Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
17 August 2021
“Geopolitical Risks – Another spanner in the works”
“Adding on to the already unprecedented nature of the recent couple of years, investors are now having to deal with further geopolitical risks as US forces withdraw from Afghanistan. ”
After nearly two decades of war, hundreds of thousands of lives lost, and more than $2 trillion spent by the U.S., the outlook for Afghanistan’s future is still grim, with regional experts believing that Taliban would ultimately come to control most of Afghanistan once again.
1: Cumulative returns to geopolitical events (%) (Source: Thomson Datastream, Schroders Economic Group)
The markets are no strangers to geopolitical risks having experienced a number of such periods over the years. However, we have rarely experienced one in such trying circumstances before, given the still ongoing Covid-19 pandemic. Uncertainty and volatility have already become mainstays in markets all over the world.
Generally, despite the initial downturn in the markets upon the onset of such events, major asset classes subsequently rebounded relatively quickly over a period of time. While there may be some benefit in switching to “safe-haven” asset classes such as Treasury and Gold in the short term, we believe that staying invested is key to longer-term returns.
That being said, the situation remains very dynamic and fluid, investors should remain cautious and expect even more volatility towards the end of the year. Investors should also shift their geographical exposure towards the US given the increasing uncertainty in the regulatory environment in China/HK. It is also important to adopt a balanced and diversified portfolio.
Fixed Income Overview:
Investors seem to be turning their attention to Treasury yields as a form of precaution. 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 rebounded to 1.26% as of 17August 2021 from 1.18% as of 3August 2021 and is expected to be around 1.0% to 2.0% for the year of 2021. The 10-yr Treasury yield has been at a low level for the past one to two months and there seems to be a continuing inflow from other assets into Treasury. However, we do foresee a likelihood for Treasury yields to increase further towards to the end of this year, depending on the economic data coming out of the US.
The credit default swap (CDS)index for Asia ex-Japan Investment Grade entities droppedfrom93 as of 3 August 2021 to 83 as of 17August 2021. Asia IG credit spread decreased to 132 as of 17August 2021 from 139 as of 3August 2021. Asia HY credit spread recorded a significant drop from 887as of 3August 2021 to 815 as of 17 August 2021. However, the current credit spread levels still remain relatively high. Sentiment will continue to remain weak as adverse news continue to flow out of the Chinese Bond market.
Figure 2: CDS Asia ex-Japan Index 1-year Chart (Source: Bloomberg)
Highly leveraged HY bonds (B rated) may face refinancing/default risks – several onshore/offshore bonds have defaulted recently including bonds issued by Tsinghua Unigroup, China Fortune Land Development, Tus-Holdings Co. Ltd., Sichuan Languang Development and Sunshine 100 China Holdings. 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 – 4 years.
We again recommend investors to stick to short dated high quality (BB Rated) High Yield bonds with a duration of less than 3 years and reduce their exposure to highly leveraged BB-rated bonds (Greenland, RiseSun) and all B-rated Chinese real estate bonds. Investors should be prepared to hold their bonds to maturity. Geographically, we are overweight Emerging Markets’ bonds (Investment Grade and High Yield with BB ratings excluding China) and neutral on Developed Markets’ and Chinese 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 to hold a more diversified fixed income portfolio or to reduce leverage of portfolios due to various uncertainties across sectors. We advise investors to dive deeper into the issuer’s stand-alone fundamentals to ensure the strength of the company.
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. Although the absolute returns in the fixed income market may be low, it is still advised to maintain a portion of the portfolio in fixed income given the heightened volatility of the markets.
Over the past two weeks, equities have continued to remain volatile given the various macro-economic uncertainties across the globe. We have still yet to see any progress in terms of the regulatory environment in China, as the HSI continues its recent downtrend. Recent GDP data emerging from China was also weaker-than-expected and signals a relative slowdown in growth. Covid-19 fears, especially in relation to the potent Delta-variant have also continued to weigh on investor sentiment. Adding on to all that, the recent increase in geopolitical risks arising from the conflict in Afghanistan has further dampened investor confidence.
Figure 3: Year-to-date chart comparing Dow Jones Index and Hang Seng Index (Source: Bloomberg)
Compared to the Greater China region, the US recovery has been more steady and relatively less volatile. Geographically, we recommend increasing our US exposure vs Greater China to reduce our portfolio volatility as we continue to be wary of the regulatory housekeeping being done by the Chinese Government, therefore preferring geographic exposure towards the US market.
Fiscal and monetary policies look set to remain accommodative in the short-term as central banks have maintained a passive approach. However, there are signs that the FED might begin to taper its asset purchases by the end of the year. We urge investors to stay constructive and selective in terms of stock selection and weigh their risk-and-reward. Volatility will persist, and investors should lean towards a more conservative portfolio.
Our investment strategy stays largely intact. We prefer sectors such as Cybersecurity, TMT-5G and healthcare. We recommend US Mega-Capitalized Companies which are constituents of the Dow Jones Index as they are less volatile and still provide decent upside potential.
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 17 August2021. 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”).