RHBRI: Market Outlook & Strategy 2H2012

In our view, the equity market will likely be stuck in a range-bound trading pattern for now, but will likely trend up as global economic uncertainties clear out towards the later part of the year. Investors’ key worries include :

1. worsening of the euro-debt crisis that remains unresolved
2. fears of China’s and India’s economies crashing down into a hard landing; and
3. the risk of US falling off the “fiscal cliff”.

External Volatility And Impending Election 2 Key Headwinds

On the home front, the major event to watch out for is the impending general election that could also create volatility to the local bourse given the uncertain election outcome. Nevertheless, we believe the market will eventually trend higher towards end-2012, premised on:

1. the ECB making a more decisive move to mutualise the debts of Eurozone governments;
2. China policymakers ease policies substantially and its economic growth re-accelerates;
3. US Congressional leaders cobble together some deals to mitigate the impact from the “fiscal cliff” and allay the fear of its economy falling off the cliff; and
4. domestically, the general election produces a result where the ruling coalition party remains in control of the government.

Meanwhile, global financial markets are still likely to be awash with liquidity as central banks in advance countries have pledged to maintain extremely loose monetary policy and could unveil more quantitative easing programmes to support economic growth should the situation warrant. 


On the home front, the economy is more resilient than feared and we expect real GDP growth to stage a modest rebound to 4.7% yoy in the 2H, from +4.4% estimated for the 1H. In the same vein, net EPS growth for the market is projected to recover to +10.8% in 2012 before moderating to +7.8% in 2013. Consequently, we are maintaining our end-2012 FBM KLCI target at 1,650 based on 14.6x 2013 earnings.

Given global macro headwinds and general eletion risks on the home front, we believe it pays for the more discerning investors to hold some defensive stocks that have strong cash flows to pay sustainable dividends in their portfolios. In addition, we believe investors would still need to accumulate fundamentally-robust stocks on weakness in order to outperform the market. Sector-wise, our key overweight are telecommunications, consumer and banking, although we also have an overweight stance on the utilities, gaming and semiconductor sectors.


Source: RHB Research Institute

Why GOLD is a different asset class?

Today, gold is becoming an ever important asset class in the world. Banks nationwide is offering investors the opportunity to invest in gold, whether it is for capital preservation or capital gain. How well you diversify without investing in gold? This is the question being asked by those already investing in gold, and most of them already making profit out of it. But, is it really so different? Is it really a must have asset class?

History of Gold

Gold has been used for numerous monetary functions long long time ago, especially in China. Ancient people used gold as a form of currency and storage of wealth. By using gold as a medium to which paper currency was pegged, most modern international monetary systems were created since then.

What drives up Gold price?

The modern gold rush scenario happened since 2008 global financial crisis, driven by extremely low deposits rate on cash, very volatile equity markets and surging inflation. Negative real value of money is the key factor why many people rushing to gold since then. And of course, the wealth generated by India and China sparked the demand for gold too. Both Indians and Chinese are buying gold as a status they long-been dreaming of.

More people are flocking to Gold

Because of the bad loss-making experience in equity investments during 2008 financial crisis, investors exited the capital markets and were holding record amounts of cash then. However, the low yields on cash and other safer instruments left investors searching for better yield elsewhere. Low volatility, safe asset class, and storage of wealth naturally makes gold investment popular. This is when "Gold rush" sets in, with or without your attention. Yes, we're in the midst of gold rush currently and could persist for few years more.

Emerging Markets is the main drivers

In 2010, 54% of total global demand for gold were for the purposes of making jewelry. Who are these rich people? Yup, Asians were the regular jewelry supporters. Indian demand alone was responsible for around 1/3 of total global demand. This trend is expected to continue as more Indians make their way into the middle class and have the ability to spend their income on gold jewelry.

Following closely was Chinese, whom is beginning to display a trend that could see it overtake the ultimate title in the near future. Traditionally, Chinese cannot runaway from buying gold during Chinese New Year, marriages, new born or even birthdays. This reasons ensure the sustainability of Chinese demand for gold. In total, 40% of global jewelry demand is contributed by Indians and Chinese.

