Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
14 September 2021
“No safe haven in sight – The FED remains a key variable as Markets continue to be on edge”
“The Street looks to have lost their nerve, issuing a wave of warnings about “sky-high” valuations after a relentless rally, plus a soft economic outlook just as the FED moves toward tapering.”
The markets look fragile as investors belatedly wake up to the coronavirus’ long-term impact. That opens up the potential for a new, inverted divide between the markets and reality. After gobs of stimulus cash allowed markets to soar in the face of crashing economies, risk assets are wobbling just as companies signal plenty of confidence in the future.
The Street look to have lost their nerve, issuing a wave of warnings about “sky-high” valuations after a relentless rally, plus a soft economic outlook just as the FED moves toward tapering. In fact, the FED may be the key variable, as investors look for some form of stability and direction towards the year’s end.
Figure 1: US Unemployment Data (Source: Bloomberg)
Even as some analysts fret about a weaker economic outlook, businesses welcome the certainty of a more readily predictable “endemic” future. Now it has become obvious that Covid waves will keep coming, and that vaccines are unlikely to rapidly lead to the disease’s elimination. Governments are therefore moving away from lockdowns as their prime tool to fight it, meaning businesses and consumers can plot out how to live with the virus.
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. We continue to recommend a more defensive and ultra-selective portfolio allocation, stock picking in certain sectors will be of utmost importance. Investors may also consider taking advantage of any volatility through the use of tactical trading strategies.
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 remained at 1.33% as of14 September 2021 from 1 September 2021 and is expected to be around 1.0% to 2.0% for the year of 2021. However, we do foresee a likelihood for Treasury yields to increase further towards to the end of this year, depending on the economic data and Fed’s policy stance.
The credit default swap (CDS)index for Asia ex-Japan Investment Grade entities remained at 66 as of 14 September 2021 from 1 September 2021. Asia IG credit spread decreased to 120 as of 14 September 2021 from 122 as of 1 September 2021. We expect IG bonds credit spreads to range bound over the coming months. Asia HY credit spread rebounded sharply from 818 as of 1 September 2021 to 860 as of 14 September 2021. This is mainly due to the ongoing Evergrande saga. We expect sentiment in the HY bond market to remain relatively weak as there continues to be adverse news emerging out of the Chinese 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 3.5 – 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 control 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 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.
As regulatory headwinds continue to hover over the Greater Chinese markets, we have continued to advocate gradually increasing exposure in the US, especially in the Dow Jones Industrial Index constituents. As of 14th September 2021, the Dow Jones Industrial Index continues its relative outperformance compared to its major peers across the globe.
Figure 3: Year-to-date chart comparing Dow Jones Index and Hang Seng Index (Source: Bloomberg)
However, value is starting to emerge in select sectors in the Greater China market. Sectors such as Technology and consumer related stocks are of note. That being said, investors must remain very selective and target specific names within each sector. Regulatory risks continue to be a worry in the region, but we think that the worse is likely to be priced in to a certain extend.
Geographically, we recommend a 60/40 exposure for the US vs Greater China markets while maintaining our core blue chip portfolio in the US. Investors should be prepared for a mid-long term investment horizon.
As the signs continue to point towards the FED beginning to taper its asset purchases towards the end of the year, we expect volatility to increase even further. The key is – how quickly, by how much and how frequently? 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, consumer discretionary, select technology and healthcare. We recommend US Mega-Capitalized Companies which are constituents of the Dow Jones Index as they are less volatile and could still provide decent upside potential.
It is important that investors adopt a well-diversified and defensive portfolio, reduce any over-exposure towards equities and raise some cash. . 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 14September2021. 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”).