IN the thick of the Covid-19 pandemic and global markets that are breaking down, Hong Kong-based Value Partners Group co-chairman and co-chief investment officer Datuk Seri Cheah Cheng Hye, also known as the Warren Buffett of Asia, says investors have to be both aggressive and defensive to profit and thrive.
In a nutshell, Cheah is bullish on China, where it is positioned for a “V-shaped” recovery.
He, however, feels it is too early to buy US stocks, with US and European stocks likely to deliver a “U-shaped” sort of recovery.
Back in his homeland of Malaysia, unfortunately Cheah remains cautious, and not surprisingly, the political scenario remains one of the key reasons.
Value Partners is one Asia’s most established asset managers with assets under management of US$15bil.
For its year ended Dec 31,2019, the fund recorded a 123.7% jump in its profit attributable to owners of the company to HK513.4mil from HK$229.5mil.
Revenue dropped slightly by 2.3% to HK$1.6bil. Its profit figures would imply impressive net margins of 32% for 2019.
“I remain cautious about the Malaysian stock market, even though the price-earnings ratio has dropped to around 13 times. Apart from the disruption caused by Covid-19, Malaysia is a victim of the plunge in oil prices and the downturn in global trade. As an export-driven, medium-sized country, Malaysia faces a very challenging environment, ” said Cheah.
He added that the renewed political uncertainty has hurt the country’s image.
In the midst of Covid-19 back in February, Malaysia saw the change of administration in the federal government with Perikatan Nasional replacing Pakatan Harapan.
“Malaysia’s politicians couldn’t have picked a worse time to engage in a power struggle. Certainly, the country cannot count on foreign investors to put money into Malaysian stocks and other assets, and the persistently weak ringgit has scared off many people, ” said Cheah.
He expresses concern that Malaysian stocks will be off the radar of international investors for years to come.
There are no shortcuts or magic pills. The solution for Malaysia’s problems will still have to be found domestically, from sound politics, reforms and good economic management.
“The country does have some advantages, including strong infrastructure, and a core group of very competent and highly-educated people in both the public and private sectors. These people should be given a full opportunity to put their abilities to work for the country, ” said Cheah.
China, cash and gold
With regard to the overall investment outlook, Cheah said the best outcome would be if a vaccine or treatment for Covid-19 could be found as soon as possible.
“I am hoping a breakthrough can be achieved this year. So the recommended investment strategy has to be both aggressive and defensive, ” said Cheah.
He explains that an aggressive investing strategy would be beneficial if a treatment can be found, or if efforts by governments around the world to stimulate their economies are successful.
However, in case the outcome remains negative, gold and cash would provide a safety net.
“So it makes sense for an investor to attack and defend at the same time, ” said Cheah.
For the aggressive part of the portfolio, Cheah likes China-related stocks and bonds.
For defence, he likes gold and cash. Furthermore, due to massive money printing, gold has strong potential.
On Monday, the US central bank launched an unlimited money-printing programme.
On Wednesday, the senate voted unanimously to approve a massive US$2 trillion fiscal stimulus package to shore up the US economy. This is the largest fiscal stimulus package in modern American history.
Despite that, Cheah feels it is too early to buy US stocks.
“China is the first major economy to emerge from Covid-19 outbreak, and it is positioned for a V-shaped recovery. Chinese stocks and bonds currently look attractive. For the United States and Europe, the situation may get a lot worse, and the recovery when it looks likely to be more of a ‘U’ than a ‘V’ shape, ” said Cheah.
Meanwhile, in Value Partner’s 2019 annual report that was released last month, Cheah, in his chairman statement, said the world face a spread of Covid-19, which has triggered a panic reaction that in some ways is worse than the disease itself.
“Because the US stockmarket, the world’s largest, had reached an extreme valuation, it was particularly vulnerable to bad news, and it plunged, adding a financial shock to the supply and the demand shock that had emerged already, ” he said.
At its peak back in January, the Dow Jones touched its high of 29,568.57 points, while it fell to its low of 18,213.65 on March 23.
As of Thursday, the Dow closed at the 22,552 level.
Cheah said like all such shocks, the impact of Covid-19 would subside, and governments and central banks are also committed to using powerful monetary and fiscal tools to fight back.
“China, currently a core focus for us, may come out of this crisis looking better than was expected. Although the damage inflicted on the economy is painful, with 2020 growth projected to drop to 5% or less after last year’s 6.1%, the country remains among the world’s fastest developing, with a massive domestic-consumer market of its own providing a solid foundation. “Robust measures taken by the Chinese authorities in early 2020 to contain Covid-19 tells the story of a China that can stay on top of crises, while avoiding the breakdown in social stability that troubles so many parts of the world today, ” said Cheah.
