THERE are investment opportunities in every market condition. The key is playing the game right.

       For RHB Asset Management Sdn Bhd chief investment officer (equity) Mohd Fauzi Mohd Tahir, the strategy now is to take a balanced approach, with a lean towards recovery plays.

       Despite the volatility in the local equity market, he remains optimistic on the prospects of the local equity market, citing resilient corporate earnings and attractive valuation, as well as the eventual recovery of the economy.

       Mohd Fauzi notes with the rising vaccination rates amid the surge in Covid-19 cases, economic reopening plans could be accelerated.

       Sharing his thoughts on the financial market with StarBizWeek, he says the sooner the economy opens up for business, the sooner the recovery and the better the corporate earnings outlook.

       Below are excerpts of the email interview with Mohd Fauzi.

       SBW: How do you see the prospects of the local equity market towards end-2021?

       Mohd Fauzi: We are positive on the prospects of the local equity market for the remaining part of the year.

       However, the market would likely to be volatile due to the current high US inflation rate and uncertainties in domestic politics.

       The high number of Covid-19 cases has led to renewed lockdown, and this has, in turn, slowed down domestic economic recovery.

       In addition, the emergence of new Covid-19 variants elsewhere in the region has potentially derailed the economic recovery in other parts of Asia.

       The spread of the highly infectious Delta variant would potentially affect market sentiment in the short term if the pandemic is seen to undermine world growth.

       The Malaysian government is obviously aware of the negative long-term impact following prolonged closure of the economy and as such, has been accelerating the National Vaccination Programme since early July 2021.

       Although the number of new infections remain high, it is expected that these vaccinations will have positive effects in the long term.

       We note that foreign governments are of the view that the Covid-19 will stay for the longer period of time despite vaccinations.

       However, this also means that Covid-19 will be downgraded into an endemic. As such, cases will likely remain high but without a correspondingly high fatality rate.

       Given the domestic and external headwinds, what is your investment strategy now when picking a stock?

       Our investment strategy is focused on a more balanced portfolio proposition, with a lean towards recovery plays, as we believe the high inflation rate in United States is transitory.

       We will position the portfolio to include both value, and growth stocks in domestic vaccine recovery stories and export-orientated economies.

       Our view is that we would likely see another round of earnings upgrade once more sectors in the economy begin to open up.

       The optimism on equity markets will improve as vaccination rates increase and concerns on Covid-19 cases abate.

       Besides the vaccination rates, the number of hospitalisations and deaths are keys to the successful reopening of the economy.

       Hence, the sooner the economy opens up for business, the sooner the recovery and the better the corporate earnings outlook.

       Overall, we expect the FBM KLCI to remain resilient despite the rising Covid-19 cases, slowdown in the economy, and uncertainty in domestic politics.

       We believe the equity market, which is now trading at an inexpensive valuation, has factored in most of the negative news.

       What is your take on inflation risk?

       So far, the acceleration in inflation largely reflects pandemic-related disruptions rather than a rapid exhaustion of spare capacity.

       The US Federal Reserve (Fed) described this as transitory as the accelerated demand came along with temporary supply shortages and logistical bottlenecks.

       The significant fiscal stimulus that boosted excess savings in households and supported consumption has ended.

       These excess household savings are likely to be drawn down further with the reopening of the economy.

       Overall, the labour market slack remains substantial and the reported labour shortages and hiring difficulties are in selective sectors such as hospitality and travel, and conditions would ease as additional unemployment benefits ends in September.

       The imbalances in labour markets and global supply chains are likely to dissipate.

       We believe inflation is likely to peak in coming months, but the timing would depend on global supply and consumer demand.

       However, the Fed would be forced to increase interest rates sooner than expected if inflation remains high for a longer period despite the resurgence of Covid-19 cases.

       This would dampen sentiment towards global equity markets that have been rallying on the back of loose monetary policies and ample liquidity.

       What is your outlook for bonds?

       The local bond market should be supported for the rest of 2021 on account of an unchanged outlook towards the overnight policy rate (OPR) at 1.75% for the remaining part of the year, and likely into 2022.

       Expectations on inflation could continue to be downplayed by most central banks as we saw US Treasury yields easing off to around 1.20%, range-bound between 1.15% and 1.30%.

       With the 10-year Malaysian Government Securities (MGS) yield at 3.15%, the differential with US debt at 180 to 200 basis points will enhance the appeal of local bond market.

       Aside from higher rates, part of the allure in Malaysian bonds is the stable outlook for ringgit.

       In real effective terms on the ringgit, which offshore investors monitor closely, the Malaysian currency is relatively cheaper than its competitor currencies in Asia.

       A positive backdrop for both domestic debt papers and the currency have encouraged foreign investors to buy into Malaysian bonds.

       In fact, they have been major buyers of local currency bonds over the past year.

       Holdings by offshore investors at present are still not as elevated as they were in past years; this indicates further room to increase.

       As at July 2021, offshore investors own about 40.4% of outstanding MGS and around 14.3% of total outstanding local debt instruments, compared with about 47% and 19%, respectively, in 2015.

       In the corporate bond space, investors are primarily focused on high-quality credit for portfolio yield preservation. The current credit spread corporate bonds offer are also attractive.

       We foresee bonds or sukuk to continue to see demand, as the OPR is expected to stay unchanged for an extended period of time. This also means that fixed deposit rates would also stay low for some time.