Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
20 October 2020
“Long-awaited US stimulus talk progresses while the road to economic recovery shows signs of weakening without it.”Market Overview:
“Stimulus negotiations have hung over the market for months with the end in sight as the elections near.”
In recent news, the US stimulus talks have progressed where House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin continued in an attempt to reach a consensus for the stimulus package with the deadline being Tuesday for the stimulus package to be passed before the Nov 3rd presidential election.
The pair have been negotiating for weeks over the latest proposals, which are intended to alleviate the economic impact of the coronavirus pandemic and are likely to include increased unemployment benefits. The pair spoke for more than an hour on Saturday, after which Ms Pelosi said the two sides still did not agree on what the bill should say about testing and about protecting minority communities.
The stock market suffered a broad decline during Monday’s session, with the Dow shedding 410 points and the S&P 500 and Nasdaq Composite both losing just over 1.6%. All 11 S&P sectors finished in the red. The slump marked the fourth down day in five for the Dow and the S&P 500, while it was the fifth-straight negative session for the tech-heavy Nasdaq.NASDAQ Composite 1-month chart (Source: Bloomberg) S&P 500 1-month chart (Source: Bloomberg) DJI Index 1-month chart (Source: Bloomberg)
Stimulus negotiations have hung over the market for months after the main provisions from the CARES Act expired at the end of July. Since then, job growth has slowed but consumer spending has continued to recover. However, some indicators have shown that savings built up by the massive economic relief package are starting to run out.
House Democrats have passed two additional relief bills that found no traction in the Republican-controlled Senate, which is moving to vote on a $500 billion targeted relief package later this week. The most recent bill from House Democrats was $2.2 trillion, while the counteroffers from the White House have crept up to about $1.9 trillion in recent weeks.
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 0.77% as of 20Oct 2020 from 0.76% as at 6 Oct 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 dropped to 65 as at 19 Oct 2020 from 77 as at 30 Sep 2020.
The CDS Index has decreased by 12 bps, reflecting a more stable outlook moving forward. Asia IG credit spread dropped to 163 as at 20Oct 2020 from 172 as at 6 Oct 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 remain the same as the last 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, we recommend investors to maintain an underweight allocation to Chinese Real Estate market as well as Financials as a consequence of weak fundamentals and industry headwinds. Taking the cue from the US Fed announced previously, interest rates will likely continue to stay low for the foreseeable future (until 2023) which will not bode well for Financials, in particular, Banks. Sector/industry focus should still remain in consumer-related 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.
To reiterate our previous recommendation, we believe Technology stocks in particular, Software as a Service (“SaaS”) will likely outperform in the ongoing recovery cycle as the digital online economy continue to gain further traction.
On the macro front, talks on US further economic stimulus have continued between Democrats and the White House despite delays that have disappointed the Street. Nevertheless, we remain confident that the stimulus will materialize and possibly in the next few weeks. This will provide the US economy the much-needed boost with a positive impact on global equities in general. Hence, we remain cautiously bullish on Equities, in particular, US and China Equities in the coming weeks ahead.
Overall, 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 major catalysts appear along the way. On the US election front, a Biden win will mean higher taxes, and higher minimum wage among others but likely a short-term relief in tension with respect to the US-China trade war. On the other hand, a Trump win will likely imply further escalation in US-China trade tensions over a prolonged period of time. Either way, volatility in global Equities market is anticipated to remain high. Amid the continued volatility with ongoing US presidential campaigns and the possibility of a second wave of the pandemic, investors may look out for short-term tactical trading opportunities which may arise.
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. 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 20 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.
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”).