China is the largest gold producing country?

Despite record high gold prices, total mine production was fairly unchanged and remain below levels seen earlier in the decade. This was due to rising production costs and tighter legislation in certain gold producing countries. The latest was in Peru, where protesters were staging a rally for past few days against environment damaged resulted from gold mining activities there.

South Africa, once the largest gold producing country, was overtaken by China since 2007. Hence, China is going to dominate both demand and supply of gold and is expected to continue its pattern of growth going forward.

US and Western Central Banks are largest gold holders?

To re-balance currency reserves, liquidation of gold by central banks globally was a routine procedure. Despite the fact that most western central banks are, for all effects and purposes, over-allocated to gold, annual sales trends began to gradually slow as the effects of financial crisis is not over yet. Obviously, European Central Banks (ECB), have been very hesitant to sell gold from their external reserves back into the marketplace because they view gold as a currency proxy and a way to diversify their holdings. European, from banks to people, prefer to hold gold rather than currency at risk of continue devaluation.

Meanwhile, Emerging countries with particularly small gold holdings as a percentage of reserves currently are diversifying from US dollars. Instead, emerging economies are regular buyers of gold now. As these economies continue its speed to grow bigger, a paradigm shift appears to be unavoidable.

The above factors explained why gold is a different asset class. We cannot simply read the historical trends and using technical analysis tools to predict the gold price directions. Yet, we invest into gold to protect and create wealth, amid the looming economy crisis.

J.P. Morgan's Equity Strategy (Sept 2011)

On Sept 7, J.P.Morgan came out a report titled "Global Markets Outlook and Strategy". Here, we would like to share the equity strategy written, which we think is the most sought after reference for investors to strategize during this uncertain times. Below is the excerpt from the said report:

"We believe perceptions of a US recession will continue to weigh on equity markets and we thus keep a low amount of risk in our equity portfolio and reduce beta to negative."

"The most likely positive catalyst for equity markets in the near term lies with US economic data. This is not happening yet. Our US Economic Activity Surprises Index remains in negative territory, where it has been for 5 straight months (Chart 1). We need to see this index moving to positive territory, and US economic data surprising on the upside, for equity markets to sustain a recovery."

2 reasons why Under-performance

The August market slump saw emerging market (EM) equities and small caps under-performing, exhibiting their traditional high beta during recessions or crises. There are 2 reasons for this under-performance.

1. During expansion and market rally phase, investors became overweight the assets with the highest beta. The economic turnaround then forces them to get back to neutral, inducing more selling in EM and small caps.
2. Small caps and EM are both less liquid markets, amplifying the impact of a given amount of selling. This happened even in periods when the crisis emanated clearly from developed markets and not from EM. The beta, position, and liquidity forces dominated the source of the crisis in driving relative performance.

The Strategies...

Rule-based trading strategies tend to perform better in highly uncertain environments. We take more risk on these strategies:

• A US equity sector trading model based on a combination of sector short interest, a contrarian indicator and 11-month return momentum suggests staying long in Energy and Materials vs. Financials and Staples.
• Our Cyclical vs. Defensive global sector trading signal based on the monthly change in global PMI is currently recommending an UW in Cyclical vs. Defensive sectors.
• Our EM vs. DM equity signals based on relative IP growth and 2-month return momentum are currently neutral in EM vs. DM equities
• Our model for allocating between the US and Euro area equities currently suggests a long in US vs Euro area equities currently hedged

Why chose ASEAN economies vs. China?

• ASEAN countries are in a sweet spot with inflation below the central bank target zone, strong currencies and healthy growth. Emerging markets for now are a non-BRIC story.
• We see a high risk of disappointment in China. The consensus view is that growth is the priority. But with wage inflation signaling healthy employment conditions and public concern about the rising cost of living we see a high risk that policymakers focus on price stability rather than growth.
• China's 2Q fixed asset investment (FAI) to GDP ratio was 53%. The re-acceleration in 2H11 growth is based on affordable housing and FAI projects. The result is FAI to GDP above 60%, a level that could result in more overheating.

