Tan, the founder and chief strategist of Pheim Asset Management Sdn Bhd, was referring in particular to the US which has seen its major stock indices surge to all-time highs this year.
A sharp drop in the US markets will invariably have a huge impact on equity markets around the world including Malaysia.
As of Dec 26, the Dow Jones Industrial Average (DJI) has climbed an impressive 15% year-to-date (YTD), consistently breaking new record highs and is now standing just 4% below its recent peak, he noted.
“Compared to its level before the pandemic crash on Feb 12, 2020, and its lowest point on March 23, 2020, the DJI has risen 47% and 133% respectively,” he told FMT.
The S&P 500 and tech-heavy Nasdaq have moved up even more, rising 26.58% and 33.37%, respectively YTD.
Tan, nevertheless, is not suggesting that a correction or a crash in global markets is imminent.
“Predicting the exact timing of a strong market correction is always challenging. Hence, we need to closely observe the market’s behaviour and the degree of price increases.
“At current levels, if we see the market rising sharply with substantial volume, it could indicate heightened speculative activity, increasing the probability of a sharp correction,” he said.
However, given the current elevated levels, he said a more cautious approach is warranted.
“It may not be prudent to be fully invested in such a high market environment as the risk of a correction increases with stretched valuations. We recommend investors to gradually raise cash.”
Tan, who has been a fund manager for over four decades, has seen it all before. “Almost all market crashes come after a good bull run.
“It is wise to reduce your equity exposure when you think the market is grossly overvalued. Doing so, your portfolio will be hurt less when the market crashes, and you will have the cash to buy discounted stocks,” he said.
Global risk factors
On possible risks that could trigger a correction, Tan said one significant factor is “escalating geopolitical tensions”, which could lead to a global conflict.
Another major risk is an intensifying trade war, especially between major economies like the US and China, he said.
“This would likely disrupt global supply chains, increase costs, and weigh on economic recovery. These scenarios, while it is uncertain in terms of timing and how they would play out, are critical risks that investors should keep in mind,” he added.
The probability of a ramped-up trade war has just increased with the election of Donald Trump as the next US president.
In anticipation of slower economic growth worldwide in 2025 and the high US valuations, Tan said Pheim Malaysia is cautious and selective in its investments.
“We will focus on undervalued companies that have low gearing with potential to grow, and good management track record.”
He also advised investors to be positioned in companies that are operating in “defensive sectors”.
“Sectors that tend to perform relatively well during an economic slowdown are generally considered defensive. These include healthcare, services, plantations, consumer staples, utilities, telecommunications, and real estate investment trusts (REITs).
“When selecting stocks in defensive sectors, we always make sure they meet our investment criteria before buying,” he said.
The focus will be on companies with low gearing, attractive pricing, rising profitability, good management, and a positive sector outlook, he added.
“High dividend yields are particularly important, as they provide a reliable income stream and add stability to the portfolio, especially during uncertain times.”
Among the major Asian bourses, Taiwan’s Taiex has emerged as the best-performing stock market index in 2024 with Hong Kong’s Hang Seng Index in second place, and the FTSE Bursa Malaysia KLCI (FBM KLCI) coming in at a commendable sixth place.
As at Dec 23, the Taiex was up 28.85% for the year, Hang Seng (16.63%), and FBM KLCI (9.73%). At No 3 was Singapore’s Straits Times Index (15.78%), followed by Japan’s Nikkei 225 (15.65%) and China’s CSI 300 Index (14.64%).
South Korea’s Kospi Composite Index, which tumbled 8.03%, was Asia’s worst-performing market.