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Saturday, January 19, 2019

People the biggestfactor in stock picking

Saturday, 19 Jan 2019
by tee lin say and intan farhana zainul

Gan Eng Peng, Director of Equity Strategies & Advisory, Affin Hwang Asset Management

Markets for 2019 seen as less onerous than those in 2018

AFFIN Hwang Asset Management Bhd director of equities strategy and advisory Gan Eng Peng is known for his high conviction, bottoms-up approach to stock picking that emphasises strong business models with quality management combined with the need for yearly income generation.

This reputation has given him a strong industry following particularly over the last few years.

Gan presently oversees some 12 funds with assets under management worth RM4bil. This includes Affin Hwang’s 5-star Select Quantum Fund (a small-cap Asian Equity strategy) as well as the company’s first flagship fund, the Select Opportunity Fund.

“As a value investor, I have a value bias and prefer to buy things that are less discovered. The satisfaction comes from buying something early and others joining in the fray and to see the price of the stock go up,” says Gan.

Gan believes that in the business of stock picking, people are the most important factor.

“My first primary factor is the people behind the company. We have this basic belief that their capabilities, motivations and intentions are the things that drive the business and share price over time,” he says.

Once the character of management has been vetted, then work goes into studying the company’s business model.

“If it’s fairly valued (which is usually the case as markets are efficient pricing tools), but the business is alright, and the people are alright, we will still go in because the people will generate the growth for us.

“So it is very important we see what the people have done historically. We need good governance and good capability to drive the company forward,” says Gan.

When asked about some of the winners that Affin Hwang has identified in the past, Gan says that Affin Hwang was a big and successful investor in Allianz Malaysia Bhd from 10 years ago. It held the stock from when it was a small cap to when it became a large cap. It is still holding the stock, and the stock continues to perform.

Another example is MyNews Bhd, where Affin Hwang was an initial public offering investor, owning 6% to7%.

It also used to own 5% of Dialog five years ago before its tank farm business in Pengerang really took off. It also first bought into Aeon Credit five to six years ago.

Looking at the market in 2019, Gan says conditions are less onerous than it was in 2018.

“The trade war escalation has stopped since the end of last year and has in fact started improving. In terms of market action, the market is improving because of the trade war de-escalation, and it has factored in most of the impact of the trade war, but not all.”

Gan says they have been cautious over the past, but at the same time, cannot be cashed up forever. Affin Hwang is 70% to 80% invested most times.

“We are not completely bullish but we are trading this rally with a view that we can get out of those positions if things take a turn for the worse. We are saying, let’s do it first, and see what happens. If things keep improving, then we keep going in. So we need to be in, and hopefully in the early stage like now, and see what happens with time.”

For Malaysia, Gan feels it still is in reform mode – meaning uncertainty and volatility are still going to be key features of our market.

So far, the changes made by the new government – the changing of heads, the cancellation of projects, while good for the long term, have in fact disrupted the economy in the short term. So if investors are of the opinion that there is no recession on the horizon, then the market offers good values now.

On this note, Gan says the economy is not going into recession, but is slowing down.

“When recession happens, most people will not know it is happening. Out of the 40 recessions that have happened over the last 10 years, economist have only predicted two recessions correctly. So it’s very hard to predict these things and that is why we don’t invest so much time in predicting the future. What is more important is to correctly position at this point in time and incrementally change when the environment changes,” he says.

SBW: What is your market outlook for 2019 and how would you position yourself/your fund. What is the strategy going forward?

Gan: We think this is a tradeable rally. A lot of the key negative drivers ailing the market in 2018 is fading. Rate expectations are being lowered, which is driving down US dollar strength and stocks’ fair values.

We seem to be moving towards a trade resolution between the United States and China. China is putting through broad-based stimulus to halt its slowing economy – credit creation is a primary positive driver of markets.

Our strategy is to put more money to work after being highly cashed up through most of 2018.

Is the trade war something to be concerned about? Is that an old story? Has the market fully priced it in?

Predicting the direction of the trade war and its impact on the market has been making fools out of forecasters. Be that as it may, based on the current dynamics, it would seem we are off the boil and heading towards some form of resolution.

Recent history, the unpredictable nature of politics and fundamentally different ideologies of the United States and China suggest conditions are still fragile. As such markets are still a lot lower than the beginning of the trade war. Markets need further evidence of trade peace to push higher.

Do you feel that the huge market fall over the last three months now presents an opportunity to buy, especially with valuations previously being quite high?

