Licenced by SFC Type 4 & 9 & MAS Capital Market Services
16 March 2021
“Markets rebound from pullback. Fed maintains loose monetary policy amid continued rise in treasury yields.”
“Markets recover from pullback as USD1.9tn is approved to fuel investor optimism.”
In recent news, the S&P 500 and Dow Jones Industrial Average both rebounded on gains in travel stocks as mass vaccinations in the United States and congressional approval of a $1.9 trillion aid bill fuelled investor optimism. On Wall Street, the Dow Jones Industrial Average rose 174.82 points, or 0.53%, to 32,953.46, the S&P 500 gained 25.6 points, or 0.65%, to 3,968.94.Asian stocks also rose on Tuesday,16th March 2021, tracking an advance by Wall Street’s main indexes to record highs, although investors remain cautious towards key central bank meetings this week, starting with the U.S. Federal Reserve on Wednesday, 17th March 2021.
S&P 500 Index 1-month Chart (Source: Bloomberg)
Dow Jones Industrial Average Index 1-month chart (Source: Bloomberg)
Hang Seng Index 1-month chart (Source: Bloomberg)
Investors are focused on the Fed’s two-day policy meeting, which will conclude on Wednesday, as bond yields have surged this year on sentiment that central bankers will need to raise rates sooner than they have so far signaled to contain inflation. Fed policymakers are expected to forecast that the U.S. economy will grow in 2021 by the fastest rate in decades.
The government and the Federal Reserve have deployed unprecedented levels of support over the past year as they look to guide the economy out of the coronavirus crisis. Last week, President Biden signed a $1.9 trillion relief bill delivering $1,400 stimulus checks to individuals in around 159 million households. Meanwhile, the Fed has committed to continuing its loose monetary policy, signalling a willingness to overshoot its 2% inflation target if necessary.
Stock markets have been volatile in recent weeks as bond yields rose alongside expectations for higher inflation, sparking concerns that central banks could begin to unwind some of the stimulus measures currently in place. Equity investors have rotated toward more cyclical stocks, those likely to benefit from the economic recovery, while pandemic winners such as the technology sector have lagged.
We recommend investors to accumulate on existing or initiate new positions on significant pullbacks in certain tech sub-sectors. Additionally, investors are recommended to accelerate increase exposure in cyclicals.
In conclusion, investors are recommended to adopt a more diversified portfolio and continue implementing 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 1.59% as at 16 Mar 2021 from 1.42% as at 1 Mar 2021 we expect it to be around 1.0% to 1.75% for the year 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 Asia ex-Japan Investment Grade entities rebounded to 61 as at 16 Mar 2021 from 58 as at 2 Mar 2021. The CDS Index has increased by 3 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread rebounded to 133 as at 16 Mar 2021 from 130 as at 1 Mar 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread rebounded to 659 as at 16 Mar 2021 from 621 as at 1 Mar 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: CCoCo 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 more investment grade / high quality high yield bond issues in Q2 of 2021 as issuers would like to take this opportunity to issue bonds at lower absolute yields before Treasury yields further surge. 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 tech sector pullback has stabilised and rebounded, in particular, the subsectors mentioned in the previous investment roundup. In addition, sector rotation into cyclicals such as Airlines, Financials, Real Estate, and Homebuilders was also observed, and we anticipate further acceleration of these cyclicals to continue. As reiterated previously, we believe the spike in treasury yields is likely short-lived. We expect inflation to gradually creep up over the course of this year. However, we expect the FED to have sufficient tools in containing inflation the form of rate hikes and reduction in bond asset purchases.
Our strategy for this fortnight remains the same as we continue to remain cautiously bullish on Equities particularly in tech sub-sectorssuch as SaaS, e-Commerce, Cybersecurity, Cloud, and Artificial Intelligence amongst others across China and the US;as we anticipate new economy stocks to gain greater market penetration through accelerated adoption across markets. Notwithstanding, we remain cautious of the other sub-sectors within the tech sector apart from those mentioned above.
We recommend investors to accumulate on existing or initiate new positions in the aforementioned tech sub-sectors as well as to further increase exposure to cyclicals as we see further progress on global vaccination programmes. We also recommend investors to take profit in the oil and gas sector from the recent rally; due to potential production hikes that may be announced by OPEC+.
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) inflation expectations 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”).