Currently China’s domestic “A” share market, with more than 3,800 companies listed in Shanghai and Shenzhen, is the world’s second largest stock market after the United States.
“Foreign ownership of ‘A’ shares, at less than 4%, remains low but as entry barriers ease, we anticipate major foreign inflows. China-related stocks, currently trading at around 10 to 12 times earnings, are cheap compared with the US multiple of 17 and the global average of 15, ” said Cheah.
For Value Partners, China is a core focus not only because it is a source of attractive investments but also because it is the area where its business is expanding fastest.
Value Partners has been in China for 10 years, where funds raised directly from mainland clients account for 11% of the group’s funds under management, and they are rising quickly.
Performance-wise, taking its flagship Value Partners Classic Fund as an example (fund size: US$1.2bil), the fund climbed by 32.4% net in 2019 compared with the Hang Seng Index’s 13.6% increase.
Since its launch in 1993, this fund has recorded a profit in 19 years and a loss in eight years, out of its 27 years in existence.
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U.S. private equity firms hold about $2 trillion in cash, a useful position amid the current market carnage. But, for now, very few are putting that money to work.
Deal activity has ground to a halt and discussions with businesses hit by the panic around the coronavirus pandemic are evaporating, according to people with knowledge of the matter. Recently, an arm of Brookfield Property Partners LP pulled out of financing Mirae Asset Global Investments Co.’s acquisition of a $5.8 billion U.S. luxury hotel portfolio.
While a few firms are buying some debt amid a panicked sell-off, the lack of private equity dealmaking shows how the virus’s spread has upended the economic outlook and made even the richest and most sophisticated investors wary. Economists are predicting an historic slump in U.S. GDP and some have suggested the nation’s unemployment rate could hit 30%.
Alternative-asset managers have already asked companies they own to draw down credit lines to stave off liquidity issues, and firms currently fundraising are trying to speed things up so they don’t have to ask investors for money at a time of uncertainty, the people said.
As U.S. states and municipalities expand lockdowns and infection rates rise, many executives expect the government to step in with bailouts.
Despite the wariness, some debt shops are starting to buy senior secured loans and second liens from banks, according to the people.
Distressed-debt stalwarts including Apollo Global Management Inc. are jumping in with loans to battered companies, but others say they’re still evaluating the situation.
“It is too early to have a full understanding of the economic impact of this crisis,” said Dwight Scott, global head of GSO Capital, Blackstone Group Inc.’s credit arm. “We are working to understand the economic impact on different sectors and companies, identifying companies that we believe will ultimately recover.”
For now, the largest alternative-asset managers are trying to use their network of companies to minimize damage and help share resources.
Apollo connected Chuck E. Cheese executives with its grocery store chains Fresh Market Inc. and Smart & Final Stores Inc., and later sent furloughed Chuck E. Cheese employees to work at the supermarkets and distribution centers that were facing increased demand.
Carlyle Group Inc.’s technology team has been working with its companies to enable staff to work remotely. Blackstone has been connecting firms looking for deep-cleaning services with its ServPro business, while procurement teams have been helping its portfolios companies source masks, safety glasses and other personal protective equipment.
Private equity firms are also trying to calm skittish investors.
Pension funds, endowments and family offices that have money in consumer businesses such as restaurant chains, fitness centers or travel and leisure should expect to feel some pain, said Michael Rosen, chief investment officer of Angeles Investment Advisors.
One firm in northern California told Rosen last week that revenue at some of its portfolio companies had already dropped 80% to 100%. “It’s not apocalyptic, but it’s getting close,” he said.
Big institutional investors are less nervous and are using the uncertainty to push for better terms, such as lower fees after the commitment period, according to people with knowledge of the matter. They’re getting regular phone calls and updates from the largest managers, who are adjusting to doing business via Zoom video and dealing with a world where most of the workforce is at home.
Carlyle is “patiently and thoughtfully assessing opportunities,” co-Chief Executive Officers Kewsong Lee and Glenn Youngkin said last week on a global conference call for its limited partners.
“We as a firm are extremely fortunate for the tremendous amount of dry powder that all of you have committed to us,” Lee said on the call, referring to their unspent cash piles. “But it’s very early days still and we understand from experience the benefit of patience.”
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