Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
22 June 2021
“Has the Fed signaled the end of an era of Pandemic Trading? The latest Fed Policy Meeting may have marked a momentous turning point.”
“The Fed dot plots blew an enormous hole in the prior narrative that policy makers would look through the higher inflationary readings as transitory.”
Federal Reserve Chairman Jerome Powell acknowledged on Tuesday 22nd June 2021 that some inflation pressures are stronger and more persistent than he had anticipated, though still not on par with some of the worst episodes the U.S. has seen historically. He continued to express his view that the recent inflation is likely transitory and closely tied to the economic reopening.
Figure 1: FOMC Member’s Dot Projections (Source: Bloomberg)
The latest Federal Open Market Committee meeting concluded with officials indicating that they now anticipate two rate hikes coming by the end of 2023, more quickly than the market had previously expected. Despite the seemingly hawkish shift, major US indices rallied from last week’s sell-off.
This week’s aggressive stock market rally indicates that investors remain comfortable with how quickly the Federal Reserve will begin tapering its asset purchases and start raising interest rates. Even though inflationary pressures may continue to intensify over the coming months, the Fed will likely let this overrun and avoid taking any preemptive tightening measures.
With that being said, widespread vaccinations have joined unprecedented monetary and fiscal policy actions in providing strong support to the recovery. Indicators of economic activity and employment have continued to strengthen, and real GDP this year appears to be on track to post its fastest rate of increase in years. This signals to us that there may be more room for the economy to recover and grow.
In spite of this, the situation remains very dynamic and fluid, investors should remain cautious as we do not expect to see a straight line path to recovery, volatility will be here to stay. Investors should continue to shift funds to parts of the market they believe will be helped by the economic reopening and adopt a balanced and diversified portfolio.
Fixed Income Overview:
There has been continued positive momentum and increasing signs of recovery in macro environment, as more countries prepare for the reopening of their economies. We anticipate FED Funds rate to be kept 0% – 0.25%, with two rate hikes by the end of 2023. The 10-yr US Treasury dropped to 1.48% as at 22 June 2021 from 1.56% as at 8 June 2021 and is expected to be around 1.25% to 2.0% for the year of 2021.
The credit default swap (CDS)index for Asia ex-Japan Investment Grade entities increased slightly to 85 as at 22 June 2021 from 83 as at 8 June 2021. Asia IG credit spread dropped to 130 as at 22 June 2021 from 136 as at 8 June 2021. Credit spreads are expected to be range bound for the coming months. However, Asia HY credit spread rebounded to 648 as at 22 June 2021 from 626 as at 8 June 2021, A quite a large increase given only a 2 week period – signaling a more “risk-off” sentiment among investors.
Highly leveraged HY bonds may face refinancing risks, several onshore/offshore bonds have defaulted recently including bonds issued by Yongcheng Coal, Huachen Automotive Group, Tsinghua Unigroup & China Fortune Land Development. As the government support factors weaken, four Chinese AMCs (Huarong, Cinda, Orient & Great Wall) may be downgraded by credit rating agencies and their credit spreads may widen. We caution investors holding marginal investment graded bonds (BBB-, Baa3) to be wary of rating agency downgrades. 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.
Figure 2: 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. 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 and particularly to reduce/control portfolio exposure in high leverage BB-rating (e.g. Greenland, RiseSun) & all B-rating Chinese real estate bonds.
We recommend investors to continue to monitor 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%. Overall, we recommend a balanced and more diversified portfolio of high quality (BB rated) high yield bonds and short duration IG Bonds.
Despite last week’s sell-off in equities and a seemingly hawkish tilt following the FOMC meeting, major US indices have rebounded strongly in the past few days. The S&P 500, Dow Jones Industrial Average and the Nasdaq Composite Index are all up by around 2% this week.
Figure 3: S&P 500 Index 1-year chart (Source: Bloomberg)
Growth (tech) stocks have remained strong, signaling that investors are still of a view that inflation is transitory and that they believe the Fed is going to be relatively slow in tapering its monthly asset purchases and raising interest rates. Continuing from our previous roundup, we maintain that the Fed will remain accommodative towards inflation risks and allow it to overrun its’ 2% inflation target in the short term, staying behind the curve.
We believe that the Fed will hold off any major tightening measures to avoid stalling the economic recovery and first deploy other tools at their disposal. As noted in our previous roundup, the Fed will continue to wind down their portfolio of Secondary Corporate Credit Facility. The sales from the corporate loan fund are expected to be completed by the end of the year. The Fed has also reassured the market that asset sales from the facility will be gradual and orderly to minimize any negative impact.
Along with the global vaccine rollout, this will provide an environment which allows the economy to further recover and expand. Overall, we are still cautiously bullish for Equities. We urge investors to stay constructive and selective in terms of stock selection.
Our investment strategy stays largely intact. We are overweight both Cyclicals and Tech, with more skew towards Cyclicals which will be closely tied to the economic reopening. We like Tech subsectors such as 5G related companies, Cyber security, Fintech/Artificial Intelligence, Ecommerce and semiconductors. For Cyclicals, subsectors such as Basic materials, Commodities and select Financials.
It is important that investors adopt a well-diversified and balanced portfolio, with a skew towards cyclicals while maintaining a core thematic position in technology. In short, investors should 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 22 June 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”).