Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
25 May 2021
“High inflation readings, chaos in the cryptocurrency markets and supply chain challenges as major economies reopen have stymied equities in recent weeks, but concerns about their effects on business took a back seat as this week’s trading got underway.”
“Wall Street stocks push higher, shrugging off recent volatility. ”
All Street stocks were back in rally mode on Monday, shrugging off recent bouts of volatility and embracing hopes for brighter days with the vaccination rollouts. All three major indices in the US were in positive territory the entire session – a striking departure from the choppy performance in recent weeks.
Bitcoin USD 1-month (Chart Source: Yahoo Finance)
Bitcoin rose on Wednesday, hovering around $40,000 — one week after the world’s biggest cryptocurrency crashed 30% to around $30,000. Last week’s sell-off came after authorities in China and the U.S. moved to tighten regulation and tax compliance on cryptocurrencies. It is to be noted that Bitcoin had previously hit an all-time high near $65,000 in April this year.
The S&P 500 sits about 1 per cent from its May 7 all-time high as the focus turns to the US Personal Consumption Expenditures report, the Fed’s preferred measure of inflation, to be released on Thursday. A much stronger than expected reading on consumer prices two weeks ago re-ignited inflation fears and stoked market volatility.
Stocks have been volatile in part due to fears inflation could lead to an abrupt shift in Federal Reserve policy – despite the central bank’s assurances to the contrary. But some analysts believe the market has already priced in this risk.
While inflationary risks as one of the major concerns and key determinant of market sentiment and direction, Investors should remain defensive and be highly selective in stock-picking process. Continue to keep a lookout for any possible sudden and significant market moves that will potentially result in an unexpected pullback, and to lookout for market entry where opportunity rises.
The situation is very fluid, and we keenly await the developments of other events worldwide – such as developments of the continuation of Anti-trusts regulations and US-China tensions. Investors should remain patient and ready to react. We do not expect markets to test new lows as global monetary and fiscal policies will continue to remain conducive, and this will likely provide a floor to the economy.
We recommend adding gradual exposure over several phases on any significant pullbacks while continuing to maintain focus on our favored themes and strategies for the year.
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 1.61% as at 25May 2021 from 1.59% as at 11May 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 88 as at 25May 2021 from 79 as at 11May 2021. The CDS Index has increased by 9 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread remained at 141 as at 25 May 2021 from 141 as at 11 May 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread rebounded to 610 as at 25 May 2021 from 605 as at 11 May 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.
US stocks closed slightly lower on Tuesday, and each of Wall Street’s main indices failed to stray far from the unchanged mark following a rally in the prior session as investors continue to try and assess the route of inflation.
For the rest of the year, we foresee inflationary risks as one of the major concerns and key determinant of market sentiment and direction. The Fed has maintained a laidback attitude towards inflation, indicating that they will be more reactive but will allow for numbers to go beyond for the time being. While tools are available to manage inflationary pressures for time being, they might potentially be behind the curve in terms of controlling inflationary risk. In midst of the volatility and uncertainties in the market, we urge investors to be constructive and very selective in terms of stock picking.
In backdrop, news of variant strains of the outbreak carried South African, UK and Indian also pose a source of concern. Although unlikely, major outbreaks on the strains and tight containment measures potentially be a black swan event that might sink all boats for equities, even bonds. Barring that however, we remain cautiously bullish on the equities with the gradual reopening of economies.
With the recovery of markets, the main theme this year will cyclicals. Geographically, we would recommend going long into the cyclicals across the board. As Cyclicals are already currently in the highs, our recommendation for investors lacking exposure in these areas is to find opportunities to enter where the market pulls back reasonably. Although we would anticipate cyclicals to have higher growth like tech stocks last year, with valuations exceeding expectations, the magnitude in terms of upside would likely be relatively smaller in comparison to tech performance previously. Investors should manage expectation in terms of portfolio allocation, to gain more in value then growth.
Sector wise, we would recommend investors to maintain overweight in the technology market leaders and trim the peripherals or secondary positions in the technology sector (incl. small-mid caps) while increasing exposure in the laggard sectors as containment measures begin to gradually loosen globally. At current valuations, we recommend to selectively start accumulating or initiating positions in Cybersecurity, 5G-related hardware and software, cloud technology and not forgetting, the electronic vehicle space. However, one should be aware of the semiconductor chipset supply shortage overhang on electronic vehicles, which might potentially squeeze sales.
The dips and current attractive valuations offer potential buying opportunities on the big names in Technology such as Tencent, Alibaba etc. We do not recommend “bottom-fishing” but rather buying in tranches to minimise risks.
Overall, the emphasis on stock selection is crucial now more than ever. We recommend investors to utilise a more back-to-basics stock selection approach and continue to adhere to company fundamentals and strict risk management principles (reducing positions, stop-loss and/or appropriate hedging) to mitigate risks from possible sudden and significant market moves. Lastly, any buying should be staggered across several phases.
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 25 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”).