Investment Roundup

06 October 2020

“Wall Street turbulent as POTUS tested positive for COVID-19. US Markets fell but rebounded when POTUS returned to office the following week.”

Market Overview:

“Signaled improvements in President Trump’s health and increasing optimism around renewed stimulus talks drove the market rally.”

In recent headlines, Wall Street was already girding itself for a uniquely turbulent US election, but the news that President Donald Trump has tested positive for coronavirus on the 2nd October 2020 adds another source of nervousness to the outlook. Stocks on Wall Street fluctuated in early trading on Friday, with the S&P 500 falling as much as 1.7 per cent before paring its losses by late morning in New York. The Vix volatility index — a gauge of the US stock market choppiness implied by options prices, often referred to as Wall Street’s “fear gauge” — climbed as much as three points to a high of 29.9, well above the long-term average of about 20.

US president Donald Trump, pictured on Thursday, has tested positive for coronavirus (Source: Financial times)

However, U.S. stocks rose higher Monday after President Trump’s doctors confirmed he would leave Walter Reed National Military Medical Centeron the 5th October 2020, despite contradictory messages about the severity of his coronavirus diagnosis.

Wall Street’s optimism also was heightened by the prospect of another round of massive economic relief from Congress, as lawmakers and the White House continue negotiations with less than a month before Election Day.

Donald Trump gives two thumbs up after returning to the White House and taking off his face mask despite his coronavirus diagnosis (Source: Financial Times)

The Dow Jones industrial average shot up 465.83 points, or 1.7 percent, to close at 28,148,64. The S&P 500 gained 60.18 points, or 1.8 percent, to end at 3,408.60 while the Nasdaq composite climbed 257.47 points, or 2.3 percent, to 11,332,49.

NASDAQ Composite 1-month chart (Source: Bloomberg)
S&P 500 1-month chart (Source: Bloomberg)
DJI Index 1-month chart (Source: Bloomberg)

Signaled improvements in President Trump’s health and increasing optimism around renewed stimulus talks drove the market rally, and a widening lead of Biden in the polls is also helping to calm market jitters. However, analysts noted that volatility will likely continue as investors assess the president’s health, weigh the prospects of government stimulus and seek clarity about the Nov. 3 election.

September proved to be a tumultuous month of trading. Sentiment soured after a summer of explosive gains as economic data and high unemployment rates tempered recovery hopes. Analysts have cautioned that many of the stocks that catapulted the market to record-high levels rose too high and too fast, inviting a sell-off. And as the number of Americans who have died from covid-19 climbed past 200,000, the business community and the broader public were receiving mixed messaging from drugmakers and the Trump administration about the timeline for safe and viable vaccine.

But reignited stimulus talks have lifted investor confidence. On Friday, House Speaker Nancy Pelosi (D-Calif.) suggested that Trump’s diagnosis could accelerate an agreement, which would potentially include government checks sent directly to households, funding for struggling cities and states, unemployment assistance and money for hard-pressed small businesses. Additionally, should there be an added stimulus, it is likely that there will be increased volatility in stock prices as well.

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 0.76% as of 6Oct 2020 from 0.67% as at 21 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 77 as at 30 Sep 2020 from 74 as at 21 Sep 2020.

The CDS Index has increased by 3 bps, reflecting a less stable outlook moving forward. Asia IG credit spread raised to 172 as at 6Oct 2020 from 169 as at 21 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.

Equities Overview:

Our investment strategy for this fortnight will be to recommend investors to stay in selected Technology stocks as well as the laggard sectors such as autos, consumer discretionary, and consumer cyclicals. With regards to China and Chinese equities, the focus should be on consumer stocks as the Chinese government continues to push for domestic consumption amid the on-going spread of Covid-19 globally. China remains one of a few, if not the only major economy and bright spot with regards to containment of the virus domestically.

Talks on US economic stimulus have continued between Democrats and Republicans, possibly taking form in the next few weeks as positive signs of further progress appears as the US awaits the much-needed boost to its economy. This will provide the market a massive boost in the abovementioned laggard sectors. Additionally, this may have a halo effect on Asian Equities especially Chinese stocks listed in HK. We anticipate the Equities market in US and Asia to gradually price in the positive signs over the next few weeks during which we expect the stimulus will likely materialize.

Furthermore, when news of President Trump Contracting COVID-19 was released, the US stock market tanked whereas the Asian stock markets rallied. This depicts the Asian market sentiment and provided short-term relief to the on-going US-China trade war initiated by the Trump administration. If President Trump wins the election, we may see more market volatility as the US-China trade war will continue and likely escalate, putting pressure on China tech stocks and to some extent, specific US tech stocks with significant revenues and growth derived from China. That said, we remain constructive on specific technology names for the mid-longer term across China and the US.

Amid the continued volatility with ongoing US presidential campaigns and the possibility of a second wave of the pandemic, we recommend investors to hold a larger proportion of cash(around 15-20%) as buffer. The cash may be utilized for short-term tactical trading opportunities which may arise as the US elections progress. We recommend investors to take a less aggressive stance with regards to Equities exposure in the portfolio for the rest of the year unless new catalysts appear along the way.

As reiterated previously, the emphasis on stock selection is crucial now more than ever for the remainder of 2020 due to the encroaching volatility from the US Presidential elections and a potential second wave of the pandemic during the winter months. 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.

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 06 October 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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