Licenced by SFC Type 4 & 9 & MAS Capital Market Services
28 July 2020
“Chinese stocks have taken a dip ever since the trade war between China and the US escalated and tensions have soared. These tensions have increased the trade war effects on the market, causing Chinese stocks to fall.”
“US-China relations: thousands gather to see closure of Chengdu consulate.”
Chinese stocks have taken a dip ever since the trade war between China and the US escalated and tensions have soared. Due to the US’ forced entry into the Houston Chinese consulate over spying claims, breaking the China-US Consular treaty, and shutting down the consulate. China retaliated through the closure of the US Chengdu consulate. These tensions have increased the trade war effects on the market, causing Chinese stocks to fall.
‘US-China relations: thousands gather to see closure of Chengdu consulate’ Crowds of people watched as trucks came and went from the US consulate in Chengdu on Saturday. Source: South China Morning Post
CSI index 1-month Chart (Source: Bloomberg)
The CSI index reflected a sharp 150 points drop due to the recent escalation of tensions. Furthermore, the US had also imposed additional tariffs on China which came about due to the rising tensions.
On the other hand, Senate GOP unveiled a coronavirus relief plan with 70% wage replacement in unemployment insurance. This may further provide extra support to the market, providing it an extra boost. This relief plan could help soften the blow of an economic recession and head off a potential financial crisis. Moreover, experts expect a vaccine to be produced in Q4 2020 or Q1 2021. This could possibly a turning point for laggard sectors such as retail, F&B, and manufacturing.We expect the laggards to continue to under-perform in the meantime as investors continue to be mainly focused on the technological sectors, driving relatively high returns in that space.
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, due to the new record daily highs in certain states 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 0.57% as of 27th July 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 80 to 75). Credit spread has dropped by 5 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 recently corrected but rebounded just as quickly led by the NASDAQ as shown in the chart below.
NASDAQ 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. Certain states have been experiencing record daily highs in recent times, delaying the reopening of certain states. 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 lacklustre performance and less rosy outlook and uncertainties posed by other sectors.
In the previous investment call two weeks ago, we previously recommend investors to take profit and raise their cash levels in anticipation of an anticipated pullback in Equities as we enter Q2 earnings season. Our call have been vindicated and concurrently we also advocate to buy on significant pullbacks in the stock market when such opportunities present themselves.
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. In short, 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. 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. Specifically, sectors that we view favourably include (i) specific technology sub-sectors, for example, the new world economy and 5G hardware manufacturers as well as (ii) COVID-19 related vaccine beneficiaries. These sectors are likely to hold up better than traditional sectors such as banking, and real estate of which we recommend investors to avoid.In short, continue to buy the winners within the technology sector and healthcare sector. However, until the vaccine is confirmed, we recommend investors to continue to stay overweight in the technology sector and healthcare sectors. Should a vaccine be found, we would then recommend investors to consider laggard sectors such as manufacturing, retail, and F&B as investors will likely sector rotate into the laggard sectors.
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 amid the current volatile market.
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”).