Licenced by SFC Type 4 & 9 & MAS Capital Market Services
22 September 2020
“The FED keeps interest rates low to stimulate the economy. China retaliates against the US with their own entity list.”Market Overview:
“The FED keeps interest rates near zero through 2023 reflecting a smaller GDP decline forecast.”
In recent headlines, the Federal Reserve kept its pledge to keep interest rates anchored near zero and promised to keep rates there until inflation rises consistently. They further mentioned that short-term rates would remain targeted at 0%-0.25% and that rates could stay anchored near zero through 2023. Officials also changed their economic forecasts to reflect a smaller decline in GDP and a lower unemployment rate in 2020.
In addition, officials addressed a new policy regime in which the Fed will allow inflation to run somewhat above the 2% target rate before hiking rates to control inflation. “These changes clarify our strong commitment over a longer time horizon,” Chairman Jerome Powell said at his post-meeting news conference. The policy making Federal Open Market Committee adopted specific language to emphasize the inflation goal.
Stocks added to gains following the FED release and the USD gained some traction, though government bond yields were little changed.The committee now sees a full-year GDP decline of 3.7%, considerably better than the 6.5% drop forecast in June. However, it lowered its 2021 outlook to 4% from 5% and 2022 to 3% from 3.5%. The committee expects 2.5% GDP growth in 2023.(Source: CNBC)
Other news include the Chinese government stepping up pressure on foreign businesses not to run afoul of Beijing, as the White House continues to target some of the Asian giant’s largest technology companies. After the US government announced a ban on monetary transactions in the US through the Chinese messaging app, “WeChat” – a social messaging app operated by Chinese technology giant Tencent, and “TikTok” – a short-video app backed by Chinese start-up ByteDance, the Chinese government has released an “unreliable entity list” over the weekend. The document mirrors the US Commerce Department’s entity list that restricts named companies from accessing items originating in the U.S.China’s Minister of Commerce Zhong Shan speaks during a press conference at State Council Information Office in Beijing on May 18, 2020. (Source: CNBC)
The Commerce Ministry first announced it was establishing the unreliable entity list in May 2019. The move came shortly after U.S. President Donald Trump’s administration said it was adding Chinese telecommunications giant Huawei to a blacklist, which prohibits the company from working with its U.S. suppliers. Huawei’s revenue last year missed internal forecasts by $12 billion, while profit growth slowed from the prior two years. The consequences for an entity added to the list could include: restrictions or prohibitions on China-related trade, investment in China and travel or work permits.
These actions may have contributed to the Monday slump where the Dow Jones fell 1.84% and the Hang Seng Index fell around 2%.Dow Jones Industrial Index 1-month chart (Source: Bloomberg)
Hang Seng Tech Index 1-month chart (Source: Bloomberg)
China’s Commerce Ministry said in an online statement that the unreliable entity list will not target a specific country or entity. Other statements on the ministry’s website about the unreliable entity list emphasized that China still welcomes foreign direct investment and foreign businesses, which are an important contributor to the national economy. Despite this, the economy remains volatile in light of this eventful political climate.
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 dropped few basis points to 0.67% as of 21 Sept 2020 from 0.71% as at 7 Sept 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%) with no rate hikes till the end of 2023. The credit default swap (CDS) Index for the Asia ex-Japan Investment Grade entities rebounded to 74 as at 21 Sep 2020 from 59 as at 7 Sep 2020.
The CDS Index has increased by 15 bps, reflecting a less stable outlook moving forward. Asia IG credit spread rebounded to 169 as at 21 Sep 2020 from 166 as at 7 Sep 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 credit rating 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 continuing to recommend investors to enter the laggard sectors or to accelerate the build-up of exposure laggard sectors. 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, the current impasse between the Republicans and Democrats in relation to the additional economic stimulus package in the US has continued, but we believe the additional stimulus package will eventually be passed eventually. 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.
Recently, the market had experienced a material pullback, especially in the Technology sector which we believe to be a healthy correction instead of an unhealthy downturn. Profit taking is to be expected and we do not foresee a tech bubble in the near future despite lofty valuations. Accordingly, we believe investors should also take this 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.
Finally, the signal by the Fed to keep interest rates low up until 2023 benefits equities. 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. 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.
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”).