Licenced by SFC Type 4 & 9 & MAS Capital Market Services
16 June 2020
“The purchasing of corporate bonds would further aid in stimulating the economy, providing the markets with yet another shot in the arm. This might point to a further dislocation of the markets -with wall street taking off, leaving main street behind.”
“Asian stocks jump as investors watch central bank developments”
Recent headlines have been dominated by social unrest in the US, with protests breaking out in cities all over the country. Across the Pacific, Beijing has also announced its new national security law which would pave the way for China to set up national security institutions in Hong Kong. US President Donald Trump responded by saying that he will begin to take steps to revoke Hong Kong’s favored trade status with the US.
The purchasing of corporate bonds would further aid in stimulating the economy, providing the markets with yet another shot in the arm. This might point to a further dislocation of the markets with wall street taking off, leaving main street behind. This added stimulus is built on the FED’s “QE infinity” approach, which has so far provided a strong support to the financial markets. The long term effects of such a strategy is still very much up for debate.
This news had overshadowed the recent Covid-19 cluster tied to a market forcing Beijing to re-enter a partial lockdown breaking a two month corona free streak. Nevertheless, investors are undaunted by these events and the market is still in the green and appear to still be bullish.
Source: Forbes, ‘Beijing in ‘Wartime Emergency Mode’ After New Coronavirus Cluster Found At Market’
Major monetary and fiscal stimulus have continued to provide strong support to the markets and will continue to do so. Investors continue to shift funds to parts of the market they believe will be helped by economic reopening.
Despite this, investors should remain cautious as we do not expect to see a smooth path to recovery, volatility will be here to stay. The attention may soon shift from the COVID-19 pandemic, to the upcoming US Presidential Race, and back to the US-China trade war.
The situation is very fluid, and we keenly await the developments of events worldwide – such as developments of the social unrests, US Election campaigns and US-China tensions. Investors should remain patient and ready to react. We do not expect markets to test new lows as global monetary and fiscal policies will continue to remain conducive, and this will likely provide a floor to the economy.
We recommend adding gradual exposure over several phases on any significant pullbacks while continuing to maintain focus on our favored themes and strategies for the year.
Fixed Income Overview:
There has been continued positive momentum and increasing signs of recovery in the fixed income environment, as more countries announce and prepare for the reopening of their economies. US 10-Year Treasuries yielded around 0.75% as of 16th June and we expect it to remain between 0.25%-1% until Q3 2020. At the same time, Federal Reserve announced that FED fund rates would maintain at current level (0% – 0.25%) till the end of 2022. The credit default swap (CDS) Index for the Asia ex-Japan Investment Grade entities in the past 2 weeks has dropped (from 101 to 85). Credit spread has dropped by 16bps, reflecting a more stable and positive outlook moving forward.
We caution investors holding marginal investment graded bonds (BBB-, Baa3) to be wary of rating agency downgrades. Also, emerging market bonds from countries such as India, Turkey, Mexico, and Brazil may continue to face further downgrades. For clients holding such bonds, we recommend reducing exposure to single issuers and to increase diversification. For investors with an investment grade bond portfolio mandate, we recommend BBB+ IG grades or higher – IG bonds are expected to yield around 2% p.a. in the near future. For investment grade bondportfolios, we suggest a shorter duration of 3.5 – 4 years. However, if the client can afford the volatility, they can lengthen further to 5 years.
CDS Asia ex-Japan Index5-year Chart (Source: Bloomberg)
We again recommend investors to stick to short dated high quality (BB Rated) High Yield bonds with a duration of less than 2 years which would offer the best value. Investors should also have sufficient holding power to hold these bonds to maturity. Geographically, we are overweight Emerging market bonds and neutral on Developed markets.
Further, we recommend investors to match their exposure of high-beta bonds such as: CoCo Bonds, Perpetuals and high yield bonds to their respective risk appetites. Loan-to-value ratios may fluctuate drastically due to rating agency downgrades and therefore investors are advised to lower their leverage and have some buffer to mitigate the potential volatility that will still exist in bonds prices. It is also recommended for investors to hold a diversified fixed income portfolio due to various uncertainties across sectors. Overall, we recommend a balanced and diversified portfolio of high quality (BB rated) high yield bonds and short duration IG Bonds.
Since our last overview, the equities market had continued to be bullish despite the sharp drop last night where the Dow Jones dropped by 700 points, and the S&P 500 dropping by 5% intraday. Due to the FED starting to purchase corporate bonds to provide strong support and to stimulate the economy, the market quickly rebounded, providing US Equities with strong support. The S&P500 index continues to hover around the 3000-point level.
Overall, in the past 3-4 months on a macro front, the FED and other central banks have been injecting both monetary and fiscal stimuli into the economy and there have been no signs of tuning it down. The FED has taken an QE infinity approach to inject unlimited amounts of liquidity to the market, acting as a stop gap to potential risks we may see in the economy. The FED also signalled to the market that interest rates would be kept near 0% until the end of 2022.
