The world has taken a battering from black swan events, namely COVID-19. Experts share their insights on Malaysia and Thailand as they put their strategies to the test in unprecedented times.
GERALD AMBROSE, COUNTRY HEAD – ABERDEEN STANDARD INVESTMENTS MALAYSIA, ABERDEEN STANDARD INVESTMENTS
Where are you seeing exciting investment opportunities in Malaysia, and how are you positioning your portfolios?
Even before the US-China trade dispute, multinational companies and even Chinese electronics manufacturers found costs in China higher than in southeast Asia. As a consequence, many have looked to locate more manufacturing facilities in the ASEAN bloc. Vietnam appears to be the cheapest and most amenable market by certain measures.
But when it comes to experience, history, infrastructure and a qualified workforce – the ecosystem of electronics manufacturing – Malaysia has served as an attractive destination.
As a result, we have taken an overweight position in electronics and electrical manufacturing. The recent market turmoil has enabled us to build positions in stocks in which we are most confident at what we see as good valuations.
It is also worth bearing in mind that since the Asian financial crisis in 1998, the Malaysian economy had become reliant on government consumption and investment (essentially, pump-priming). But given recent fiscal constraints, Malaysia has had to embark on a different route and is encouraging private investment and private consumption. The story of domestic demand and the emerging middle class is not over yet.
Malaysia had been seeing a renaissance in some of its upstream and downstream oil and gas businesses as companies started to reinvest in getting oil out of the ground (or sea) – at least until Russia and Saudi Arabia became embroiled in their dispute on oil supply. If they can settle their dispute, there are a number of small and medium-sized oil and gas players in Malaysia with competitive advantages over regional peers.
What are your top investment/asset allocation concerns for Malaysia?
The general election in May 2018 heralded a period of underperformance for government-linked companies (GLCs) as investors were unsure how the new political coalition, Pakatan Harapan, would treat them. But just as we were getting used to newly appointed GLC senior management, the coalition’s recent collapse and the launch of a new coalition between UMNO, PAS, the Malaysian Chinese Association (MCA) and others has thrown the outlook of GLCs into renewed uncertainty. It might be another case of musical chairs.
Are you taking steps to step up defensiveness in your portfolio (i.e. high-quality stocks)?
In instances where stocks in which we have high conviction fall to price levels where we see significant upside, we have the cash to take advantage. What our high-conviction stocks have in common is strong balance sheets, cash flows and competitive advantages.
Which asset classes and sectors are you keeping an eye on in Malaysia and why?
Although Aberdeen Standard Investments (Malaysia) does have team members who specialise in sectors, we have no preference for one sector over another. Our anchor stocks span a number of sectors. Their common features include strong and transparent management, good governance and commitment to run a sustainable business. These attributes – alongside strong balance sheets and free cash flows – allow us to invest for the long term. What has changed of late is that many of these companies are now offering competing value.
According to research by the Institute for Capital Market Research Malaysia, changing investor preferences is the most significant shift to affect the business of asset managers. How are investor preferences changing and how are you adapting?
The obvious change from clients (initially European, now global, not least in Asia and Malaysia) is the need to invest in companies with good governance that understand climate change and the importance of shareholders, stakeholders and staff. Additionally, clients are placing increasing emphasis on portfolio diversification and protection against “black swan events”. It explains why Aberdeen Standard Investments opted to provide clients with a full range of strategies, which we can combine to match clients’ risk and return requirements. While most markets have been hammered this year, some of our absolute return, multi-asset and alternative products are comfortably up by investing in non-correlated strategies.
What changes would you like to see in Malaysia’s asset management industry over the next 12 months?
With the help of a number of large asset owners, Malaysia’s fund management industry is transitioning to become more aware of its obligation to the long-term wellbeing of investors, shareholders and stakeholders through ESG investment. This is a trend we would like to see continue, in association with the strong ESG elements that permeate Islamic investing. Personally, I would be very happy to see Malaysia’s inexorable shrinkage in weighting in emerging markets reverse. Of course, the market can’t be bigger than China, India or Taiwan, but it would be good to see its weighting in indices hold its own from here.
GRACE TAM, CHIEF INVESTMENT ADVISER – HONG KONG, BNP PARIBAS WEALTH MANAGEMENT
Where are you seeing exciting investment opportunities in Thailand and how are you positioning your portfolios?
We have a neutral stance on Thailand equity within Asia. Domestic demand has traditionally been a key driver for the country’s economy. We expect it to increase in tandem with global demand when there are clear signs that the coronavirus crisis is starting to taper. The COVID-19 situation also had a sizeable impact on Thailand’s tourism industry, so we expect an improvement once COVID-19 concerns quell, thanks to the pent-up demand in tourism.
What are your top investment/asset allocation concerns for Thailand?
Top concerns include COVID-19 and the strength of the Thai baht.
