EPF warns of bumpy year for equities

PETALING JAYA: The Employees Provident Fund (EPF), which recorded the highest ever gross investment income of RM53.14 billion in 2017 and announced the highest dividend payout in the last two decades, foresees 2018 to be a bumpy year for the stock market following the recent heavy sell-off across the globe.
The EPF’s equities portfolio contributed 59.23% to investment income in 2017.
“With the market pullback in February, it is quite clear that unwarranted optimism that the market will only go into one direction for long time has been broken … people will look at economic fundamentals, rather just taking a bet that the market will just go up,” CEO Datuk Shahril Ridza Ridzuan told a media briefing here on the EPF’s 2017 dividend today.
Despite that, he said the volatility will help boost market liquidity, which is favourable for the pension fund.
Following the recent correction globally, Shahril said, valuations for the equity market have become more reasonable as global stocks were fundamentally overbought in some areas.
The local market’s key index rebounded 10.35 points or 0.57% to close at 1,830.17 points yesterday after a 19.62-point or 1.07% fall last Friday. Year to date, the index has gained 1.86%.

Shahril cautioned that inflation, which is currently under control given the recent interest rate increase, is one of the major risks this year in anticipation of continued economic and corporate earnings growth.

Commenting on the coming general election (GE), Shahril believes investors will not be affected by any short-term headwinds as economic fundamentals remain resilient.

“Everybody knows GE is this year, so there is no uncertainty about that. Most investors have already priced that in. Most people will focus on corporate results.”
The EPF, which has a presence in 30 global markets, is continuously looking to diversify its portfolio to benefit from global growth, with the Latin American equity market seen as an expansion target for this year, Shahril said.
In addition, it is targeting higher global assets exposure of 32% this year from 28% in 2017.
“We need to have a balanced portfolio. At 28%, we think it is under where we think we should be. It should be running about 32%,” he added.
Despite having only accounted for 28% of total asset exposure, global investments contributed 41.1% to total income contribution, thanks to gains in the banking sector.
However, syariah investments underperformed, dragged by impairments in the oil and gas as well as mobile telecommunication sectors, registering a 6.4% dividend rate, lower than the conventional scheme’s 6.9% for 2017.
Currently, the EPF has 700,00 members for the syariah scheme, with RM68 billion in funds. A total of RM100 billion has been allocated for the scheme since registration opened in August 2016.
Syariah investments accounted for 47.5% or RM376.03 billion of the EPF’s total investment asset of RM791 billion in 2017, which is 2.5 percentage points shy from the pension fund’s target of 50%.
Shahril highlighted that the banking sector is the only “missing part” for syariah investment due to the lack of syariah-compliant banking institutions.
“We're taking steps towards that direction, that's why we've been pushing MBSB (Malaysia Building Society Bhd) to become a full-fledged Islamic bank. Hopefully over time, we'll be able to find ways for more exposure in the Islamic banking sector."