Asset owners in Asia are continuing to fret about the spiralling US-led trade conflict, worried that it is accentuating the effects of dollar strength and higher US interest rates by encouraging capital to flow away from the region and other less developed markets.
Among the latest to voice concern is the chief executive of Kuala Lumpur-based Axa Affin Life Insurance, Rohit Nambiar, who currently has a preference for local bonds over local shares.
“Should trade tensions escalate further, we expect further outflows from emerging markets as investors turn to safe-haven assets,” he told AsianInvestor last week.
US President Donald Trump's growing list of tariffs on goods from countries ranging from China to Canada is fuelling fears of tit-for-tat measures by other nations, which could hurt global trade prospects and push up inflationary pressures.
The spectre of a trade war has rattled investors worldwide — and showed up in the widely-tracked monthly Bank of America Merrill Lynch fund manager survey, which showed global investor appetite for risk assets, in particular in emerging markets, dropping steeply on trade war concerns.
The survey, published on July 18, showed the largest monthly drop in emerging market equity allocations in two years – down 23 percentage points to a net 1% underweight in this asset class.
In it, a clear majority of respondents (60%) cited a trade war as the biggest tail risk.
In recent weeks, other influential regional investors have also aired their disquiet about the escalating trade conflict.
Emerging markets have swooned, as investors have pulled out money from perceived risky assets and into US dollar-denominated assets. After soaring 37% in 2017, the MSCI Emerging Markets equity index was down 6.7% for the first half of 2018.
In Asia, stock markets in India, Indonesia, the Philippines, Malaysia and Thailand have also seen net outflows of money by foreign investors since the start of this year, according to Bloomberg data.
Nevertheless, Nambiar believes the impact for Malaysia may be limited going forward following sizeable money outflows in the past few months, with foreign holdings of domestic stocks and bonds some way off their recent peaks.
Foreign investors have pulled out a net $2 billion since the start of this year; however; outflows began in early May, just before the country held its historic elections, which returned former prime minister Mahathir Mohamed to power, Bloomberg data shows.
And according to Bursa Malaysia data, foreign shareholdings in Malaysia slipped to 27.6% in June from a 2018 high of 28.5% in January.
Foreigners also accounted for 33% of the Malaysian bond market (corporate and government debt) at the end of September 2016, but that had slipped to 27.4% by the end of this March.
HIT ON TWO FRONTS
Malaysia is being hit on two fronts: “On one side you have the impact of trade tensions, and on the other there is the uncertainty about policy direction from the new government,” Nambiar said.
One of the first things the new administration did was scrap the 6% goods and sales tax (GST) imposed by the previous Najib Razak government. In its place, a 10% sales and service tax (SST) is expected to be introduced in September. Because the SST is applicable on a smaller set of goods, it is expected to create a gap in projected government revenues.
Given the overall lack of clarity, both at home and abroad, Axa Affin Life prefers both local corporate and government bonds over local company shares.
"Now, we are neutral to underweight on this asset class,” Nambiar said of Malaysian stocks.
“We still need clarity on how the loss of revenue from GST will be replaced. While international investors are still wondering about this, the domestic mood, nevertheless, is very positive and people are optimistic about what changes the new government will bring,” Nambiar said.
About 70% of the insurer’s overall investment portfolio of about $384 million at the end of December 2017 is invested in bonds, while another 20% is in equities. The balance is in money market funds.
For all that, Nambiar remains optimistic about the medium-to-long term fundamentals of Malaysia. “Good inflation numbers and growth numbers are clear positives,” he said.
According to central bank data, the country's GDP expanded at a 5.4% rate in the first quarter of 2018, slightly below the 5.9% seen in the last quarter of 2017.
Kenanga Investors, the fund management subsidiary of Malaysia-based Kenanga Investment Bank, expects consumer price inflation to remain between 2% and 3% over the rest of 2018 but decelerate going forward, especially in light of the GST cancellation and its expected replacement with the SST, it said in a July market update.
Axa Affin Life Insurance is a joint venture between France-headquartered Axa group and Malaysia's Affin Holdings.