Licenced by SFC Type 4 & 9 & MAS Capital Market Services
12 April 2021
“Notwithstanding anti-trust regulations in place, Alibaba’s Hong Kong shares rose in trade, while its U.S. counterpart rallied more than 9% overnight.”
“Despite being hit with a 18.23 billion yuan ($2.8 billion) fine after its anti-monopoly investigation, Alibaba’s Hong Kong-listed shares jumped about 4% at the open but pared those gains throughout the day.”
Thereafter, the tech Giant’s U.S.-listed shares closed over 9% higher on Monday. The massive anti-trust fine and the Ant Group restructuring plan are part of a broader push by China to regulate the country’s technology companies. Their activities often span across sectors from gaming to financial technology as well as cloud computing.
Alibaba HK-listed shares 3-day chart 10 – 12 April 2021 (Source: Bloomberg)
Alibaba U.S.-listed shares 3-day chart 10 – 12 April 2021 (Source: Bloomberg)
Following the storm, we see major market leaders such as Meituan, JD.Com Inc and Kuaishou Technology declining 7.44%, 3.49% and 3.14% respectively Tuesday.
On the otherhand, in US, The Dow and S&P 500 started the week lower, breaking three-session winning streaks and falling from Friday’s record high closes. The Nasdaq also broke a two-session winning streak. The tech-heavy index, as of Monday’s finish, was 1.7% from its February record close.
Following the FDA and CDC recommended a pause in the use of Johnson & Johnson’s one-shot Covid vaccine. The federal health agencies said they are reviewing reports of six recipients who experienced rare and severe blood clotting issues.
In a statement, J&J said there’s “no clear causal relationship” between rare the blood-clotting events and its Covid vaccine. The U.S. pharmaceutical giant also said it is working with regulators. All six cases occurred in women ages 18 to 48, with symptoms developing 6 to 13 days after they received the shot. The CDC will convene a meeting of the Advisory Committee on Immunization Practices on Wednesday to further review the cases, federal health regulators said Tuesday. Cases will also be under investigation by The FDA.
Taking catalyst events into consideration, we recommend investors to 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. Amid the continued volatility, investors may also look out for short-term tactical trading opportunities for added alpha in their portfolios.
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. However, 10-yr Treasury dropped to 1.65% as at 12 Apr 2021 from 1.73% as at 30 Mar 2021 expect to be around 1.25% to 2.0% for the year of 2021. Moreover, to contribute to the recovery, we anticipate FED Funds rate to be kept 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 70 as at 12 Apr 2021 from 66 as at 30 Mar 2021. The CDS Index has increased by 4 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread rebounded to 136 as at 12 Apr 2021 from 128 as at 30 Mar 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread dropped to 622 as at 12 Apr 2021 from 648 as at 30 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/offshore bonds defaulted recently including bonds issued by Yongcheng Coal, Huachen Automotive Group, Tsinghua Unigroup& 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 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.
Despite spiking inflation expectations in the previous month, 10-year treasury yields managed to stabilize in the past 2 weeks. The equities market has continued to rally, translating into trading opportunities on short-term pullbacks. We recommend investors take profits into this rally to lock in any short-term gains. 12 April marks the peak as the S&P 500 closed above 4,100 and posted its third-straight weekly advance. Treasuries ended the week on a downward note, with 10-year yields up around 1.66%.
In China, the anti-trust related fine imposed on Alibaba (US$2.8 billion or approx. 4% of full-year 2019 revenues) provides a major relief to overhang on Chinese Internet giants. However, we expect anti-trust regulations in China will continue to tighten. The Chinese Internet sector will continue to remain under scrutiny. At the portfolio level and across geographies, we recommend investors to remain highly selective on stock picking and take an overall slightly more defensive stance as we prepare for even greater volatility throughout the rest of the year.
As reiterated previously, we recommend investors to remain invested in Technology subsectors namely Cybersecurity, Saas, Cloud and 5G related themes, preferring market leaders with solid underlying fundamentals. With increasing market volatility over US and China anti-trust laws, we recommend avoiding the Big tech names – FAANGs, Facebook, Amazon, Apple, Netflix and Alphabet (formerly known as Google). Alternatively, we recommend investors to keep an eye on the cyclical sectors which we anticipate to continue to benefit from ongoing vaccine rollouts globally as well as improving economic data as the global economic gradually reopens and normalize.
Nevertheless, investors should also consider setting aside some cash as buffer to capitalize on the expected volatility throughout the rest of the year. Accordingly, investors should look to consider taking more short-term tactical trades when the opportunity presents itself on significant market pullbacks. The traditional “buy-and-hold” strategy will likely result in under-performance.
Overall, we recommend investors to be selective and take a defensive stance. We remain cautiously bullish on equities and to initiate or add positions on significant market pullbacks. Staying overweight on large cap utilize a more tactical trading approach and continue to employ risk management tools (stop-loss and/or appropriate hedging) to mitigate risks from possible sudden and violent market moves.
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”).