HIT by the double whammy of political uncertainty and unabated Covid-19 cases, the Malaysian equity market is one of the worst-performers in the region year-to-date.

       Nevertheless, Principal Asset Management Bhd chief executive officer Munirah Khairuddin remains optimistic about the investment opportunities in the local stock market.

       “We believe the local equity market still offers opportunities in certain aspects such as cheap valuation, attractive dividend yield and cyclical or catch-up plays,” she tells StarBizWeek.

       With Malaysia accelerating its vaccination rate to above 450,000 per day, Munirah says investors’ focus has now turned to the fourth-quarter gross domestic product (GDP) outlook in anticipation of the economy reopening in a more sustainable manner.

       “This will provide a much-needed boost to investor sentiment and the market in general,” she explains. “We also think local sentiment will be supported by the global reopening, accommodative monetary policies and improving corporate earnings.”

       The FBM KLCI has lost about 6.6% year-to-date as of yesterday, with benchmark index closing at 1,518.03.

       Selective mode

       Despite recognising the opportunities, Principal continues to see the necessity to tread cautiously in the stock market, given risks associated with the prolonged lockdown. Hence, the asset management company has taken a more defensive orientation.

       “We have lowered our portfolio betas recently,” Munirah shares.

       “We are selective on stocks from a bottom-up basis that plays into the reopening theme, thus we remain constructive on sectors such as financials; cyclicals, namely consumer discretionary; and select transport.

       “We are now turning positive on technology, following the recent pullback, and maintain our underweight stance on gloves and plantations,” she adds.

       As for local bonds, Munirah notes the low-interest rates will be a plus point for the debt market.

       “We believe the local bond market has stabilised since the correction in the first quarter of 2021. We expect the market to do well in the remaining part of 2021, as the interest rates are likely to stay low for a longer period of time, given the prolonged movement control orders, which will have a negative impact on Malaysia’s GDP growth outlook. This is positive for bonds,” she explains.

       Munirah notes concern about the large government bond supply, which has affected the market sentiment early this year, is already behind us, with less supply overhang going forward.

       External markets

       Overall, Principal continues to advocate diversification as a way of maximising a portfolio’s returns while minimising risks, especially given the uneven economic recovery on the global front.

       Geographically, the fund manager favours developed markets, citing sustained recovery amid the continued rollout of vaccines, as well as fiscal and monetary policies support.

       “Central banks will stay accommodative until the economic recovery trajectory is ensured and full employment and inflation target is achieved,” Munirah says.

       The group is also positive on Asia over a 12-month horizon, she adds.

       “We maintain our preference on the cyclical and value part of the assets and selectively diversified to communication services, healthcare and energy,” Munirah shares.

       “The focus remains on quality companies, which are long-term winners, or benefit from structural changes in their respective industries through market share gain or exhibit stronger earnings growth prospects,” she adds.

       In recent months, elevated inflation levels have resulted in volatility in the financial markets. This is because of concern that the rising inflation could prompt central banks to raise interest rates or tighten their monetary policies.

       Munirah, however, sees the current period of high inflation as transitory, in tandem with the view of key central banks.

       “The higher inflation we saw since the beginning of this year is owed to a low base in 2020 because of depressed demand. In addition, higher commodity prices and rising transportation costs have also contributed to the situation.

       “The surge in pent-up demand, with supply remain at constraint level, is another contributing factor. We share the views of key central banks that inflation would eventually fall from today’s elevated levels,” she adds.

       On ESG (environment, social and governance) exposure, Munirah points out that data accessibility and transparency remain the main challenge and this is common across other markets.

       “Data accessibility, transparency timeliness and accuracy or standardisation of practices are essential,” she says.

       “For equities, we are fortunate as we see a growing commitment from issuers to provide more disclosures on ESG risks; however, for fixed-income securities issued by non-listed issuers, data remains scarce and it is a gap that needs to be closed fast.”

       Another challenge that the group faces is the readiness and ability of investee companies to transition to ESG-compliant principles and embed sustainability pillars in their business strategies.

       “It is a journey of change in ESG integration in all our investee companies.

       “Despite these challenges, we see many initiatives and action plans underway within the industry, and supported by regulators, to make this happen,” Munirah says.