Licenced by SFC Type 4 & 9 & MAS Capital Market Services
08 September 2020
“US continues its fervent crackdown on Chinese companies as the trade war intensifies. SoftBank makes a dangerous bet to fervently rally NASDAQ.”
“US includes more Chinese companies to the entity list to prevent the companies from receiving US goods.”
The Trump administration is considering imposing export restrictions on Semiconductor Manufacturing International Corporation (SMIC), China’s largest manufacturer of semiconductors, according to a Defense Department spokesperson. The Department of Defense (DoD) is in discussions over whether SMIC should be added to the Commerce Department’s entity list, which restricts those companies from receiving specific goods made in the United States.
The U.S. entity list now includes more than 300 China-based companies. The DoD is currently working with the interagency in assessing available information to determine if SMIC’s actions warrant adding them to the Department of Commerce’s Entity List. Such an action would ensure that all exports to SMIC would undergo a more comprehensive review.
The potential move by the administration, is part of a continued effort to put pressure on China’s technology firms and would mark a major escalation in the tech battle between Washington and Beijing. This could potentially adversely affect Chinese tech stocks where the Hang Seng Tech Index fell around 8.5% when it was reported to date.
Hang Seng Tech Index 1-month chart (Source: Bloomberg)
U.S. officials complained that Chinese tech firms are beholden to the People’s Republic of China and collect sensitive information on behalf of the People’s Liberation Army. However, The Chinese Communist Party has previously said that it does not engage in industrial espionage.
Other recent news included the revealing of the NASDAQ whale that causes the massive rally on Friday to be SoftBank. SoftBank is the “Nasdaq whale” that has bought billions of dollars’ worth of US equity derivatives in a series of trades that stoked the fevered rally in big tech stocks before a sharp pullback on Thursday and Friday, according to people familiar with the matter.
The Japanese conglomerate had been snapping up options in tech stocks during the past month in huge amounts, fuelling the largest ever trading volumes in contracts linked to individual companies, these people said. One banker described it as a “dangerous” bet.
The aggressive move into the options market marks a new chapter for the investment powerhouse, which in recent years has made huge bets on privately held technology start-ups through its $100bn Vision Fund. After the coronavirus market tumult hit those bets, the company established an asset management unit for public investments using capital contributed by its founder, Masayoshi Son.
NASDAQ Composite Index 1-month chart (Source: Bloomberg)
Stock markets across AsiaPac were mixed, with Australia’s S&P/ASX 200 up 0.8% while China’s CSI 300 of Shanghai and Shenzhen listed shares fell around 0.5%. Hong Kong’s Hang Seng dropped around 0.6%.
The losses for Chinese market tanked following US President Donald Trump’s comments on floating the idea of “decoupling” the US economy from China, saying the move would save America “billions of dollars”. This could adversely affect the market on a whole.
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 0.71% as of 7 Sept 2020 from 0.66% as at 25 August 2020 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 65 as at 20 Aug to 59 as at 7 Sep. The CDS Index has dropped by 6 bps, reflecting a more stable and positive outlook moving forward. Asia IG credit spread also dropped to 166 as at 7 Sep 2020 from 169 as at 24 Aug 2020. Credit spreads would be range bound for the coming months.
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.
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. This sector rotation will last a few weeks to a month at most as we head into the US elections; we anticipate significant upside in selected laggard sectors such as autos, consumer discretionary, travel(incl. airlines).
The technology sector continues to see 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 for short term trades. 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. Finally, we believe investors should also take the opportunity to accumulate or buy back into core tech positions which have high growth potential and a strong balance sheet, amid the on-going pullback in growth stocks, as these are likely to become mainstay going forward recent pullback in tech stocks.
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 08 September 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”).