Investment Roundup

17 November 2020

“Mr. Biden was declared president-elect on Saturday, Pfizer and BioNTech announced that their vaccine candidate was 90% effective in clinical trials on Monday causing around $32.5 billion course into U.S. equity funds.”

Market Overview:

“Biden wins election with republicans taking the senate, and democrats taking the house. Multiple vaccines of 90% efficacy and above have been reported.”

In recent news, Mr. Biden clinched the US presidential elections, triumphing over Trump last week. This caused the S&P 500 to rise 1.4 percent on Friday, exceeding its Sept. 2 closing record of 3,580.84. Wall Street had toyed with that high for days, first because of the view that the presidential election delivered an outcome that could lead to growth next year, and later after Pfizer released surprisingly good trial results for its vaccine candidate. The rally has left the S&P 500 up 9.6 percent this month. Banks, industrial companies and small caps — all of which are sensitive to near-term expectations for growth — were among the best performers of the day Friday. Shares of companies that have become barometers of sentiment toward the pandemic also reflected optimism.

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

It was reported that an analysis of all possible political scenarios going back to 1945, a Democratic president alongside a split Congress generated the best average annual returns for the U.S. stock market, of nearly 14% in dollar terms.

In the week after the election — in which Mr. Biden was declared president-elect on Saturday, Pfizer and BioNTech announced that their vaccine candidate was 90 percent effective in clinical trials on Monday causing around $32.5 billion course into U.S. equity funds, the second largest weekly inflow of all time. Additionally, Biotechnology firm Moderna, a major beneficiary of US government funds through Operation Warp Speed, announced on Monday that it conducted a successful trial of its COVID-19 vaccine candidate mRNA-1273, reporting that the vaccine was 94.5 percent effective in preventing COVID-19 infections. With more effective vaccines being created, it is possible that we may see a v-shaped recovery as soon as next quarter, potentially causing laggard sectors to rebound quickly and sharpy in a post-covid era.

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, we recommend investors to aim for stable returns instead of short-term tactical trading during this period.

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 increased to 0.90% as of 17Nov 2020 from 0.84% as at 3Nov 2020 and we expect it to remain between 0.25%-1% for the rest of 2020.

The credit default swap (CDS) Index for the Asia ex-Japan Investment Grade entities dropped to 60 as at 16 Nov2020 from 70 as at 2Nov 2020. The CDS Index has decreased by 10 bps, reflecting a positive outlook on credits moving forward. Asia IG credit spread dropped to 155 as at 17 Nov 2020 from 166 as at 3 Nov 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. Several onshore bonds defaulted recently including Yongcheng Coal, Huachen Automotive Group & Tsinghua Unigroup. 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 excluding bonds issued by Chinese issuers 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 excluding China and neutral on Developed Markets’ and China 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:

Biden clinched victory over Trump for the presidential election. However, we have a split Congress which in turn will potentially become a hurdle for future policies to be rolled out by the Biden administration. With a Biden win as previously mentioned, we have witnessed a relief rally in Chinese technology sector in general. We expect Biden to take a more constructive approach towards China which would take off some pressure Chinese technology sector going forward.

Against this backdrop, we recommend investors to be selective and continue to be overweight US and Chinese tech companies, in particular, as market leaders are expected to outperform. As reiterated previously, we have been and remain bullish and overweight in the consumer discretionary sector, in particular, that in China for obvious reasons since the Chinese economy is coping well amid the pandemic (vs the rest of the other major economies).

Over and above, despite US infection rates breaking new highs, stock market investors remained bullish and seem to be looking forward beyond the pandemic, ignoring such numbers. With further positive progress on the vaccine front, we recommend investors to increase the pace of adding further exposure to the laggard sectors, in particular, airlines, oil & gas, infrastructure and building materials.

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, we recommend investors to aim for stable returns instead of short-term tactical trading during this period.

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 17 November 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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