Licenced by SFC Type 4 & 9 & MAS Capital Market Services
02 March 2021
“Markets rebound after month-long pullback. Additional FDA-approved COVID-19 vaccine by Johnson & Johnson.”
“Equities market recovers from month-long pullback as fiscal stimulus bolstering expectations. COVID-19 vaccine from Johnson & Johnson approved by the U.S..”
In recent news, the S&P 500 had its strongest one-day gain since June on Monday (1st March 2021) as bond markets calmed after a month-long pullback. Meanwhile, another COVID-19 vaccine from Johnson & Johnson gained FDA approval and fiscal stimulus bolstered expectations of a swift economic recovery. Johnson & Johnson ended up 0.5%, but off earlier highs, after it began shipping its single-dose vaccine. It became the third authorized COVID-19 vaccine in the United States over the weekend.
President Joe Biden scored his first legislative win as the House of Representatives passed his $1.9 trillion coronavirus relief package early Saturday. The bill now moves to the Senate.
S&P 500 Index 1-month Chart (Source: Bloomberg)
U.S. bond yields eased after a swift rise last month on expectations of accelerated inflation due to bets on an economic rebound. The U.S. 10-year treasury yield dipped to 1.449% after hitting a one-year high of 1.614%. All 11 S&P 500 sectors rallied, led by financials and technology. Apple Inc, Microsoft Corp, Facebook Inc and Amazon.com Inc bounced back after a selloff last week in tech stocks. Apple rose over 5% and was the strongest contributor to the S&P 500’s gains. In extended trade, Zoom Video Communications jumped 10% following its strong quarterly report.
Dow Jones Industrial Average Index 1-month Chart (Source: Bloomberg)
The Dow Jones Industrial Average surged 1.95% to end at 31,535.51 points, while the S&P 500 gained 2.38% to 3,901.82. The Nasdaq Composite jumped 3.01% to 13,588.83. The Russell 2000 index of smaller companies surged 3.37%, putting its gain in 2021 at over 15%, compared with the S&P 500’s gain of about 4% in the same period.
We recommend investors to accumulate on existing or initiate new positions on significant pullbacks. Additionally, investors are recommended to increase exposure to cyclicals.
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 economies5.10-yr Treasury rebounded sharply to 1.42% as at 1 Mar 2021 from 1.24% as at 16 Feb 2021 and 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 rebounded to 58 as at 2 Mar 2021 from 57 as at 16 Feb 2021. The CDS Index has increased by 1 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread dropped to 130 as at 1 Mar 2021 from 135 as at 16 Feb 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread dropped to 621 as at 1 Mar 2021 from 654 as at 16 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, and China Fortune Land Development. 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. Also, we recommend investors to maintain short durations for IG bond portfolios from around 3.5 – 4 years. 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.
The recent concerns over inflation, and rising commodity prices have caused unease across global equity markets. Despite these concerns, we do not anticipate a rise in inflation rates. Even if inflation rates run, the FED is well equipped to control inflation in the form of rate hikes and reduction in bond asset purchases. With new technology becoming mainstream.
Our strategy for this fortnight remains the same as we continue to remain cautiously bullish on Equities. However, we recommend investors to accumulate on existing or initiate new positions on significant pullbacks. Additionally, investors are recommended to increase exposure to cyclicals. We also recommend investors to take profit in the oil and gas sector due to potential production hikes that may be announced in the upcoming OPEC+ meeting this week.
We anticipate new economy stocks to gain greater market penetration through accelerated adoption across markets. Investors are recommended to hold off profit taking on selected tech sub-sectors such as SaaS, Fintech, e-Commerce, Cybersecurity, Cloud, and Artificial Intelligence amongst others across China and the US 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.
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 March 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”).