Investment Roundup

11 August 2020

“Macau loosened China borders to revitalize the casino market, providing a haven in this pandemic. Could this potentially stimulate laggard sectors such as gaming and retail?”

Market Overview:

“HK listed Macau casino stocks rallied from loosening of China borders. Trump issued executive orders against TikTok and WeChat.”

In recent times, China had loosened coronavirus-related border restrictions between Macau and the neighbouring coastal province of Guangdong, sending shares of Macau casino operators surging on hopes of a quick pickup in demand. Hong Kong-listed Galaxy Entertainment (00027.HK) soared, up 5.5% on Tuesday while SJM (00880.HK) climbed 5%. The stocks have increased by 25% and 34.7% respectively year to date.

Casinos and hotels following the coronavirus outbreak in Macau, China February 5, 2020. Source: REUTERS/Tyrone Siu

Additionally, shares of Chinese tech firms listed in Hong Kong fell last Friday afternoon after U.S. President Donald Trump issued executive orders targeted at major tech firms Tencent and ByteDance. The Hang Seng Tech index, which tracks the 30 largest technology companies listed in Hong Kong, also fell 3.37%. In mainland China, the Nasdaq-style start-up board Chinext slipped 2.828%.

Source: CNBC: ‘Shares of Tencent plunge after Trump’s executive order on TikTok and WeChat’

The repercussions of Trump’s order on Tencent may ring beyond just WeChat, China’s most popular messaging app. The Chinese tech juggernaut is also a titan in the video gaming space, with stakes in companies such as Activision Blizzard and Riot Games (the firm behind “League of Legends”). Potentially implicating the Chinese tech stocks listed in the US. The latest development comes as tensions between Beijing and Washington ratchet up, with both sides imposing retaliatory measures on each other.For example, the US Treasury imposed sanctions on Hong Kong chief executive Carrie Lam and 10 other top officials from Hong Kong and mainland China, and China retaliated by imposing sanctions on 11 high profile individuals that include certain senators.

As the US-China trade war continues to intensify, US and China stocks will continue to be volatile. Against the backdrop of political tensions, it would be less risky to invest in the domestic champions such as the Macau casinos that have recently been gaining traction, and US tech stocks.

Overall,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.

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 rebounded to 0.58% as of 11August and we expect it to remain between 0.25%-1% for 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 75 to 73. 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 and increasing diversification to other countries’ issuers. For investors with an investment grade bond portfolio mandate, we recommend bonds with BBB+ ratings or higher, and portfolio duration of 3.5 – 4 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 Markets’ bonds and neutral on Developed Markets’ bonds.

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 for bond holdings may fluctuate drastically due to rating agency downgrades and therefore investors are advised to lower their leverage and have more buffer to mitigate the potential price volatility. 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.

Equities Overview:

Our investment strategy remains unchanged where we are still overweight in the tech sector. We believe investors should continue to accumulate on the sector when there are significant pullbacks As reiterated over the past few months, certain technology counters will see higher valuations and these will be crowded trades but rightfully so against the current macroeconomic landscape.

One key observation over the past week is that investor focus has redirected to the laggard sectors such as retail, consumer discretionary casino stocks. We recommend investors to gradually build up exposure in these sectors as certain economies start to loosen containment measures. It is likely that the Chinese economy will recover faster from the COVID-19 situation than the US, and hence we believe the focus for these laggard sectors should be inclined towards Chinese companies rather than American companies.

With the escalation in US-China trade war, specifically in the technology space, we also prefer Chinese “domestic champions” that are key beneficiaries of China’s focus on domestic consumption and development. Among the laggard sectors, we would like to highlight the Macau gaming sector where we see favourable policies with regards to re-opening of its economy to Chinese tourists (albeit with limits and conditions).

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.

As reiterated previously, until a 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 overweight the laggard sectors such as manufacturing, retail, consumer discretionary, etc. as we anticipate a major sector rotation into these laggard sectors.

Without doubt, we believe more attention will gradually shift from the COVID-19 situation to the upcoming US Elections as we approach the US elections. With these continued macro headwinds and the YTD run-up in global equities, 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.

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 11August 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.

Portfolio Managers:

Derek Loh, Head of Equities

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

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”).

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