Licenced by SFC Type 4 & 9 & MAS Capital Market Services
8 June 2021
“The Global Tax Reform: an end to race-to-the-bottom in corporate taxation, or the beginning of a long road which will take sweat and tears to implement?”
“The reforms, together with tapering efforts of inflation, would affect the world’s largest companies with profit margins of at least 10%.”
After years of discussion, G7 finance ministers have reached a historic agreement to reform the global tax system to make it fit for the global digital age. Amazon, Qualcomm and Micron were among the Growth Stocks that fell after the announcement on 5th of June 2021.
Amazon US Stock Chart 1-month (Source: Bloomberg)
In the US, we would expect volatility around any announcement from the Fed that it will reduce asset purchases, with yields potentially rising as a result. It is possible that markets may become more aggressive in pricing in rate hikes. The measure of success for the Fed’s current efforts will come if policymakers can move toward reducing asset purchases but see only modest changes in expectations for rate increases.
One view inside the Fed is that the taper tantrum occurred because it failed to adequately separate in the market’s mind the timelines for hiking interest rates and for reducing asset purchases. This time, the Fed is creating a long runway for tapering, making clear that rate increases only come after this process. It also has set a higher standard of economic improvement required for rate increases than it has for asset purchase reductions.
All of that is contingent on how the economy rebounds from the pandemic. The recent pace of new job growth, averaging 541,000 payrolls over the past three months, and the recent decline in the unemployment rate look to be more or less in line with Fed expectations. Most Fed officials continue to believe that the recent spurt of inflation will prove temporary, so even big monthly gains are unlikely to speed up the plan, at least for a time.
In spite of this, investors should remain cautious as we do not expect to see a smooth path to recovery, volatility will be here to stay. Major monetary and fiscal stimulus have continued to provide strong support to the markets and will continue to do so. Investors continue to shift funds to parts of the market they believe will be helped by the economic reopening.
With that being said, the situation remains very dynamic and fluid. We recommend investors to remain invested in cyclicals and be very selective in big tech names. favoring blue chips stocks. Investors should remain patient and ready to react in midst of the uncertainties in current volatile markets, while continuing to maintain focus on our favored themes.
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 1.56% as at 8 June 2021 from 1.61% as at 25 May 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 dropped to 83 as at 8 Jun 2021 from 88 as at 25 May 2021. The CDS Index has decreased by 5 bps, reflecting a more positive outlook on credits moving forward. Asia IG credit spread dropped to 136 as at 8Jun 2021 from 141 as at 25 May 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread rebounded to 626 as at 8 Jun 2021 from 610 as at 25 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.
For the past 2 weeks, we see a rebound in growth stocks from the pullback in March. In the US, the NASDAQ has been testing new highs, almost nearing peak.
Nasdaq Composite Index 1 Year Chart (Source: Bloomberg)
As reiterated in our previous roundup, the Fed has been accommodative towards inflation risks, allowing it to overrun its’ 2% target. US Treasury Secretary Janet Yellen has explicitly stated that interest rate hikes are beneficial for the economy.
Last week, Fed also commented that they will start to wind down their portfolio of Secondary Corporate Credit Facility. This corporate facility was one of several emergency lending vehicles set in motion by previous Treasury Secretary Steven Mnuchin. Fed reiterated that this corporate lending facility was not related to its handling of monetary policy. And the sales from the corporate loan fund are expected to be completed by the end of the year. The Fed also reassure the market that its’ asset sales from the facility will be gradual and orderly to minimize any impact.
We believe that US is hinting to market investors to prepare for interest rate hikes, while at the same time, signaling they have other tools at their disposal that they can deploy.
That being said, we are still cautiously bullish for Equities. At the same time, we foresee equity markets to be in a constant tug-of-war state for the rest of the year, especially for growth stocks. Growth stocks will likely pullback upon news, rumors or any indications from the Fed, or some economists with regards to US Fed interest rate hikes or short-term spikes in the 10-year treasury yields. Thus, amid market volatility, we urge investors to stay constructive and selective in terms of stock picking.
Our investment strategy still stays intact. We are overweight both Cyclicals and Tech, with more skew towards Cyclicals. We like Tech subsectors such as 5G hardware and software, Cyber security, Cloud, and SaaS. For Cyclicals, subsectors such as Basic materials and Commodities. As reiterated from the previous roundup, another the noteworthy sector to look out for is Cyclicals due to the expectation of mass vaccination and reopening of economies. Despite the slight pullback in basic materials, we remain cautiously bullish and overweight in this sector.
Amid the continued volatility with ongoing inflation risks and speculations of Fed rate hikes, we recommend investors to hold a larger proportion of cash (around 15-20%) as buffer. The cash may be utilized for short-term tactical trading opportunities when value emerges from pullbacks. We recommend investors to take a more conservative stance with regards to Equities exposure in their portfolio with US indices testing new highs and more clarity upon the upcoming FOMC meeting this 17th June.
As reiterated previously, the emphasis on stock selection is crucial now more than ever for the remainder of 2021 due to the encroaching volatility from the inflation and prospects of higher interest rates. 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.
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 08June2021. 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”).