Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
27 April 2021
“President Joe Biden has witnessed an unprecedented growth on Wall Street in his first 100 days in office, better than any of his predecessors. “
“The S&P 500 has risen 24.1% since Election Day with numbers that easily trounce any of Biden’s predecessors.”
Wall Street’s bull run has accelerated buoyed by the Biden administration’s $1.9 trillion fiscal stimulus that was injected in February. The rollout of $1.9 trillion of COVID-19 stimulus package — including dolling out of $1,400-stimulus checks, the announcement of $2.3-trillion worth of infrastructure plan, joining of Paris Climate Change agreement in support for a green economy and a massive push for coronavirus vaccination — are some of the measures that Biden resorted to in the first 100 days in office.
S&P 500 6-months chart (Source: Bloomberg)
The U.S. dollar edged higher on Wednesday as investors moved to the sidelines ahead of a U.S. Federal Reserve policy statement and a speech by Joe Biden later in the day where the U.S. president is set to announce more stimulus plans.
U.S. dollar 500 1-year chart (Source: Bloomberg)
The dollar index rose 0.2% at 91.047 =USD, bouncing from Monday’s low of 90.679, its weakest level since March 3, though investors were not convinced a recent downtrend had ended.
The greenback’s gains were also bolstered by higher U.S. Treasury yields US10YT=RR with benchmark yields on 10-year notes rising above 1.60% after tepid auction results.
Investors should note that U.S. manufacturing activities are in decent shape. The reopening of economies and Biden’s infrastructure plan has also been boosting the stock prices of the materials and industrial sectors.
Meanwhile, as of Apr 23, projections for total earnings of the S&P 500 companies in 2021 have jumped 27.5% year over year on 8.6% higher revenues. Moreover, projections for total earnings of these companies in 2022 are up 13.1% year over year on 6.3% higher revenues. Notably, total earnings of same companies plummeted 13% year over year in 2020 on 1.8% lower revenues owing to the global outbreak of the deadly novel coronavirus.
Overall, 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.
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 1.57% as at 27 Apr 2021 from 1.65% as at 12Apr 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 77 as at 27 Apr 2021 from 70 as at 12Apr 2021. The CDS Index has increased by 7 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread rebounded to 145 as at 27 Apr 2021 from 136 as at 12Apr 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread dropped to 631 as at 27 Apr 2021 from 622 as at 12 Apr 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. As the government support factors are weakened, four Chinese AMCs (Huarong, Cinda, Orient & Great Wall) may be downgraded by credit rating agencies and their credit spreads may be widened. 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.
In the past fortnight, S&P 500 and tech-heavy Nasdaq Composite climbed, edging higher to close at new records. Nevertheless, muted volume was observed.
Although tax hikes plans might create uncertainties in the markets, our perception is that the tax hikes will remain more of a non-event, as the Wealth Tax Policy appears to affect only 0.3% of the population (income of more than US$1mil). Nonetheless, with consensus that the tax policies will be watered-down even further, we highly recommend investors to exercise prudence and be selective in stock selection.As we continue to monitor the progress of the Tax laws passing through Congress, we prepare for volatility and uncertainties in the markets for the upcoming weeks.
With economies gradually reopening and a constant push for inoculating the masses, we would expect continued positive momentum and increasing signs of recovery. However, we would advise investors to take some profits to lock in any major short-term gains and to keep a look out for trading opportunities on any short-term pullbacks. At the portfolio level and across geographies, we recommend investors to remain highly selective in stock picking and to take an overall more defensive stance as we prepare for even greater volatility throughout the rest of the year.
For these 2 weeks, we would advise our investors to be selectively overweight in US and Chinese tech companies. We favour selected technology subsectors such as: Cybersecurity, Saas, Cloud and 5G related themes, favouring market leaders with solid underlying fundamentals. While it is encouraged to continue holding certain names in Tech subsectors for the mid to long term, valuations have been getting relatively more expensive and we would recommend for investors to selectively trim their positions to raise cash levels in their portfolios. Investors should also set aside buffer funds to prepare for any volatility and significant pullbacks in the markets.
We also remain cautiously bullish in consumer discretionary sector given the reopening of major economies. For the coming weeks, we foresee continued upside in Cyclicals, and would advise investors to gradually increase exposure in these industries for their portfolio.
To sum up, we recommend investors to remain invested in technology sub-sectors but start trimming exposure to raise buffer capital for the upcoming quarter. 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 possible sudden and significant market moves. Portfolios should be positioned to remain nimble and more defensive at this juncture through having relatively higher cash levels. The higher cash levels also allow portfolios to capture short-term trading opportunities to produce alpha amid current market volatility.
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 27 April 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”).