Dow Jones industrial average index 1-year Chart (Source: Bloomberg)
Major private and investment bank representatives have recommended investors to take profit, with some warning that the Equities market has run ahead of itself, citing lofty valuation premiums relative to historical averages.We concur that there is growing dislocation between current high stock valuations relative to their historical averages and/or business fundamentals. However, we do not anticipate a significant pullback in Equities due to the significant stopgaps put in place by the FED (i.e. the monetary and fiscal stimuli as well as corporate bond buying program). We instead expect the market to consolidate or range trade around current levels in the near term. Moreover, the numerous stimulus by the FED and global Central Banks have provided strong support for risky assets, in particular, equities.
Investors seem to be fixated on the reopening of economies around the world rather than the recent protests in the US. Another important factor in keeping equities aloft is no doubt the strong fiscal and monetary programs still being rolled out. However, we expect the markets to remain extremely volatile as we continue to see unrests and uncertainties. These incidents are likely to delay the reopening of the US economy, but we do not foresee it being a major long-term issue. With that being said, we recommend investors to stay invested, while remaining nimble in their equities allocations and strategies.The emphasis on stock selection is crucial now more than ever. We recommend investors to stick to fundamentals rather than get swayed by headline news.
Notwithstanding, investors should also consider setting aside some cash as buffer to capitalise on the expected volatility throughout the rest of the year. More attention will gradually shift from the COVID-19 situation to the upcoming US Elections towards the second half of the year, with a key focus being on the US-China trade war. Accordingly, investors should look to consider taking more short-term tactical trades when the opportunity presents itself on significant market pullbacks. The traditional “buy-and-hold” strategy will likely not yield a good return in volatile market.
S&P 500 1-year Chart (Source: Bloomberg)
We recommend gradually increasing or initiating exposure into quality blue-chip names with strong balance sheets and solid fundamentals especially in the technology sector on any significant pullback in the markets. Furthermore, it is also recommended to be more overweight in 5G related technology.
Concurrently, investors may wish to consider taking some profits if they have initiated exposure into the beaten down, laggard sectors such as airlines, consumer retail and certain industrials over the past few weeks.
Overall, we recommend staying Overweight large cap in technology sector (especially China’s 5G sector), and to have or maintain a relatively smaller exposure into laggard sectors whose business will stand to benefit or improve as economies start to gradually reopen. Utilise a more back-to-basics stock selection approach and continue to adhere to company fundamentals and strict risk management principles (stop-loss and/or appropriate hedging) to mitigate
risks from possible sudden and significant market moves. Lastly, any buying should be staggered across several phases.
This material is provided for informational purposes only. It is not a recommendation or solicitation of any investment or investment strategy. There is no guarantee that any investment or strategy will achieve its objectives. Unless otherwise stated, all information contained in this document is from Raffles Assets Management (HK) Ltd. and/or Raffles Family Office Pte Ltd (Singapore) and is as of 2 June 2020. The views expressed regarding market and economic trends are those of the authors and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. By acceptance of these materials, you agree that you shall use the information solely to evaluate your investment in this Raffles Assets Management (HK) Ltd and/or Raffles Family Office Pte Ltd (Singapore) sponsored investment opportunity and you shall keep the information confidential.
Head of Equities
Mr. Derek Loh is the Head of Equities at Raffles Family Office. Derek has numerous years of work experience from top asset management firms and Banks – 13 Years on the Buy-side across 3 Major Cities in Hong Kong, Singapore and Tokyo. Derek demonstrates in-depth industrial knowledge and analysis, covering mostly listed equities.
Ex-Portfolio Manager for ACA Capital Group, managing a multi-billion dollar global fund for a world-renowned sovereign wealth fund and reputable institutional investors. Previous notable Investors serviced include Norges Bank (Norwegian Central Bank), Bill & Melinda Gates Foundation and Mubadala. Derek holds an Executive MBA from Kellogg School Of Management and HKUST. He is also a CPA.
Head of Fixed Income
Mr. Lawrence CHAN is Head of Fixed Income of Raffles, where he is responsible for credit and fixed income investments.
Mr. CHAN has over 15 years of experience in the fixed income industry. Prior to joining Raffles, he was Chief Investment Officer (Fixed Income Investment Department) of Taiping Assets Management (HK) Co. Ltd. to manage China Taiping Group’s offshore bond investments and co-manage MPF & ORSO funds for China Life Trustees. His co-managed China Life Guaranteed Return Fund won various awards from Bloomberg Businessweek (2015-2017), BENCHMARK (2015) and MPF Ratings (2015-2016). He had worked for various financial institutions, including Taikang Asset Management (HK) Co. Ltd., Deutsche Bank AG (HK Branch) and Hong Kong Monetary Authority.
Mr. CHAN graduated with a Master’s degree in Finance from The Chinese University of Hong Kong and a Bachelor’s degree in Accountancy (with First Class Honours) from City University of Hong Kong (formerly known as City Polytechnic of Hong Kong). He is a CFA charterholder, Hong Kong CPA, and a Fellow of the Association of Chartered Certified Accountants (“ACCA”).