Licenced by SFC Type 4 & 9 & MAS Capital Market Services
05 January 2021
“With the Senate at stake as the US undergoes the dual runoff election, a potential blue wave could send ripples across the stock market.”
“A Democratic victory in both races could tip control of the Senate away from Republicans, potentially boosting the agenda of President-elect Joe Biden.”
World stock markets hit record highs on Monday, the first trading day of the new year, as investors hoped the rollout of vaccines would ultimately lift a global economy decimated by the COVID-19 pandemic. Further news in the new year include the control of the U.S. Senate being at stake with Tuesday’s dual runoff elections in the state of Georgia, and the results may ripple through a stock market that closed 2020 at record highs. A Democratic victory in both races could tip control of the Senate away from Republicans, potentially boosting the agenda of President-elect Joe Biden.
Such a scenario could hurt areas of the market that benefited from expectations that a gridlocked Congress – with Republicans holding the Senate and Democrats running the House of Representatives – would prevent legislative overhauls such as higher corporate taxes and tougher regulations. The latest polling data gives a slight edge to both Democratic candidates in their respective races, according to data website 538 here.
But even if both Democrats prevail, analysts have said the market impact could be blunted because the party will hold only a slim Senate margin, casting doubt on the prospect for significant legislative changes. Some investors, meanwhile, say the market will embrace any result as long as it creates clarity in the political landscape.
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 0.92% as at05Jan 2021 from 0.89% as at 15Dec 2020 and we expect it to remain between 0.5%-1.25% for the 1H of 2021.Moreover, to contribute to the recovery, we anticipate FED Funds rate to be kept between 0%-0.25% with no rate hike by the end of 2023.
The credit default swap (CDS) Index for the Asia ex-Japan Investment Grade entities dropped to 57 as at 05 Jan2021 from 58 as at 15Dec 2020. The CDS Index has decreased by 1 bps, reflecting a more positive outlook on credits moving forward. Asia IG credit spread dropped to 149 as at 05Jan 2021 from 152 as at15Dec 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 3 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.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).Additionally, we further remain bullish on cyclical sectors in particular, Oil and Gas, and Airlines.
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. With the new Biden administration taking over, we also recommend investors to closely monitor the developments with regards to US-Sino relations which could indicate a pullback in the equities market. Moreover, the variant in the COVID-19 strain could throw a wrench in the recovery of the global economy.
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 05 January 2021. 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”).