Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
6 July 2021
“The crackdown continues – China proposes new data security laws and continues to tighten its antitrust regulations. Will this spell the end for Chinese-based technology companies?”
“The crackdown shows how big data is quickly becoming the next major battleground in the clash of superpowers, with implications that could potentially reshape the global economy for years to come.”
Regulatory fears in China have been a constant headwind especially for technology companies based in China, with giants such as Alibaba, Tencent and Meituan all underperforming the global technology index. Previous action was mostly focused on anti-monopoly and financial technology regulation, which led to the suspension of Ant Group’s $34.5 billon listing and Alibaba’s $2.8 billion antitrust fine — major developments that shook the confidence of investors. Since the announcement of the newly proposed data laws earlier this week, all three have fallen around 5% amid new investor fears.
Figure 1: 4-Chart Comparison (Source: Bloomberg)
While there are clear concerns in the short run due to the increased regulatory scrutiny, we believe that there will be potential buying opportunities to come for such companies with strong fundamentals. Investors should see through these concerns and focus on the company’s valuation and growth prospects.
From a macro perspective however, the ongoing reopening of the global economies along with the unprecedented monetary and fiscal policies continue to providing strong support to the recovery. 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:
Since our last roundup discussing the potential FED rate hikes, the markets seem to be taking it in quite comfortably. Investors do not seem to be nervous about rate hikes in the short term future. 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 1.44% as at 6 July 2021 from 1.48% as at 22 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 dipped slightly to 84 as at 6 July 2021 from 85 as at 22 June 2021. Asia IG credit spread remained at 130 from 22 June 2021 to 6 July 2021. Credit spreads are expected to be range bound for the coming months. However, Asia HY credit spread increased to 690 as at 6 July 2021 from 648 as at 22 June 2021. The current benchmark of the Asian HY is around 2%. Sentiment continues to remain weak and we might see a further decline in the coming month.
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 and Tus-Holdings Co. Ltd. As the government support weaken, four Chinese AMCs (Huarong, Cinda, Orient & Great Wall) may be downgraded and their credit spreads may widen. We caution investors holding marginal investment graded bonds (BBB-, Baa3) to be wary of 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.
In the past two weeks since the latest FOMC meeting, signaling a potential rate hike in 2022, major US indices have continued to remain strong, shrugging off any rate hike fears. The S&P 500, Dow Jones Industrial Average and the Nasdaq Composite Index are all up by around 2% during that time.
Figure 3: S&P 500 Index 1-year chart (Source: Bloomberg)
With the ongoing anti-monopoly and anti-trust issues surrounding China, technology companies are concerned that these new regulations and laws would also be implemented in Hong Kong. Major US technology companies including Google, Facebook and Twitter have all indicated that if such regulations and laws were to be introduced in Hong Kong, that they might seriously consider pulling out their operations from the City. This would not only result in major repercussions for the Hang Seng Index, but more importantly, affect market sentiment and volatility in the Greater China Region overall. At this stage, it is still too early to speculate on the extent of these new regulations.
Outside of the region, global vaccine rollout continues to allow countries to slowly reopen their economies. Fiscal and monetary policies look set to remain accommodative in the short-term future. Therefore, we are still cautiously bullish for Equities. We urge investors to stay constructive and selective in terms of stock selection and weigh their risk-and-reward.
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, cloud computing and Ecommerce. For Cyclicals, we prefer subsectors such as Basic materials and commodities. It is also worthwhile for investors to gain some exposure to the healthcare industry which is typically defensive in nature.
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 6 July 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”).