Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
14 July 2020
“China boosts its market as well as paving the way for more money to flow into Hong Kong and shoring up its status as a financial hub.”Market Overview:
“China’s state-owned editorial encourages investors to look forward to the prospect for a healthy bull market.”
Recent bullishness of Chinese stocks has been partially credited to reports that have been caused by afront-page editorial in the state-owned China Securities Journal for fuelling a strong rally in Chinese markets overnight that spread to global equities. Shanghai stocks jumped 5.7%, after the publication said investors should look forward to the “wealth effect of the capital markets” and the prospect for a “healthy bull market.” Providing a shot in the arm for Chinese stocks. However, the Chief Asia economist at Capital Economics mentioned that the use of media to drive up markets may not end well as seen in 2015 where the market collapsed. Hence, we keenly await the results from this course of action.
Source: CNBC ‘China told citizens to buy stocks, boosting market — ‘We have the Fed…China has its state media’’
Additionally, Hong Kong investors remain undaunted in the face of the new security law as shown on the Hang Seng Index rising by 5% since the 30th of June(the passing of the law). This is likely due to China’s central bank launching the Wealth Management Connect initiative which analysts said will bring more inflows into Hong Kong and attract foreign financial institutions to expand their business in the city.
Hang Seng Index 1-month Chart (Source: Bloomberg)
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 US-China trade war to the Covid-19 Pandemic unhindered outbreaks especially in the US.
The situation is very fluid, and we keenly await the developments of events worldwide – such as developments of the US-China tensions, and the Covid-19 outbreaks. 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.
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 the rest of 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 83 to 80). Credit spread has dropped by 3 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 even 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 around a500 points intraday decrease.
Dow Jones industrial average index 1-month Chart (Source: Bloomberg)
Investor focus is recalibrating back to the COVID-19 pandemic once again as rising number of daily infected cases continue to spook investor confidence. We expect markets to remain extremely volatile as we continue to see unrests and uncertainties globally. Delays in reopening of individual states in the US and the resulting impact to businesses and the US economy is likely to further dent investor confidence.
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 in the near term despite relatively high valuations witnessed in these sector or stocks. That said, we believe these high valuation premiums are likely justified given the lackluster performance and less rosy outlook and uncertainties posed by other sectors.
At the portfolio level, we recommend investors to take substantial profit at current levels if their positions are in the black, and/or to reduce overall portfolio exposure in equities and raise their overall cash levels in anticipation of a potential pullback in Equities as we enter Q2 earnings season. Additionally, we also like gold for its defensive nature amid this pandemic. Despite our call to reduce overall Equities exposure or raise cash levels in the portfolio, we do recommend investors to stay overweight and maintain exposure in specific technology sub-sectors,specifically, the online economy and 5G hardware manufacturers. These sub-sectors are likely to hold up better than traditional sectors such as banking, and real estateof which we recommend investors to avoid.
The emphasis on stock selection selection is crucial now more than ever. We recommend investors to stick to fundamentals rather than get swayed by headline news. Generally, we do not recommend excessive sector diversification of portfolios for the sake of it as most sectors other than technology will likely under perform amid the current macro headwinds. In short, continue to buy the winners within the technology sector.
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)
To sum up, we recommend reducing overall portfolio exposure in equities while staying overweight large caps in specific technology sub-sectors (especially the 5G-related sector and the digital / online economy), and perhaps have some exposure to in the laggard sectors whose business will stand to benefit or improve as economies start to gradually reopen. Employ a more back-to-basics stock selection approach and continue to adhere to company fundamentals and strict risk management principles ( stop-loss mechanisms and/or appropriate portfolio hedging) to mitigate risks from possible sudden and significant market moves. Portfolios should be positioned to remain nimble and more defensive at this juncture through having relatively higher cash levels. The higher cash levels also allow portfolios to capture short-term trading opportunities to produce alpha amid current market volatility. Last but not least, any buying on significant pull backs is recommended but these 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 14 July 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.
Derek Loh – 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.
Lawrence Chan – 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”).