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The RHB guide to a good night’s rest

There is a premium on peace of mind these days, as 2018 continues to cause investors sleepless nights. The stock market started the year strongly enough, as positive momentum carried on from 2017 meant the S&P 500 registered one of its best performances for January since 1997, with nearly a 6% gain. Shortly after that, however, volatility returned with a vengeance and the global sell-off dragged performances down, with the MSCI World Index retracting 8% from its peak at the 2,248 level.

According to Ryan Tong Yee Chow, RHB’s head of wealth insight on the Wealth Management team, the reasons for the global sell-off are varied. “First was the stronger-than-expected US wages data, which sparked concerns that the Federal Reserve would accelerate the pace of its tightening. Following that, the Cambridge Analytica issue dragged technology stocks down and, most recently, there is the prospect of a looming trade war brought on by escalating tensions between the US and China.”

With the ongoing trade war rhetoric and posturing having chilling effect on global markets, Tong says the fears are not without reason. Although US President Donald Trump has made it a key priority of his administration to narrow the US-China trade deficit, Tong is concerned an escalation in the trade war would be more damaging than beneficial to the world.

If concerns of a trade war aren’t bad enough, the prospect of an actual war is keeping investors on edge, with a potential flashpoint in the form of ongoing tensions between North Korea and the US. That said, both sides have made recent attempts at de-escalation ahead of a possible groundbreaking summit in late May or early June.

On the Brexit front, negotiations continue on issues surrounding the UK’s Brexit bill, the status of Northern Ireland’s border as well as Irish citizenship. Other issues pertaining to trade and security in that region look to be in a deadlock, although one silver lining is that the transition period has been extended to March 30, 2019, with possibilities of extension if both parties agree. For the moment, political risk in Europe and the UK is less of a concern, as major European elections have taken place in the last two years.

Stock market sniffles

So, what does all this mean for the global investment scene? Unsurprisingly, volatility across multiple asset classes is rising this year, after enjoying historic lows just a few short months ago in 2017. The Chicago Board Options Exchange SPX Volatility Index, a popular measure of the stock market’s expectation of volatility, is lingering around 15 to 25, much higher than the level of below 10 few months ago.

RHB Wealth Management is still “underweight” on bonds, owing to rising yields globally keeping the upside limited. The 10-year US Treasury yield recently rose above 3% for the first time since January 2014, amid excess supply, with the Fed looking to boost interest rates. The prospect of new US government debt weighed down the Treas-uries market, with yields climbing as high as 3.0014% in late April.

As inflation continues to creep up, Tong cites commodities as the most preferred asset class right now. “Given that commodities tend to be an inflation-friendly asset class, the current rising interest rate environment could present opportunities to discerning investors. Combined with a weak US dollar, which is likely to remain low for some time, commodities should continue to remain positive. The asset class is still ‘underweighted’ by many investors, but this could turn soon.”

All told, however, Tong remains positive on global equity markets and, in fact, is more bullish after the correction. “After nearly 10 years of the equity bull run, volatility has returned this year. It is not easy, but with the right investment strategy, it does not have to be overly difficult either.

“We would suggest that investors not avoid equity but, rather, consider increasing some of their exposure as the current correction might have presented some buying opportunities. Taking the S&P 500 Index as a proxy, the equity market tends to register a double-digit loss during a correction, followed by a double-digit gain later.”

In the meantime, investors should consider diversifying across strategies rather than products, especially during periods of increased volatility.

Cool heads prevail

So how exactly does one sleep well in the current investment climate? It is more important than ever for investors to be mindful of falling into certain common behavioural traps. According to Tong, investors should remain objective about their investments and, above all, seek diversification. “One of the most common mistakes is that investors only pay attention to the information that supports their previous decision while ignoring everything else. As a result, investors run the risk of failing to cut their losses once the tide has turned.”

Another surprisingly common mistake is investors believing that historical returns are an accurate predictor of future market performance. Taking 2017, for example, many market participants expected the momentum to persist well into 2018, but that has clearly not been the case.

Attempting to time the market is another common trap that could potentially harm investors. “As a result of [timing the market], investors tend to blindly chase returns when the market is doing well and fail to diversify their portfolios,” he adds.

To this end, there are investment products that offer an upside oportunity while the principal is protected upon maturity. These can be a good fit given the current volatility. The investment enables one to reap the potential market returns, albeit with a locked-in period over a number of years, while keeping the downside protected in a way.

Basics is best

Tong says that, ultimately, investors must keep an eye out for both economic data and corporate earnings growth. “We reckon the impact of trade war (even if it does happen) shall be minimal. The whole world, including the US and China, understands that there is no clear winner. Trump’s tactic is always to be hard up front, with the aim of striking a more reasonable agreement later on.”

However, with the return of volatility comes the increased probability of falling into tail risk. Tong explains: “Tail risk, which is the worst of an asset’s returns, can be a major negative shock to investors, especially after such an extended equity rally.

“There are a number of ways to reduce the damage of tail risk. One could consider allocating some funds — typically not more than 10% — to a tail risk hedge. Investors could also look into safe-haven assets like precious metals, which tend to be negatively correlated with equity markets. Alternatively, there are funds that use advanced derivatives to mitigate tail risk for investors’ consideration.

“For equities, we would suggest considering large-cap stocks over the small and mid-caps due to their relative stability during periods of volatility.”

In the wake of the tech wobble in late March, Tong acknowledges that major American internet giants might be unable to avoid increased regulation on the back of mounting pressure to reform their data collection and privacy practices. However, he does not expect this to deter the long-term outlook of the industry. “User confidence will be restored, and there are few threats to the existing giants like Alphabet, Amazon and Facebook. The current discount we see could be a buying opportunity in the near term, although volatility will persist,” he adds.

Stay ahead with RHB

In the current climate of increased volatility, it can be a daunting task for investors to cut through the noise, let alone beat the market enroute to achieving one’s financial objectives. With thousands of unit trust funds in Malaysia, and potentially more than 2,000 types of investment products in the ecosystem, finding alpha can be tougher than locating the proverbial needle in the haystack.

“We adopt a portfolio advisory approach that focuses on providing total solutions rather than product pushing. We help our clients first evaluate their own risk appetite through a risk profiling exercise, after which the client could explore building an investment portfolio through suitable products with our relationship managers,” says Tong.

Investors typically seek the highest available returns at the lowest possible risk, but with multiplevarieties of risk to contend with right now, it can be difficult to avoid altogether. “Unsystematic risks are the kinds that are unique to a particular company or industry, such as the Cambridge Analytica issue that weighed down the tech sector. This can be mitigated with proper diversification within one’s portfolio, Tong explains.

With the RHB Wealth Management team’s portfolio advisory approach, investors are empowered to pursue returns while keeping unsystematic risk at minimal levels, attributed to a well-balanced and adaptive asset allocation strategy.

The more adventurous clients can even personally customise their portfolios, with the help of the RHB Wealth Management team. “Our asset allocation mechanics offer guidance to investors on what they should be looking for amid the environment of rising rates, rising volatility, and rising correlation between equity and bonds. We propose an adaptive allocation methodology with the ability to respond to changing market conditions,” he adds.

“Regardless of one’s goals, invest in RHB’s wide range of award- winning funds that suit your risk appetite.”