Investment Roundup

25 August 2020

“The US announced the possibility of fast-tracking an experimental COVID-19 vaccine – driving markets to a potential V-shape recovery. US-China tension eases with trade deal diplomacy, driving up Asian markets.”

Market Overview:

“Trump administration considers fast-tracking experimental COVID-19 vaccine by AstraZeneca, driving S&P and NASDAQ close to new highs.”

The Trump administration is considering fast-tracking an experimental COVID-19 vaccine being developed by AstraZeneca Plc and Oxford University in hopes it could be deployed in the United States before the US elections in November.This could quicken the rate of which the economy recovers into the new normal of a post-COVID-19 world with pre-COVID-19 elements.

The four-day Republican national convention got under way on Monday, with the party making the case for Trump’s re-election.On Capitol Hill, Democrats and Republicans remained at loggerheads over funding levels and unemployment benefits.Market participants will pay close attention to U.S. Federal Reserve Chairman Jerome Powell’s remarks on monetary policy at this week’s Kansas City Fed Jackson Hole symposium, which is being held this year in a virtual format.The Dow Jones Industrial Average rose 378.13 points to 28,308.46, the S&P 500 gained 34.12 points, or 1.00%, to 3,431.28 and the Nasdaq Composite added 67.92 points, or 0.6%, to 11,379.72.Of the 11 major sectors in the S&P 500, all but healthcare ended the session in the black.

Dow Jones 1-month Chart(Source: Bloomberg)

Ahead of its 4-to-1 share split on Friday, Apple Inc provided the biggest boost to the S&P 500 and the Nasdaq, its share price closing above $500 days after becoming the first public U.S. company to top $2 trillion in market value. The stock gained 1.2%.Boeing Co gave the Dow its biggest lift, rising 6.4%. This signals the sector rotation towards the laggard sectors such as autos, consumer discretionary, and travels which include airlines.

NASDAQ 1-month Chart(Source: Bloomberg)

Further news on US-China tensions depict trade being a haven for the two international giants, leaving a way out of the trade war. Whilst conducting trade talks, tensions eased as both nations continue to use diplomacy during trade talks. In contrast to the retaliatory actions these nations have taken against each other.China’s commerce ministry confirmed that the two countries had a “constructive dialogue” and agreed to continue pushing forward the implementation of the Phase 1 trade deal made six months prior. This caused Asian stocks to take an uplifting turn as seen where the HSI recently bounced back up 126 points.

Bloomberg HSI 1-month Chart (Source: Bloomberg)

Overall, we recommend investors to 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 market swings and uncertainties.

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 0.66% as of 25 August from 0.58% as at 11 August 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 has dropped from 73 as at 31 Jul to 65 as at 20 Aug. Credit spread has dropped by 8 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 for this fortnight will be recommending investors to enter the laggard sectors or to accelerate the build-up of exposure laggard sectors if one has not done so. As we head into year end, and if a vaccine is confirmed, we anticipate significant upside in selected laggard sectors such as autos, consumer discretionary, travel(incl. airlines).

One key observation over the past week or so is that investor focus has clearly redirected to the laggard sectors where investors are sector rotating into several laggard sectors while the technology sector sees continued profit taking after a strong out performance since the March lows. That said, we continue to recommend investors to maintain an overweight in the strongest of blue chip technology market leaders and trim the peripherals or secondary positions in the technology sector (incl. small-mid caps) while accelerating the pace of increasing exposure in the aforementioned laggard sectors as containment measures begin to gradually loosen globally. With respect to the laggard sectors, we are more inclined towards Chinese companies that have greater exposure to the domestic Chinese economy as we believe that the Chinese economy will recover faster from the COVID-19 situation than the US and other major economies. Nevertheless, we wish to note that we are also in favour of selected laggards listed in the US.

In addition, we anticipate that the current impasse in relation to the additional economic stimulus package in the US will likely be resolved and the additional stimulus package will eventually be passed in the near term as the US economy is clearly in need for additional stimulus. Against this positive stimulus backdrop alongside increased hopes of the confirmation of a vaccine in Q4, we anticipate that the corresponding potential upside in these laggard sectors, if materialise, will likely be significant.

As reiterated previously, the emphasis on stock selection is crucial now more than ever for the remainder of 2020. 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 market swings and uncertainties.

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 25 August 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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