In terms of COVID-19, Thailand is one of the most impacted economies particularly due its focus on tourism, which contributes about 21% to Thai GDP. Additionally, Chinese holidaymakers account for more than a quarter of all foreign tourism spending in 2019. Hence, since the initial outbreak in China, growth outlook for the country has started to diminish. Apart from China, the coronavirus has also begun spreading globally, and the World Health Organization (WHO) has now termed COVID-19 a pandemic. Globally, tourism will surely be impacted even further as more countries implement travel bans or lockdowns.
A strong baht acted as headwind against both tourism and exports towards the second half of last year.
Assets in Thailand’s mutual funds industry rose by just over 6.5% in 2019 (versus 0.5% the previous year) due to the increased value of bonds and equities. What are your expectations for 2020?
Emerging market countries including Thailand saw outflows in recent weeks given the risk-off sentiment. We have had two black swan events in the year to date, namely the COVID-19 pandemic as well as the price war on oil between Saudi Arabia and Russia. Before this year, we have had the US-China trade war, which severely impacted global economies, especially export-reliant countries such as Thailand. As of now, the three main pillars of the Thai economy are getting hit pretty hard. Domestic demand started declining after global growth slowed on trade worries, and this was further amplified on recession worries due to the global outbreak of COVID-19. However, we do see a U-shaped global growth recovery in the second half of 2020, and we expect flows going back to emerging market countries as a whole later this year.
Which asset classes and sectors are you keeping an eye on in Thailand and why?
• Consumer staples and auto – mainly for the subsequent improvement in domestic demand once the coronavirus crisis globally becomes more contained.
• Tourism-related sectors – likely to benefit due to the pent-up demand on tourism, especially once global travel resumes back to normal.
Thai equities have been badly battered this year. Following such a big correction, investors can choose to invest in Thailand equity exchange-traded funds (ETFs) and mutual funds with a medium-term view that the market will see significant rebound once the dust settles.
GABRIEL WILSON-OTTO, HEAD OF STEWARDSHIP – APAC, BNP PARIBAS ASSET MANAGEMENT
We have seen Thailand reacting well to ESG – from corporates engaging with shareholders to the Government Pension Fund (GPF) aiming to use an ESG lens for all of its investments in the Thai market across equity classes including real estate, private equity and infrastructure by the first quarter of 2020. How do you see this developing over the next 12 months, and will Thailand continue to see increased foreign capital flow as a result?
For a number of years, Thailand’s Government Pension Fund (GPF) and the Stock Exchange of Thailand (SET) have been focused on enhancing sustainable business operations in listed companies and integrating ESG into investment management practices.
Two key drivers behind this development are the goals of reducing investment risk and supporting the sustainable development of capital markets. With these objectives in mind, we see the significant progress to date as building a foundation for enhancing corporate governance and broader integration of material social and environmental issues into investment decisions.
We see strong momentum in the development of ESG in Thailand. However, we have seen that globally these changes can take time, and often need to be accompanied by a shift in both corporate and investor mindset regarding the financial materiality of sustainable or ESG business practices.
Building blocks that can help enhance and expedite engagement of issuers and investors with material ESG issues include high-quality ESG data disclosure, capability building, clear guidelines and taxonomies, incentives for the development of ESG investment products, pricing of negative externalities and government asset managers and owners leading by example. With several of these building blocks in place, we expect the engagement with sustainable business practices to continue to increase in Thailand.
If sustainable investment practices and issuer integration of material ESG issues becomes widespread, we would expect an improvement in risk-adjusted returns and lower volatility.
For a number of years, Thailand’s GPF and the SET have been focused on enhancing sustainable business operations in listed companies and integrating ESG into investment management practices. A key driver behind this development is the goal of reducing investment risk and supporting the sustainable development of capital markets.
With these objectives in mind, we see the significant progress to date as building a foundation for enhancing corporate governance and broader integration of material social and environmental issues. Critically, these changes take time and need to be supported by high-quality data disclosure, capability building, clear guidelines and taxonomies.
What key steps have Thai authorities taken to set up processes in order to fund sustainable projects?
Thailand’s 2017-21 National Economic and Social Development Plan highlighted “security, prosperity, and sustainability” as key objectives. The ten development strategies highlighted include a strong focus on environmental, social and governance issues, contributing towards the [United Nations] Sustainable Development Goals, and the importance of establishing incentives to attract the participation of the private sector in meeting these objectives.
To help support the development of sustainable projects, Thailand’s SEC introduced regulations to govern the issuance of green, social and sustainable bonds. The guidelines build on standard bond issuance requirements and reference international guidelines and required disclosures, including use of proceeds, process for project evaluation and selection, management of proceeds and reporting.
The SEC has also introduced a number of initiatives to enhance and promote sustainable projects and financing, including capacity building (seminars, boot camps for issuers), engagement with institutional investors and issuers, and waiving approval and filing fees. The Thai Bond Market Association has previously waived bond registration fees for sustainable bonds.
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