Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
16 February 2021
“Major indices closed at record levels in the past week. Rising interest rates and an uncertain policy outlook could affect trading as global demand for goods recover.”
“Global demand recovering and supply bottlenecks likely to drive up cyclicals.”
Futures contracts tied to the major U.S. stock indexes rose in extended trading Monday evening after finishing strong last week. Dow futures rose 250 points, suggesting an implied open of about the same magnitude, while S&P 500 contracts added 27 points, or 0.7%. Nasdaq 100 futures gained 95 points, also a gain of 0.7%.
The major averages finished last week with decent gains even as February’s rally appeared to cool off somewhat. The blue-chip Dow Jones Industrial Average posted two little changed days, while the S&P 500 swung within 0.2% for three days in a row. Still, the S&P 500 finished the week with a gain of 1.2%, while the Dow added 1%. The tech-heavy Nasdaq Composite rose 1.7%. All three closed at record levels on Friday.
Dow Jones Industrial Average 1-month Chart (Source: Bloomberg)
The Dow has gained 4.9% in February, while the S&P 500 and the Nasdaq have rallied 5.9% and 7.8%, respectively. The S&P 500 has raked in ten record closes in 2021. Moreover, the potential ofrising interest rates and an uncertain policy outlook could keep trading from growing too frothy in the near term. With global demand returning and supply bottlenecks likely to drive up shipping, food and energy prices.
We recommended investors stick to cyclical stocks that could see the most upside as the U.S. economy recovers. The Energy sector is up more than 13% month to date, with financials and materials also among the outperforming sectors.
NASDAQ Composite 1-month Chart (Source: Bloomberg)
Freezing weather in regions across the U.S. sparked another rally in energy futures on Monday and put West Texas Intermediate crude contracts above $60 a barrel for the first time since the early days of the coronavirus pandemic.
Easing fears across Wall Street are likely in large part thanks to the rollout of the Covid-19 vaccine, economic re-opening, and expectations for more fiscal stimulus. 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.10-yr Treasury rebounded sharply to 1.24% as at 16 Feb 2021 from 1.08% as at 2 Feb 2021and we expect it to remain between 0.75%-1.5% for 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 Asia ex-Japan Investment Grade entities dropped to 57 as at 16 Feb 2021 from 62 as at 1 Feb 2021. The CDS Index has decreased by 5 bps, reflecting a more positive outlook on credits moving forward. Asia IG credit spread dropped to 135 as at 16 Feb 2021 from 143 as at 2 Feb 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread dropped to 654 as at 16 Feb 2021 from 658 as at 2 Feb 2021. 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.
China’s GDP was reported to have been up 6.5% YoY since 4Q2020 numbers were reported. Whereas consumer spending was lower than consensus due to high expectations. Economic trends are on the rise in terms of new housing, and consumer confidence as China and the US are anticipated to be driving ahead into 2021.
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.
Despite some disappointment in terms of efficacy of vaccines from Astra Zeneca, equities remained buoyed as investors remain hopeful that further rollout of mass inoculations and subsequent cross-border travels to improve. We recommend investors to hold off profit taking on selected tech sub-sectors such as SaaS, Fintech, e-Commerce, Cybersecurity, and Artificial Intelligence amongst others as we anticipate further upside in these sub-sectors.
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.
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”).