UOB Malaysia expects US Financial, Asia-China markets and global healthcare to provide investment opportunities amid uncertainties in 2023. The tumultuous spell of 2022 is expected to spill over throughout the year on an initial uncertain note as investors weigh on potential recessionary risks, inflation trends, and the monetary policy path of global central banks. With geopolitical tensions reassessed, China continuing its re-opening path post-COVID, and global central bank tightening slows, the storm clouds may start to break, resulting in a potential short but shallow recession in 2023.
While many variables are still at play, a greater sense of clarity may start to emerge as we approach the second half of the year. With volatility expected ahead, steering investment portfolios through market volatilities may prove to be a challenge. Mr Ronnie Lim, Managing Director and Country Head of Personal Financial Services, UOB Malaysia explains what investors can do in making sense out of these noises and where there might still be opportunities to build strong portfolios.
Q: What can investors expect from global markets in 2023?
Mr Lim: Earlier expectations of moderating growth have now morphed into a more uncertain global outlook. In the wake of the 2008 Global Financial Crisis, central banks played the crucial role of financial market stabilisers, with loose financial conditions laying the groundwork for an unusually long equity bull market. That is no longer the case now, with global central banks currently prioritising the fight against inflation, even with the risk of aggressive rate hikes triggering a recession.
Given the backdrop of high inflation and aggressive monetary policy tightening, we see heightened risks of developed economies such as the United States (US) and Europe including the United Kingdom, potentially slipping into recession in 2023 as financial conditions tighten while consumer and business confidence declines. On a brighter note, we think any recession will be short and shallow, assuming the labour market does not weaken drastically and central bank tightening tapers off. A quicker than expected COVID re-opening in China will also be a positive factor, helping to offset some of the downside risks for the coming year and benefiting the global outlook. Nonetheless, we believe that emerging market economies, particularly ASEAN, should outperform, as financial conditions there are expected to remain more benign.
Q: What is your outlook for Malaysia in the year ahead?
Mr Lim: In Malaysia, external demand is expected to moderate in tandem with the softer global growth. Thus, domestic demand will remain the prime driver of Malaysia’s economy as household spending is underpinned by improving labour market conditions and prospects of higher tourism activity. Investments will be supported by the realisation of infrastructure projects and improved domestic conditions to attract foreign direct investments.
Further efforts to expand digitalisation, sustainability, and decarbonisation activities will drive new growth areas. Despite heightened volatility in global financial markets and the local currency, these developments have not derailed Malaysia’s economy as domestic liquidity and functioning of domestic markets remained stable. Such compelling factors supported by robust fundamentals will further support Malaysia’s economy to defend against the uncertainties ahead in 2023. Potential downside risks to Malaysia’s growth outlook could stem from a weaker-than-expected global growth, higher risk aversion in global financial markets, further escalation of geopolitical tensions, volatile commodity prices, worsening supply chain disruptions, and climate-related risks.
Overall, there are grounds for optimism as Malaysia’s diversified economic structure provides underlying strength and resilience. Ongoing policy support with the re-tabling of Budget 2023 anticipated in the early part of this year, as well as an accommodative monetary policy, will serve to support sustainable economic growth.
Q: What do you foresee being key risks for investors in 2023?
Mr Lim: Key risks that investors should be aware of, among others, include the impact of escalated geopolitical tensions between Russia-Ukraine and US-Sino that fuels another surge in food and energy inflation across the world. A further surge in core global inflation can necessitate even higher interest rates to cool demand. Other risk factors include financial stability risks stemming from tightening financial conditions.
With control of the US Congress now divided, there could also be a paralysis of domestic policies, while we also need to be mindful of a potential US debt ceiling crisis around the middle of the year. Another potential risk will be complications in China’s COVID re-opening, as this could trigger a deeper downturn in global demand and worsen supply chain disruptions.
Q: In light of the risks ahead, how should retail investors position their investment portfolios in 2023?
Mr Lim: Our recommendation is to always focus on the long-term, looking at how global indices performed during recessions. We encourage investors to consider their risk tolerance versus expected returns and to stay invested amid market volatility because it tends to pay off over the long term. Our risk-first approach is built on the foundation of investing based on one’s risk appetite before considering returns. Instead of chasing market rallies, investors are encouraged to stay defensive and build core investments to position for slower economic growth and continued volatility in stock markets entering a recession. Core investments include defensive assets such as investment grade bonds and lower-volatility solutions such as multi-asset strategies.
Q: Given the challenges ahead, are there still opportunities for investors?
Mr Lim: We have identified investment opportunities through a rigorous process of research and deliberation using our value, trend, activity and risk (VTAR) framework. This framework provides a holistic view of financial markets and identifies investment opportunities across asset classes, sectors, geographical regions and time periods. Among the top ideas that we have identified are:
1. US Financials
We retain US Financials as one of our top ideas as it remains relatively attractive compared to the broader Standard & Poor 500 Index. This boils down to higher interest rates boosting net interest margins, while bank earnings remain healthy overall. The sector will continue to benefit from a high interest rate environment even if loan growth slows. Risks include recessionary concerns and rising competition from alternative payment platforms putting pressure on traditional banking revenues.
2. Asia-China market
The Asian stocks could pick up momentum as economic reopening continues to play out and as economies such as China adopt supportive policies to boost economic growth. The recent easing of pandemic policies and fresh stimulus for the property sector were also welcomed by investors. While Asian markets are not immune to recession risk in developed markets, they have become less reliant on export demand from these markets.
The growing Asian middle class is driving global consumer trends and spending, creating prospects for domestic and foreign companies to capitalise on. Furthermore, structural drivers such as urbanisation and digitalisation remain key drivers for sustainable domestic consumption. This ensures that Asia’s growth will become less dependent on developed market economic growth.
3. Global healthcare
We continue to see opportunities within the global healthcare sector as this industry has both a defensive and long-term growth profile, with inelastic demand and compelling long-term structural drivers. Pharmaceutical revenue is less affected by the economic cycle than that of other sectors, making it one of the most defensive industries. In a slow growth environment, we expect pharmaceutical stocks to hold up better compared to other sectors.
On top of its defensive characteristic, the global healthcare sector also benefits from structural tailwinds such as an ageing global population, which gives rise to the need for healthcare services. The pandemic has also accelerated digital transformation within the healthcare industry. We see long-term structural growth in themes such as health tech, which enables remote healthcare services at reduced costs.
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This article is written by UOB Malaysia.