UW: Underweight

OW: Overweight

New Fund: HwangDBS China Select Fund

The Fund is a wholesale feeder fund that aims to achieve capital appreciation over the long term by investing in a collective investment scheme, namely the China Select Fund, a Cayman Islands-domiciled sub-fund of Citi Investment Trust (Cayman) II managed by Citigroup First Investment Management Limited (the "Target Fund"). Being a wholesale fund in nature, this Fund is open for sale to Qualified Investors only.

The Manager will invest a minimum of 95% to maximum of 99.8% of the Fund's NAV in units of the Target Fund and a maximum 5% in deposits. The base currency of the Target Fund is US dollar.

3 reasons to invest in this fund:

What is the permitted investments for the Target Fund?

It is expected that approximately 70% to 100% of the Target Fund's portfolio will be invested directly and indirectly in equity securities issued by companies which are listed or being offered in an initial public offer on official stock markets in Hong Kong, China (A Share and B Share markets), the United States, Taiwan, Singapore and other countries.

Other than that, the fund may also use financial derivative instruments (including index futures, index options and index and currency swaps) to hedge market and currency risk only.

How about China A shares?

NO. The Target Fund will not directly invest in China A shares, but may use Access Products to gain exposure. Access Products will generally account for approximately 10% to 30% of the Target Fund's portfolio.

What is Access Products?

It represents an obligation of the relevant Access Product issuer to pay to the Target Fund an economic return equivalent to holding the underlying A Shares. It will be valued on a mark-to-market basis on each valuation day by the relevant Access Product issuer and independent verification (at least on a weekly basis).

A 10% performance fee will be charged to the fund if the appreciation in the NAV during the relevant performance period is above the high watermark of the Target Fund.

Click here to download the Product Kit

Click here to download the Information Memorandum

Source: HwangDBS Investment Management

New Fund: OSK-UOB Capital Protected Dual Opportunities Fund

While inflation fears in China is a dominant factor, signs that China's growth is holding up well despite this concern will certainly fuel further growth. Traditionally in China, a higher inflation tends to exhibit a positive correlation with Chinese companies price-earnings ratios and nominal earnings growth. Having said that, the consensus view is that the government will raise borrowing costs to contain inflation and prevent the economy from overheating.

With such growth euphoria and inflationary concern, a new fund is structured to take advantage of the current inflationary economy in China. This is a 4-year close-ended capital protected* fund which aims to provide income and capital appreciation over the medium term whilst protecting investors’ capital* on the Maturity Date.

Where is the Fund's return comes from?

The Hong Kong (HK) Option is designed to provide investors with potential annual coupon payments that are based on the performance of Chinese companies’ stocks and potential returns from its exposure to a gold investment at Maturity Date. Hence, the Fund’s name “Dual Opportunities” reflects the two opportunities available under the HK Option.

The HK Option is denominated in US Dollars and thus, the Fund’s return from the HK Option is subject to US Dollars / Ringgit Malaysia exchange rate risk. The Fund has 100% participation in the HK Option payout. The HK Option will provide the Fund with exposure to the performance of a fixed basket of 5 Chinese companies’ stocks listed on the Hong Kong Stock Exchange (“Underlying”).

However, the performance of each of these stocks under the HK Option is capped at 8% per annum. The final Underlying which will always be comprised of 5 stocks will be determined on the Commencement Date of the Fund.

The HK Option will pay the Fund a potential annual coupon payment that is based on the performance of a basket of 5 Chinese companies’ stocks which are expected to perform during this inflationary period.

In addition to the performance of the Underlying, the HK Option is also structured to pay a gold return, if any, at the Maturity Date. The HK Option’s exposure to gold return would depend on the annual performance of the Underlying and also on the performance of gold prices between the Commencement Date and the Maturity Date.

Indicative Asset Allocation of the Fund

The Fund is suitable for investors who:

• have a low risk tolerance;
• seek capital protection;
• have a positive outlook on China's growth potential;
• have a positive outlook for gold prices;
• have a medium term horizon and seek regular income.

