Licenced by SFC Type 4 & 9 & MAS Capital Market Services
15 December 2020
“Markets stay afloat from positive vaccine news despite infections soaring by the day. While Democrats and Republicans continue stimulus talks.”Market Overview:
“Markets have buoyed by the recent approval of the Pfizer vaccine despite the overwhelming record breaking daily infections in the US.”
Although we continue to see a record number of daily COVID-19 infections in the United States with increasing reports that hospitals are becoming constantly overwhelmed, the markets in general have been buoyed by the recent approval of the Pfizer vaccine for emergency use by the FDA. Moderna’s vaccine is also slated for approval in the coming days. Will the rollout of the COVID-19 vaccines push markets to new highs in a year riddled with global uncertainties?
Also, in focus this week will be whether or not we see further progress with the stimulus talks between House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell. The proposed stimulus plan is split broadly into two parts – the first plan calls for $748 billion in spending for programs including federal unemployment benefits and additional loans under the Paycheck Protection Program. The second $160 billion bill would include areas of business liability protections and financial aid to state and local governments.
Wall Street is also keenly watching the Federal Reserve, which will be releasing its statement with projections on the stance of monetary policy on Wednesday. While the FED’s long-term view is expected to be improve due to the vaccine rollout, the central bank is expected to still maintain its dovish stance on the economic outlook.
Investors will continue to gauge how quickly the global economy will fully recover once the vaccine rollout get underway. Seemingly, these various tailwinds are looking to push markets into a “Santa Claus Rally” into the new year.
We recommend investors to enter laggard sectors as economies worldwide benefit from a global recovery Examples of such sectors are autos, airlines, oil & gas, and infrastructure & building materials.
In conclusion, investors are recommended to employ a more diversified position 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 macro environment, as more countries announce and prepare for the reopening of their economies. US 10-Year Treasuries yields rebounded to 0.89% as at15 Dec 2020 from 0.85% as at 1Dec 2020 and we expect it to remain between 0.5%-1.25% for the 1H of 2021.
The credit default swap (CDS) Index for the Asia ex-Japan Investment Grade entities dropped to 58 as at 15Dec2020 from 61 as at 1Dec 2020. The CDS Index has decreased by 3 bps, reflecting a more positive outlook on credits moving forward. Asia IG credit spread dropped to 152 as at 15Dec 2020 from 156 as at01Dec 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 more diversified fixed income portfolio or to reduce leverage of portfolios due to various uncertainties across sectors.
We anticipate there to be an influx of new bond issues at the start of 1Q2021. Hence, we recommend investors to monitor this space, in particular, low beta bonds. For reference, the purchase yields for 3-5 year low beta IG bonds are at 1% – 2%, and 3-5 year low beta HY bonds are at 3% – 5%. For investors with a higher risk tolerance, high beta bonds can be considered, vice versa, investors can consider low beta bonds. Overall, we recommend a balanced and more diversified portfolio of high quality (BB rated) high yield bonds and short duration IG Bonds.
Despite vaccine progress making significant headway, infection rates in the US have been breaking new highs, increasing the need for economic stimuli, supporting the equity sector from downturns. Our strategy for this fortnight remains the same as we continue to remain cautiously bullish on Equities. We recommend investors to be selective and continue to be overweight US and Chinese tech companies. As reiterated previously, we have been and remain bullish and overweight in the consumer discretionary sector, in particular, that in China since the Chinese economy has stabilized and is coping well amid the pandemic (vs the rest of the other major economies).
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, autos, airlines, oil & gas, infrastructure and building materials. We especially recommend investors to be overweight in consumer discretionary (especially the Chinese EVs). Notwithstanding, we throw caution into the wind with regards to selected tech giants as a result of headwinds potentially arising from antitrust laws across US and China. Apart from further positive progress on the vaccine front, the anticipation of a near-term materialisation of an economic stimulus from the US continues to bode well for Equities. Hence, we remain constructive on Equities for the remainder of this year and beyond.
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.
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 15 December 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”).