AS equity markets around the world continue to get beaten down, an interesting prospect faces the Malaysian investor.
With global benchmarks such as the Dow Jones Industrial Average (DJIA) and S&P 500 Indexes trading at forward price-to-earnings (PE) multiples which have come off their record highs, it begs the question of whether Malaysian investors ought to be looking at putting more of their money into overseas markets.
Aside from seemingly toppish valuations of the Malaysian stock market, there is also this disturbing statistic – the Malaysian market has been on a losing streak in the last few years.
In fact, some Malaysians have for some time now, already “given up” on local equities, choosing to focus on investing in overseas stocks.
Take John Lee, a former equity analyst who has been investing his personal and family wealth into the US markets, buying only their blue chips.
“We have lost interest in Malaysian stocks for some time now, choosing to put our money into blue chips in the US market. Of course, the current downtrend needs to be managed, but overall we are doing okay, returns wise,” he quips.
Similarly, ex-investment banker turned private investor Ian Yoong Kah Yin says he has been investing in Hong Kong and Singapore stocks for about 10 years.
“It is better to have a portfolio of diversified stocks and securities – diversified by sector, currency and geography,” he says.
“There are tremendous opportunities in the United States, Hong Kong and Singapore markets, especially in the technology manufacturing sector.”
However, Yoong cautions that a lot of information on overseas stocks remains inaccessible to retail investors.
“They will have to undertake primary research which may not be within the capability of many retail investors. This is especially relevant in the case of the foreign small and mid-cap stocks.
“This is why an alternative would be to invest in exchange-traded funds (ETFs). You have a wide variety of ETFs in the US markets and even in Singapore,” Yoong adds.
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There are a number of valid reasons why investing abroad is a growing trend among Malaysians.
One is the issue of valuations.
That said, if one goes by the PE ratio – which is often used to value a company based on its current share price relative to its earnings – the local equity bourse seems more attractive now at 14.8 times when compared with the DJIA, which is trading at 16.5 times.
However, closer to home, the Singapore Straits Times Index, which is trading at a PE of 13.8 times, is cheaper than the local FBM KLCI.
Take for example, some semiconductor and tech stocks in Malaysia which are trading at more than 50 times PE. Compare this to the Singapore market for instance, where generally, stocks in the same sector trade at around 10 times PE.
In fact, DBS Research has pointed out that Singapore has the “cheapest” tech plays compared with Malaysian and Thailand stocks under its coverage.
Generally, a lower PE indicates that a stock or bourse is cheaper.
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Fortress Capital Asset Management CEO Thomas Yong says after the recent correction in US equity markets, the valuations of most US shares have actually become comparatively more attractive than local shares, given the appealing business fundamentals of dominant large global names there.
“Having said that, recent weakness in the US markets due to expectations of higher inflation and the Federal Reserve’s (Fed) response of accelerating monetary tightening measures may take some time to settle down.
“In addition, inflationary pressure will take months to ease considering the ongoing geopolitical developments such as the Russia-Ukraine tensions and the United States-China trade war,” Yong tells StarBizWeek.
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Value Partners Asset Management Malaysia managing director Durraini Baharuddin says historically, Malaysian equities have been trading at a premium versus other markets, largely due to the high concentration of institutional investors in the local market.
“This in some way provides assurance to investors that the stocks listed are safe, well managed and qualify as investable stocks based on the stringent screening criteria set by institutional investors,” she tells StarBizWeek.
The justification of valuations depends on how Malaysian equity is included in a portfolio, she adds.
“If it is meant to track a designated benchmark, then the valuation is of limited concern. However if it’s to source alpha, then other considerations need to be taken into account including the health of the companies, liquidity, earnings growth and macro outlook,” says Durraini.
Yong says similar to many South-East Asian markets, the Malaysian market looks “fair” at current valuation.
“The Malaysian equity market has historically traded higher than its current valuation due to its defensive characteristics that is dominated by a strong domestic institutional presence.
“From a macroeconomics perspective, Malaysia achieved a strong 5% year-on-year gross domestic product (GDP) growth in the first quarter of this year that exceeded many economists’ estimates and is likely to perform even better in the second quarter, as the country has opened up its borders and eased all business and social Covid-19 disruptions.
“We are expecting to see more earnings upgrades within the Malaysian market which should be the key price driver in the near term,” Yong adds.
Comparing Bursa Malaysia to the Singapore equity market, he says the latter has always been regarded as a stable and matured market where growth stock opportunities may be somewhat limited.
Additionally, the Singapore semiconductor sector has always traded at a discount to its Malaysian peers, even when many of these businesses have factories operating in Malaysia.
“In fact, these semiconductor businesses operate mostly out of South-East Asian countries but are frequently listed at discounted valuations in Singapore,” Yong adds.
Apart from semiconductor and tech, Yong says that in the current market environment, there is an investment angle where Singapore real estate investment trusts (REITs) are concerned.
“Despite an environment of rising interest rates that make dividend yields from stocks like REITs less appealing, the recovery or reopening play provides an investment case for certain REITs.
“The idea is that once the underlying businesses stabilise and have improved, the asset owners (REITs) can demand rental reversions and hence eventually achieve higher dividend pay-outs for investors.”
Besides valuation-related reasons, there is also the growing ease of being able to dabble in overseas stocks.
Malaysian retail investors can now trade and invest in overseas markets fairly easily with brokerages like Rakuten Trade Sdn Bhd and MIDF Amanah Investment Bank Bhd having developed user-friendly apps and systems in recent times.
