Licenced by SFC Type 4 & 9 & MAS Capital Market Services
03 November 2020
“US stocks rebound as the former vice president takes the lead in polls. US dollar expected to devalue with extra robust stimulus.”Market Overview:
“Wall street rebounds as national polls show Biden having a strong lead in, depicting market sentiment for the US elections.”
Wall Street shares staged a rebound on Monday following last week’s rout, with investors repositioning their portfolios as Joe Biden holds a strong lead in national polling ahead of election day.
The blue-chip S&P 500 closed higher by 1.2 per cent, having lost 5.6 per cent last week in what was the index’s worst weekly performance since March. Leading the index were stocks in the basic materials and industrials sectors, as investors bet these areas would benefit from the increased infrastructure spending pledged by Mr Biden, should he become president.
The tech-focused Nasdaq, which started the session more than 1 per cent higher, fell back to a 0.4 per cent gain for the day. Analysts believe a blue-wave victory, where Democrats take control of both houses, could usher in more regulation of big tech businesses such as Facebook and Google.NASDAQ Composite 1-month chart (Source: Bloomberg) S&P 500 1-month chart (Source: Bloomberg) Dow Jones Index 1-month line chart (Source: Bloomberg)
Many market participants believe that a victory by Joe Biden – currently the front-runner in polls – and a potential Democratic sweep would likely weigh on the U.S. currency further, as the former vice president is expected to open the door to policies that investors view as dollar-negative, including robust fiscal stimulus. Potentially devaluing the dollar and driving up equity prices.
Four more years of a Donald Trump presidency may offer a less-clear path for the dollar. Although Trump’s continued belligerent approach toward China would likely boost the dollar’s allure as a haven asset, those gains may be outweighed by factors such as continued negative U.S. real yields. A Reuters poll last month showed analysts’ median forecast looking for the euro to rise to $1.21 in a year, up about 4% from current levels. This escalation of the US-China trade war could cause de-globalisation, potentially harming both markets.Federal Reserve interest rate and USDEUR 1-year charts (Source: Reuters)
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. Amid the continued volatility, investors may also look out for short-term tactical trading opportunities for added alpha in their portfolios.
Fixed Income Overview:
There has been continued positive momentum and increasing signs of recovery in macro environment, as more countries announce and prepare for the reopening of their economies. US 10-Year Treasuries yields rebounded to 0.84% as of 3Nov 2020 from 0.77% as at 20 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 rebounded to 70 as at 2 Nov2020 from 65 as at 19Oct 2020. The CDS Index has increased by 5 bps, reflecting a cautious outlook on credits moving forward. Asia IG credit spread rebounded to 166 as at 3Nov 2020 from 163 as at20 Oct 2020. Credit spreads are expected to 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 bondsto 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.
For this fortnight, we will have two different scenarios that take into consideration the potential results of the US elections.
In the case of a Biden victory, the anticipated increase in taxes for Corporate America may become an overhang on the US equities market. That negative impact may spillover to the broader Equities market across the globe. However, we expect the Biden administration to promote globalization (vs Trump) and to be less aggressive on China, providing some form of relief for Chinese equities, in particular, the Technology sector. Against this backdrop, we recommend investors to continue to be overweight US and Chinese tech companies, in particular, those caught in the crosshairs of the US-China trade war under the Trump administration. Notwithstanding, investors should remain cautious of heavy/over exposure toUS Big Tech counters (namely FAANG) as a result of potential anti-monopoly regulation actions taken against these entities.
In the case of a Trump victory, we expect a continuation and likely an escalation of the on-going US-China trade war. Clearly, President Trump has been using the US Equity market performance as a one of several key benchmarks for the recovery of the US economy as well as his own performance. As such, a Trump victory will likely be regarded as positive for the US Equities market by investors. In addition, the lack of an overhang from increased taxes as proposed by Biden will also be positive for the US equity market. Under this scenario, we recommend investors to reduce heavy exposure to the Technology sector (that said, we remain bullish on US technology overall) while increasing exposure to sectors such as consumer discretionary, infrastructure, materials, healthcare, and commercial real estate as investors sector rotate into beaten down sectors and also position portfolios for a potential confirmation of a vaccine that may eventually put an end to the pandemic.
Regardless of who wins in the US election, we remain bullish and overweight in the Chinese consumer discretionary sector such as autos and sportswear, etc.
As reiterated previously, the emphasis on stock selection is crucial now more than ever. 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. Amid the continued volatility, investors may also look out for short-term tactical trading opportunities for added alpha in their portfolios.
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”).