Licenced by SFC Type 4 & 9 & MAS Capital Market Services
12 May 2021
“Major Asia-Pacific stock markets slumped, as Wall Street fell sharply with inflation data triggering fears of a rate hike.”
“In the past few weeks, inflation have accelerated at its fastest pace in more than 12 years as the U.S. economic recovery kicked into gear and energy prices jumped higher. ”
April’s Consumer Price Index rose 4.2%, a faster-than-expected rise in prices and the biggest year-over-year increase since 2008. The Producer Price Index spiked 6.2% for the 12 months ended in April, the largest increase since the Bureau of Labor Statistics started tracking the data in 2010.
U.S. stocks slumped overnight as key inflation data showed higher-than-expected price pressures. Overall, the Dow fell 681 points, or 1.99% lower, to notch its single-worst session since January. The S&P 500 lost 2.1%, its biggest one-day drop since February, while the tech-heavy Nasdaq Composite slid 2.6%.
Dow Jones Industrial Average 1-month Chart(Source: Bloomberg)
S&P 500 1-month Chart (Source: Bloomberg)
On the other side in Asia Pacific, mainland Chinese markets also tumbled. The Shanghai composite dropped 0.96% to close at 3,429.54, while the Shenzhen component slipped about 1% to 13,917.65. Hong Kong’s Hang Seng index fell 1.64% during afternoon trading.
Hang Seng Index1-month Chart (Source: Bloomberg)
One cause of the rising prices and inflation indicators might be due to the base effects, meaning inflation was very low at this time in 2020 as the Covid pandemic caused a widespread shutdown of the U.S. economy. As such, year-over-year comparisons are going to be distorted for a few months because of the pandemic’s impact.
Higher price pressures come as the country tries to recover from the pandemic-induced recession. While a pickup in inflation is normal as the economy reopens, investors fear it could squeeze companies’ margins and erode profits if lofty prices are sustained for a long period. Such a scenario could also force the central bank to start tapering easy monetary policies in place.
However, Federal Reserve policymakers and many economists are dismissing the current round of numbers as transitory, with the expectation that inflation settles down later this year around the 2% range targeted by the central bank. In addition, Fed officials have repeatedly mentioned that they will not raise interest rates or pull back on monthly bond purchases until inflation averages around 2% over an extended period.
Overall, whereas inflation appears to be a growing concern for investors, the Federal Reserve has insisted any price rises should be transitory, pointing to the re-opening of the economy in the recovery from the coronavirus pandemic.
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 rebounded to 1.59% as of11May 2021 from 1.57% as at 27Apr 2021 and is expected 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 79 as of11May 2021 from 77 as at 27Apr 2021. The CDS Index has increased by 2 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread dropped to 141 as of 11May 2021 from 145 as at 27Apr 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread dropped to 605 as of 11May 2021 from 631 as at 27Apr 2021. We caution investors holding marginal investment graded bonds (BBB-, Baa3) to be wary of rating agency downgrades. 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.
The equities market experienced a substantial pullback in the past 2 weeks, whereas oil and commodity prices rose. Hong Kong’s Hang Seng Index fell 2% as Chinese tech stocks declined, with shares of Alibaba falling around 7.48% this year as of Monday’s close. In U.S. markets, the Dow fell by 681 points, or 1.99% lower, to notch its single-worst session since January. The S&P 500 lost 2.1%, its biggest one-day drop since February, while the tech-heavy Nasdaq Composite slid 2.6%.
Hang Seng Index 1-Month Graph (Source: Bloomberg)
S&P 500 1-Month Chart (Source: Bloomberg)
Dow Jones Industrial Average 1-Month Chart (Source: Bloomberg)
With the constant rollouts of vaccines and reopening of economies, inflation rates are running at all-time high. This might affect the FED’s policy stance, which will potentially lead to a market correction and selloff in equities in the short term. As the markets are currently running at lofty valuations, we urge investors to be selective and exercise caution when comes to short term tactical trading, for, prices have become much more volatile.
Despite rising concerns over inflation, FED has adopted a laidback attitude, with gradual decrease in bond purchase, indirectly reducing the balance sheet. As such, we would advise investors to stay adaptable and nimble in their portfolio investments in the long run, preparing for any corrections in the market.
Considering the above, we highly recommend investors to stay overweight in cyclicals, which are likely to outperform this year. If the portfolio is relatively underweight in tech exposure, we highly recommend increasing exposure into specific large caps, considering that they are trading at a relatively more reasonable valuation. The recommended sectors remain largely the same tech subsectors such as: Cybersecurity, SaaS, Cloud and 5G related themes, as well as Chinese consumer discretionary and Chinese Telecommunications. Investors can also choose to invest in gold or gold mining stocks, to hedge against the inflation risks concerns, as these will likely have good upside potential. However, overall, remaining mostly overweight in cyclicals in the long run is still recommended, as valuations are likely to overrun with the gradual reopening of economies.
All in all, 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. Amid the continued volatility, we recommend investors to be selective and engage in short-term tactical trading where opportunity presents itself.
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 12 May 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”).