Investment Roundup

02 February 2021

“Markets rebound as the new COVID support stimulus plan was released on Monday. Markets in disarray from the short squeeze by retail traders.”

Market Overview:

“Asian Markets buoyed by GOP’s $618bn stimulus plan released. Markets in disarray from the short squeeze by retail traders on Reddit in NYSE:GME.”

Asian stock markets gained for a second day on Tuesday on increased optimism about economic stimulus and global recovery, while retail investors retreated from GameStop and their new-found interest in silver.

Markets were buoyant ahead of negotiations Tuesday between U.S. President Joe Biden and Republican senators on a new COVID support bill. The GOP’s $618bn stimulus plan released early Monday was about a third the size of the President’s proposal. Top Democrats later on Monday filed a joint $1.9 trillion budget measure in a step toward bypassing Republicans.

The momentum looked set to carry through into European trade, with FTSE futures up 0.66% and E-mini futures for the S&P 500 index rising 0.52%.

MSCI’s gauge of Asia Pacific stocks outside Japan rose 1.49%, building on Monday’s 2.3% gain. Hong Kong’s Hang Seng Index and China’s benchmark CSI300 Index jumped 1.37% and 1.1% respectively, helped by easing concerns about tight liquidity and falling cases of new coronavirus infections. Japan’s Nikkei 225 added 0.78%.

GameStop’s shares have traded wildly in recent weeks after retail traders on Reddit sparked a short squeeze in the stock, a phenomenon where traders who had bet against the stock are forced to buy it to limit their losses, pushing the price even higher. Shares of GameStop continued to lose ground after the bell on Monday, with shares of sliding more than 16% in extended trading. The after-hours tumble follows a more than 30% drop during the regular market session and brings the stock price below $200 per share, which would erase the rest of the nearly 68% gain for the stock on Friday.

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 dropped to 1.08% as at2Feb 2021 from 1.11% as at 19Jan 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 dropped to 62 as at 02Feb2021 from 63 as at 18Jan 2021. The CDS Index has decreased by 1 bps, reflecting a more positive outlook on credits moving forward. Asia IG credit spread droppedto143 as at 02Feb 2021 from 149 as at 19 Jan 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread dropped to 658 as at 02 Feb 2021 from 669 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.

Equities Overview:

Chinese equities have rallied in hopes of a more stable outlook for US-Sino relations as President elect Joe Biden took office, a potential rollout of the mass vaccine inoculation, and in anticipation of a more positive outlook of corporate earnings.

Our strategy for this fortnight remains the same as we continue to remain cautiously bullish on Equities. However, 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 Chinese Real Estate.

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. Broadly, we advise investors to closely monitor several key factors that could affect the current positive market momentum: i)the developments with regards to US-Sino relations,ii) corporate earnings and outlook,and iii) a resurgence 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.

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 02 February 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.

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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