Licenced by SFC Type 4 & 9 & MAS Capital Market Services
30 June 2020
“Investors in Hong Kong stocks remain undeterred despite the new security law. The stopgap from the FED’s purchase of bonds alongside a second covid-19 outbreak have caused large waves, incurring the ire of investors.”Market Overview:
“Hong Kong stocks, undeterred by new security law, rise with Asia”
Recently, the new security law by China in Hong Kong had been passed. However, Hong Kong stocks remain undaunted by the new law, and prices have risen with Asia. It was also reported that the US have started to remove HK’s special status. However, this had left Investors’ demand for Hong Kong stocks undaunted on Tuesday where the Hang Seng Index (HSI) even jumped 0.52%.
Additional headlines have focused on the sluggish reaction of the US in response to the covid-19 pandemic. There is a possibly that the US is experiencing its second wave. It was reported Covid-19 cases increased by over 38,000 cases a day. This caused governors in certain states to pull back their reopening plans from the rise of the new cases, causing the curve to steepen.
Source: NBC News, ‘Coronavirus deaths: U.S map shows number of fatalities compared to confirmed cases
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 yields dropped to 0.63% as of 30th 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 85 to 83). Credit spread has dropped by 2 bps, 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 bond- portfolios, 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 Index 1-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 more diversified portfolio of high quality (BB rated) high yield bonds and short duration IG Bonds.
Since our last overview, the equities market had become more volatile where the Dow Jones and S&P 500 depicted high flux movement. The Dow Jones even depicted a 500 points intraday increase. Due to the FED’s purchase of corporate bonds to stimulate the economy, the market is currently highly volatile.
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, flushing the US market with liquidity. Causing us to face extreme uncertainties in the market.
Dow Jones industrial average index 1-month Chart (Source: Bloomberg)
Investors seem to be fixated on the reopening of economies around the world rather than the recent covid-19 outbreaks 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.
The negative impact of this delay is felt across most sectors except for some of the new world sectors such as online gaming, online food deliveries and e-commerce. This will likely result in crowded trades for these winning/outperforming sectors.
At current levels, we recommend investors to take substantial profit if their positions are in the black, or to reduce overall portfolio exposure and raise their cash levels. That said, we do recommend investors to stay overweight and maintain exposure in specific technology sub-sectors, specifically, the online economy and 5G hardware manufacturers. Among dividend plays, we believe investors may consider the Singapore-listed REITS versus other sectors or geography given the high quality of the underlying assets as well as the relative stability and strength of the Singapore government and economy vs other geographies.
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. However, if there are extreme pullbacks, it may be good to ‘dip your toes’ into the market. Generally, we do not recommend excessive sector diversification of portfolios for the sake of it as most sectors other than technology will remain depress amid the current macro headwinds.
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. With these continued macro headwinds, we continue to anticipate significant market volatility in the 2H2020. 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-month Chart (Source: Bloomberg)
Overall, we recommend staying Overweight large cap in technology sector (especially the 5G-related sector and the online economy), 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 (reducing positions, 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.
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”).