Source: OSK-UOB Investment Management

Click here to download Prospectus

Top 3 Commodity Picks for 2011

Forget about supply and demand issue of commodity, everyone knows the main mover now is Emerging Market, especially China. As long as US economy not yet recovered, China was expected to continue its great appetite to consume commodities globally. Not for its consumptions, but mainly because of China's currency management.

China, already the largest creditor of US by holding USD which was slipping with a series of quantitative easing programs, would definitely forced China to diversify its holding elsewhere. However, China would hand-picking according to its own local demand. As such, Finance Malaysia forecasts those commodities which were used heavily in construction, infrastructure, production will continue to perform in 2011.

 

Top pick #1: Palladium

One in four goods manufactured today either contain platinum group metals or the platinum group metals play a major role during their manufacturing process. Palladium was used in many electronics including computers, mobile phones, multi-layer ceramic capacitors, LCD televisions.

Top pick #2: Silver

Being a precious metal, silver is used to make ornaments, jewelry, high-value tableware, and  currency coins. Today, silver metal is also used in electrical contacts and conductors.

Top pick #3: Copper

About 98% of all copper is used as the metal, taking advantage of distinctive physical properties - being malleable and ductile, a good conductor of both heat and electricity, and being resistant to corrosion. It is widely used in piping for water supplies, refrigeration and air conditioning.

When would asset bubbles in Emerging Market "Burst"?

Do you discounted the possibilities of asset bubbles in Emerging Market?

Even though our governments, including China, saying that asset bubbles is under-controlled for almost one year now, yet, investors are not comfortable with the record breaking prices.

Investors are encountering high prices in properties, commodities, resources, and of course, shares market in emerging markets. People are investing, buying, spending, and borrowing to an extent that would caused asset bubbles in various sectors.

Return, the only thing in mind...

 

Meanwhile, investors are chasing for returns to beat the market at large, and to avoid being left behind. This "Kiasu" behavior are only pouring oils on fire. Yet, returns is the only thing in mind, and those "kiasu" investors are winning the game to date. For those who does not participate in the game were blaming them for causing the high property prices, undermining their affordability to own a house.

 

When did the bubbles started?

 

In fact, the asset bubbles was started end of last year. And, the bad news is, the bubbles are growing non-stop until today. People are blindly pouring oils (until crude oil reaches USD87 per barrel lately), although the fire is big enough to swallow a bungalow.

 

When would it stops?

Oh... To answer it, we have a two-sided views...

One, the asset bubble will anyway stop one day

Two, it will stop when it "burst"

 

All will come to an end by following the sequence below:
- when US and Europe recover from their painful crisis,
- when investors found that US and Europe can give them better return,
- when "kiasu" attitude infecting US and Europe,
- when oil prices is too pricey to ignite the fires (commodities will come down),
- when speculative capital flow out of emerging markets,
- THE END

New Fund: AmIslamic Greater China Fund

The fund aims to grow the value of the investment in the Longer Term by investing in a portfolio of Shariah-compliant equities with exposure to the Greater China region namely in China, Hong Kong, Taiwan markets, as well as companies on Approved Equity Markets with business dealings in China.

To achieve the investment objective, the fund will invests a minimum 85% of the fund's NAV in a portfolio of Shariah-compliant equities with exposure to the Greater China region. AmIslamic is partnering with Hamon Investment Management Limited, the sub-investment manager who is responsible for the asset allocation and stock selection for the portfolio based on the following style:-

1. Performing active bottom-up stock selection
   
2. Picking securities without the constrain of market capitalization
   
3. Growth or value styles which depends on the changing economic cycles and market conditions
   

The fund is suitable for an investor seeking:-

• Investment exposure to the fast growing Greater China region
  
• Capital growth and appreciation through a portfolio of Shariah approved equities investments
  
• Long Term investment goals
  

China's banking stocks... Your next destination?

While Malaysian market is hovering around 1,500 points, a ground survey shows that local investors are skeptical about the sustainability of our market. Bursa Malaysia's website shows that local retail participation is merely at 25% daily.

