The allure of foreign stocks
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…
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