Rakuten Trade CEO Kazumasa Mise says while there has been a lot of interest in foreign trading over the years, up until recently, Malaysian retail investors had to go through complicated channels to invest with foreign digital brokers and buy foreign shares.
“With the recent shift towards offering foreign trading with local brokers, it has become much more accessible for Malaysian retail investors,” he tells StarBizWeek.
“Our newly-launched US trading service contributed close to 20% of total brokerage income in the month of April and we anticipate that retail interest in the foreign markets will likely continue to grow with the increasing awareness of the need to diversify one’s investments,” Mise adds.
According to him, trading foreign shares using Rakuten Trade’s system is “an easy process”, which requires two to three days to activate.
“We launched foreign trading services for our Cash Upfront product earlier this year, which is accessible through the iSPEED.my app. With just one account, you can trade both US and Malaysian shares under one account.
“At Rakuten Trade, to trade foreign shares, you can deposit ringgit into your cash upfront account as usual. The currency exchange is done automatically when you buy and sell.
“For more advanced trading options, we are also looking to offer foreign currency wallets soon.”
In terms of brokerage fees, he says the brokerage is offering the same rates for both Bursa Malaysia and US markets, starting from RM7 and capping it at RM100.
“One point to note is that on our platform, real-time share price feeds are available for free while others may impose a service fee.”
Mise says based on data, the brokerage is seeing more traders that are familiar with the local market expand into foreign trading, which is also why it is providing education and trading ideas geared at various levels of foreign trading.
“Based on collected data, the most popular US shares are Grab, Vanguard and Apple.”
Another reason for investing abroad is the chance to have a currency hedge.
This is especially given how much the ringgit has weakened against global currencies such as the greenback and the Singapore dollar, which just recently hit a record high against the ringgit at 3.17.
In the same vein, Value Partners’ Durraini argues that the purpose of looking at valuations is to identify securities that have been mispriced and capture the upside.
“If an investor takes this approach, he or she should be looking at it from a medium to long-term basis. Other factors to account for include foreign exchange (forex) risks – in this time of rising rates and fluctuations in forex, even strong gains can be offset by forex losses.”
Casting the net far
Like many, Fortress’ Yong says that by widening investment choices, for example by investing overseas, the risk-reward profile of investment portfolios can be improved.
What’s more, there are now numerous stock brokers, asset management companies and mutual funds offering routes for Malaysians to invest into overseas markets, he adds.
Says Durraini: “Investing overseas has been seen as a key way to diversify investments for investors – and the recent pandemic and its impact on the markets is testament to its importance.”
She says diversifying sources of alpha and income is a key way to preserve and grow wealth.
“In the past 20 years, we have seen the proliferation of unit trusts products that gives (local investors) access to overseas investments – while this option is workable, it is also costly (because of sales charges and higher management fees) and may have an impact on total returns in the medium to long term.
“Another option to consider and which is used widely in developed markets like the United States, South Korea, Japan and Taiwan is ETFs listed on Bursa Malaysia, which are essentially funds that are listed and passively tracks designated indexes.”
According to her, this instrument is transparent and cost competitive as it does not incur any sales charge and has a lower fee than active funds.
“As it is listed – investors can also check its value on a daily basis to better understand their own investment portfolios, compared to unit trusts products that are unlisted.”
Rakuten Trade’s Mise says the brokerage “always encourages having a healthy mix of local and foreign shares to diversify your portfolio and minimise risks.”
“There are different opportunities for growth in different markets and if an investor only invests in one, they are missing out on opportunities for more consistent gains,” Mise adds.
“You might even see your portfolio performing better than expected even if one market does not perform as expected, or more consistently, when one market performs well and the other doesn’t.
“Foreign stocks present different opportunities for investors than what may be available in their local market. Many well-known shares are listed overseas, and investors can stand to benefit as a result of global trends or what’s in the news.”
MIDF Research says having foreign holdings, which “plausibly” have a lower correlation coefficient in relation to Malaysian equities, will enhance the risk-adjusted returns of an overall portfolio.
“In essence, the lower the correlation coefficient of various assets in a portfolio, the better the diversification effect.
“The secular outlook of the world’s equity markets (including the United States, Europe and Asia) is wholly dependent on the underlying corporate earnings performance which in turn is underpinned by macro trajectory.
“In this regard, we believe the prevailing economic ordeals will find its trough in due course. In summary, buy on weakness and stay long for the long term,” MIDF analysts tell StarBizWeek.
Fortress’ Yong says that over the medium-term, investor sentiment in the US market will be dominated by inflationary concerns and the Fed’s hawkish stance towards monetary policy tightening.
“However, the longer-term outlook of the many global leading names listed in the US markets remain fundamentally sound.”
Meanwhile, in the rush to invest in alternative investments, some Malaysians have, or are considering, putting their money in things like cryptocurrencies or forex platforms.
To this, Value Partners’ Durraini says information in this space is limited and can be dependent on unverified sources and “comments from the Internet.”
“One has to exercise caution investing in these instruments. Opt for alternative instruments that are approved by the regulators utilising a safer structure for a more sustainable portfolio of investments,” she adds.
Yong says these “exotic” investments might create excitement and sometimes offer short-term surges in returns.
“Our advice to investors is to not place a large portion of their investment funds into these investments, as many of these are highly speculative and volatile in nature,” he says.