Licenced by SFC Type 4 & 9 & MAS Capital Market Services
19 January 2021
“WHO sends expert team to Wuhan to investigate the source of the pandemic. Dozens of companies delisted from NYSE as trump signs executive order.”
“Trump administration prohibits US investors from purchasing securities from dozens of companies associated with China’s military.”
In recent news, US-Sino relations have strained further due to the United States calling on China earlier this week to allow a team from the World Health Organization (WHO) to investigate the source of the pandemic in Wuhan, ensuring access to medical data and samples.
The United States has accused China of hiding the extent of the initial COVID-19 outbreak and for a “transparent” WHO-led investigation.
The evolution of the global coronavirus pandemic and geopolitical tensions of US-Sino relations will continue to resonate throughout the world for some time, even after the virus is brought under control and bilateral tensions ease. The stakes are high in the relationship between the world’s two largest economies, and the full effects it will have on the global economy are still unclear.
The Trump administration also prohibited US investors from purchasing securities from dozens of companies that are said to have links to China’s military. Last week, the New York Stock Exchange delisted US-traded shares of China’s top three telecommunications companies – China Mobile, China Telecom and China Unicom – to comply with an executive order signed by President Trump that bars Americans from buying shares in “communist Chinese military companies”. Despite the Biden administration pledging to return to multilateralism, it will take time for president-elect Joe Biden to deal with the aftermath that is the worrying domestic economy, the pandemic, and US-Sino relations.
We recommend investors to enter laggard sectors as economies worldwide benefit from a global recovery Examples of such sectors materials, and infrastructure & building materials. In addition to the laggard sectors, we view the Chinese Real Estate favourably as well with undemanding valuations and respectable dividend yields.
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 1.11% as at19Jan 2021 from 0.92% as at 05Jan 2021 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 rebounded to 63 as at 18Jan2021 from 57 as at 05Jan 2021. The CDS Index has increased by 6 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread unchanged at149 as at 19Jan 2021 from 05 Jan 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread rebounded to 669 as at 19 Jan 2021 from 632 as at 5 Jan 2020. 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.
Chinese equities have rallied in hopes of a more stable outlook for US-Sino relations as President elect Joe Biden is about to take office, a potential rollout of the mass vaccine inoculation, and in anticipation of a more positive outlook of corporate earnings. A pullback is imminent the timing of which depends on events such as the COVID-19 variant, or from political impacts, or from the outlook on corporate earnings. Increasing the need for economic stimuli.
Our strategy for this fortnight remains the same as we continue to remain cautiously bullish on Equities. However, we recommend investors to take profit partially and gradually from the current strength we witness in the equities market. We also 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, Airlines. In addition to the laggard sectors, we view the Chinese Real Estate favourably as well with undemanding valuations and respectable dividend yields.
Notwithstanding, we throw caution into the wind with regards to selected tech giants as a result of headwinds potentially arising from antitrust laws in the US. Moreover, with the Chinese antitrust laws cooling off, we further anticipate drawbacks from such news to have a minimal effect on the market.Broadly, we advise investors to closely monitor several key risks that could derail the current positive market momentum: i)the developments with regards to US-Sino relations which could indicate a pullback in the equities market, ii) corporate earnings and outlook, and iii) a are surgence of infection numbers globally 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.
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”).