Maybe, we could look aboard to find some other investing options. And, China's banking stocks could suit investors appetite for the following reasons:-

1. China was an under-performer this year
2. China's banks should report better profits
3. Robust loan demand

Due to the higher interest rate being announced recently, banks of China should experienced expansion of net interest margin for the next few quarters. Although loan growth is moderating now, it was still high, and will continue as long as China's economy is growing. We can't deny that China is the world's engine of growth currently, in which we persist for the next few years, at least.

Will China raise rate again?

Depending how fast and big the housing bubble was, China would continue it's monetary tightening policy going forward. In contrast, Malaysia had raised interest rate 3 times this year, albeit small percentage, China is lagging us although with a more serious property bubble.

However, there are risks involved.

1. Banks could be facing liquidity problem
2. Potential of loan defaults
3. Huge loans allocated to local government's infrastructure projects

In order to minimized risks, investors should favor BIG lenders (pic) and avoid smaller banks, given their greater capital sufficiency.

Why China raise interest rate? And, what's the effect?

Yesterday, China surprisingly raised its interest rate by 0.25% as follows:

- 1 year lending rate from 5.31% to 5.56%

- 1 year deposit rate from 2.25% to 2.50%

Why China raise interest rate?

1. To cool down the over-heating property sector.

2. Combat inflation

3. Low liquidity in the banking system

While inflation was hovering around 3.5% currently, even though the deposit rate has been raised, the net real interest rate is still in negative territory (3.5% - 2.5% = -1.0%). This is one of the main reason why Chinese were going all out to invests, especially in real-estate, due to its low yield if sitting in the bank (even lower than Malaysia).

However, China would be facing another problem...

Raising interest rate would attract capital inflows, which could dampen the purpose of containing inflation. Foreign investors view Chinese renmimbi as undervalue, mainly due to interventions by Chinese government. The latest news could ignite a fresh round of thoughts, worsening the current situation, pushing renmimbi higher and faster.

In fact, China should target it's main problem specifically - real estate. Inflation there is mainly caused by high flying properties prices. Hence, measure such as property gain tax should be introduced first, before raising interest rate, to avoid further attracting inflow of hot-money.

Affecting Malaysia?

Given that China is one of the largest trade partner with us, Malaysia could see a surge in capital inflow also. In fact, the whole region will experience the same fate of stronger currency, making our export to western countries more expensive. Anyway, I believe that we can offset the negative effect with China being the largest commodities / resources consumer, which supplied by Asian countries.

New Fund: HwangDBS Aiiman A20 China Access

Another Syariah Compliant product, yet, A20 is first in Malaysia which have China access investment opportunity. The fund represents a superior China access product, which provides investors direct exposure to highly lucrative China A-Share Market and potential currency appreciation of Renmimbi.

Reason to invest in A20:

1. First Shariah-complian direct A-share offering in Malaysia and globally.

2. Direct, Simple and Optimal. Potential appreciation of Renmimbi.

3. Robust market dynamics & Valuations still supportive of future growth.

What is the Strategy?
The fund will invest into the 20 largest Shariah-compliant China A-share companies, in terms of their market capitalisation, listed in Shanghai or Shenzhen Stock Exchanges.

Below is some of the informations:
- Fund Category   : Structured (wholesale fund)
- Min investment   : USD 10,000
- Sales Charge      : 3.00 %
- Redemption Fee : 2.00 %

Source: HwangDBS investment management

New Fund: OSK-UOB China-India Dynamic Growth Fund

OSK-UOB Unit Trust Management Bhd is launching a new fund on 11th March 2010. The fund will capitalise on the potential growth of world's two largest emerging countries. With a spectacular GDP growth of 8-10% per annum, China and India poised to lead the world's economy out of recession. China and India now ranked as world's 2nd and 4th largest economy respectively, and will outpace Japan in the next few years.
Among the key selling points of the fund are:

1. Rapid urbanisation
2. Great domestic consumption demand
3. Sustainability of strong GDP growth

This is a high risk, high return fund, with portfolio allocation of 60%-40% between the two countries.
UOB asset management will manage the China portfolio, while, UTI International (Singapore) is the sub-manager for India portfolio of the fund.