds. In fact, in September 2015, the government, through its other state owned fund called Value Cap tried to stem the decline in Malaysian equity by injecting RM200 billion into the fund. The plan is that Value Cap will buy undervalued stocks to help stabilize the market and restore confidence. This helped the Malaysian equity to stabilize after reaching the bottom in August.

So, we could see that flow of foreign fund greatly influence the performance of Malaysian equity since foreign institution usually hold more than 20% of total market cap of the main benchmark, the Kuala Lumpur Composite Index (KLCI). There are a host of factors that influence the flow of foreign fund into Malaysian equity. But for now, the pace of interest rate hike in US is the biggest concern. Any unexpected change in the pace and timing of rate hike would be unfavorable.

Source:Bursa Malaysia

4) Internal Factors

As for internal factors, there are several developments that might, to a lesser degree, affect the direction of KLCI such as the change of central bank's governor. But one major crisis that weighs on investors' sentiment towards Malaysia is the 1MDB crisis. It is a long story and you can follow the story here and here. But to make it simple, the state investment fund is in deep trouble due to heavy loss on investment, indebtedness and also the allegation of being used as vehicle to move money to certain individuals which includes the prime minister himself.

Where Are Things Now?

All these headwinds caused the local currency (Ringgit, MYR) to decline sharply making it the worst performer in Asia in 2015. The same goes to the stock market. However, improvement in oil price and investors' sentiment had pushed the Ringgit to be the best performer in Asia YTD. There is a potential that the rally could continue in the short term due to short covering and stable oil price.

The underlying economy remain resilience with GDP growth for 2016 expected to be around 4% - 4.5%, slightly down from last year's 5%. S&P, Fitch and Moody recently reaffirmed their "stable" outlook for Malaysia giving some needed confidence to investors.

Related - Positive turn for the ringgit?

Recent improvements in oil price and also dovish tone from the Fed has helped the KLCI to gain a mere 1% YTD. But the MSCI Malaysia ETF which tracks MSCI's own Malaysia Index gained more than 10%.

My Take On Malaysia

As mentioned, Malaysia's stock market is held captive by oil price and interest rate movement in the US. Both elements are hard to predict. But ultimately, earnings determine the value of a stock and the direction of the market. In the case of Malaysia, the relationship between earnings and stock market movement is depicted below.

I have to thanks and give credit to the local research house, MIDF Research for their extensive report on Malaysia's equity market which includes excellent observation regarding the behavior of foreign fund flow as well as corporate earnings with regard to the direction KLCI.

Source:MIDF Research

The earnings for the KLCI is expected to tick up in 2016 based on consensus from Bloomberg. The long term average PE for the local exchange is 15.3 and with upper and lower standard deviation at 13.7 and 16.9.

Using forecasted 2016 earnings and KLCI average PE of 15.3, the index seems fairly valued at current level of 1700. But during period of rising earnings, the benchmark could close at higher level compared to that based on average PE. So, using 16.9x PE (1SD from mean), the KLCI could close at 1800. However, absence declining oil price and uncertainty from the Fed, I believe the local benchmark could climb even higher.

The 1800 target level for KLCI implies a 5% return from current level. But unlike the SPDR S&P 500 (NYSEARCA:SPY) which closely tracks the S&P 500, the MSCI Malaysia ETF tracks the slightly different MSCI Malaysia index. As in the chart below, EWM price movement is more volatile compared to benchmark. It outperforms the benchmark in uptrend but underperforms in down trend.

So, it's difficult to make a direct comparison between EWM and KLCI. But when the KLCI was at 1800 back in June 2015, EWM was trading around $12 which will give 40% return if the ETF moved up to that level.

Note: EWM , FTSE Kuala Lumpur Composite Index, KLCI ( Orange)

Country Specific ETF or ETF of Countries?

Some investors would ask, if the purpose of investing in Malaysia is simply to get exposure of emerging market for the sake of diversification, then why not buy the MSCI Emerging Market ETF (NYSEARCA:EEM)?

I have two reasons for why I would choose specific country ETF rather than buying EEM which contains more than 800+ stocks. First, when you have more than 800 stocks in the portfolio, it's hard to get a nice capital appreciation. Different stocks from different countries with different catalysts and economic conditions have to appreciate at the same time in order for the ETF to make meaningful gain. This is depicted below where EEM (orange) traded sideways from 2010 - 2015. Meanwhile, country specific ETF such as Malaysia pushed higher until mid 2014.

But of course, higher reward come with higher risk as proven by the price movement of EWM towards the end of 2015. However, this is where another advantage of country specific ETF comes into play. Investors should only buy something that they really know about. In this case, it is easier to study and follow the events related to a single country rather than the whole emerging markets. Those who did their due diligence could have certainly avoided being burnt by the 50% drop when the news about oil glut started to appear in the summer of 2015.

But if you insist on buying the whole emerging markets, why not consider Vanguard's FTSE Emerging Market ETF (NYSEARCA:VWO) for a lower fee and hence, better return?

Conclusion

For the year 2016, I think Malaysia's stock market would continue to be influenced mostly by oil price. If we assumed that oil price has bottomed at $30/barrel, then there is little risk for Malaysia even if oil traded sideways. Conservative estimate shows that the KLCI can reach 1800 level this year. But that is based on consensus earnings which could change for the better or worse. If price of oil and situation in China stabilizes, the 1800 target could be achieved. In this case, investors could take advantage by going long on EWM to amplify the gain.

The Fed's decision won't have a lasting influence. This is because usually, foreign fund sells on the news and then return as buyer after the news is confirmed. Also, the pace of rate hike is expected to be slower as monetary policy amongst developed nations continue to diverge. However, remember that the Fed is data dependent. Recall that most investors believe there will be no rate hike in 2016 after the November rate hike didn't happen. But they were forced to change their mind in December. In other words, I think the cost of future increase in US interest rate has been priced into most of the emerging markets and only unexpected moves from the Fed could bring further downward pressure.

As for 1MDB, the company is now in the process of selling its assets to pay down its debt. I believe 1MDB is not a hot news item anymore and that internal politics are less of a concern for investors.

I continue to hold my mutual funds in Malaysia and believe in the long term potential of the country. Malaysia is among the top 20 most competitive economies. The government, through its Economic Transformation Program has shown that the country is on the path to diversify its economy and reducing dependence on oil. The signing of the Trans Pacific Partnership agreement could further benefit Malaysia and its regional peers in the years to come. For investors with long term view, I think starting to build a position in EWM at its current level is a sound idea.

Disclosure: I am/we are long MALAYSIA. - seekingalpha

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a registered investment advisor. The opinion expressed here is to help me articulate and inspect my investment thesis as well as to receive feedback from public. Investors should do their own due diligence before investing in the market.


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