I think we are good for a one-three month bounce. This is enough to put more money to work in the market. Where it goes beyond that is anyone’s guess. We know no one knows the answer also. There are two potential scenarios. Firstly, global economic growth slows but stabilises, trade war rhetoric fades away and generally market moves away from macro issues.

In such a case, stocks will be more reasonably driven as opposed to last year’s mass selloff.

In the second scenario, global macro condition worsens, recession risk gets priced into the market. Then we are looking at the current rally as a dangerous bounce that sucks more money into the market before collapsing.

Most investors coming into the market now are approaching it with a short lived rally, trading mentality. It would take time and better data to establish if this bounce is sustainable.

What are some of the catalysts that you foresee for our FBM KLCI? Do you feel most of the kitchen sinking has been done with, and it will soon be time to focus on how to grow the economy?

It would appear we are still firmly in reform mode. Malaysia is still looking for justice for historic misfeasance. Market participants has felt it’s overdue for some focus on growing the economic pie, along with the social restructuring we are seeing now.

As of now, we do not see much evidence growth driven economic policy, hence the only catalyst we find is that some stocks have overshot on the downside.

The Malaysian economy now is on better footing. Do you see earnings doing better this year following the poor earnings last year?

Markets follow earnings and we had a dismal year for earnings in 2018. For 2019, growth expectations are low at 6%-8% with the bulk of it driven by the banking sector. Even then, the banking sector is looking at single-digit growth, which is hardly exciting and it’s an overcrowded consensus call, maybe because there is a lack of better choices.

What are some of your other concerns or risks that you foresee for the market?

Besides global risk which are well documented, we think the following are of concern:

> Losing our defensive nature

Malaysian market has traditionally been a low beta market within Asia. It’s a place for foreign funds to hide when times are bad as it usually falls the least.

The year 2018 has not seen a defensive market. We fell heavily with most Asean markets, especially towards the second half of 2018. We also notice increased volatility among once low beta stocks. This could be due to increased shorting activity, fund and fund house restructuring.

Whatever the case, higher volatility leads to lower valuation overtime.

> Consensus positioning

Because of the lack of growth going into 2019, most funds are cashed up and positioned into expensive defensive names and there is an almost desperate search for yield names as that provides some semblance of single digit return.

The risk of overcrowded positioning is that we have seen how some of these expensive names broke down with minor change in fundamentals. The flip side is that if there is incremental positive news on the economic front or among the least loved sectors, there will be a wall of money chasing it up.

Which part of the cycle are we in? A matured bull market or do you feel, the end is near and the big fall is coming?

Or do you feel the volatility in 2018 was indeed the “bear” everyone was anticipating?

Challenging and volatility were some of the common catchphrases to describe the market in 2018. In layman’s terms, stock prices went down sharply and quickly. This is indeed a matured bull market and we have been cautiously waiting for the big fall for the last couple of years and at the same conflicting time, trying to capture whatever upside there could be from a last push.

What are some of the indicators you look at, to guide you to an impending bear market?

This is slightly circular but we are guided by the markets – when there is a wholesale breakdown of values across multiple asset classes – that is typically a good warning sign.

How are your clients feeling? Are they anticipating a drop, or is there growing confidence among them?

We have been very transparent with our clients. Highlighting the unknowns and keeping up a constant dialogue through the bad times. I think our clients understand the conditions that markets are facing and expects us to help them navigate through this period.

How do you advice your clients when they ask you what sort of assets/stocks they should hold on to, to protect against sharp drops in the market.

We think the practical advice for clients is to maintain their asset class exposure like equity and bond funds that is commensurate with their risk profile, while within these funds we do the tweaking to suit the differing market conditions.

For example, given the “challenging and volatile” market conditions, our equity weights are low to protect capital. But we can quickly swing to risk-on mode if conditions change.

We find this is more reliable than asking clients to go in and out of funds as the error rate on market call can be very high and there is usually a very big time lag and hence opportunity cost before they execute on our advice.

What about the US dollar? How do you see it performing this year? With that, how would you strategise based on this view?

For emerging markets to perform, we need a weaker US dollar as the majority of foreign portfolios are based on US dollar. A strong US dollar makes their underlying foreign assets diminish in value, which compels them to sell, which was what happened in 2018.

We are starting the year on the right note as the US Federal Reserve dials down their rate increase expectations, which is softening the US dollar. This is constructive for emerging market assets and currencies vis-a-vis the dollar.


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