Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
8 February 2022
“Fed all Set for March Hike, Potential stiff 50-basis point hike?”
“Last Friday’s (4th Feb 2022) stronger than expected US employment figures stirred fears and speculations that the Fed may start off its tightening program with a stiff 50-basis point rate hike in March. Triggering a sell-off as equities dipped into the red in last Friday’s morning trading; the sell-off should be viewed as a corrective action, rather than perceiving it as the start of a bear market.”
On the interest rate front, the Fed is taking a more hawkish stance towards rate hikes, raising possibilities of more than 4 rate hikes in 2022. But the pace of rate hikes are expected to be raised gradually over each quarter of 2022.
Figure 1: FOMC Dot Plot (Source: Bloomberg)
Geopolitical uncertainties arising from the Russian-Ukraine border escalates, driving up commodities, specifically oil prices, adding to more volatility and uncertainties.
As the year progresses, we see the biases of global monetary leaning towards tighter conditions. Expect risk of sharp volatility especially in risk assets at least into the first quarter of 2022 as the Fed readies to hike interest rate. We urge investors to adopt a more conservative approach and be highly selective in their investments. Remain defensive and stay nimble with regards to asset allocations.
Fixed Income Overview:
We anticipate FED Funds rate to be kept 0% – 0.25%, with three rate hikes each in 2022 and 2023 (FOMC dot plot median at 1.6% by the end of 2023) based on the December 16th meeting. The 10-yr US Treasury rebounded to 1.93% as at 8 Feb 2022 from 1.82% as at 18 Jan 2022 and expect to be around 1.5% to 2.5% for the year of 2022.
The credit default swap (CDS)index for Asia ex-Japan Investment Grade entities rebounded to 97 as at 8 Feb 2022 from 90 as at 18 Jan 2022.
Asia IG credit spread rebounded to 128 as at 8 Feb 2022 from 126 as at 18 Jan 2022
Asia HY credit spread dropped to 891 as at 8 Feb 2022 from 1036 as at 18 Jan 2022.
10-yr Treasury rebounded to 1.93% as at 8 Feb 2022 from 1.82% as at 18 Jan 2022
(expect to be around 1.5% to 2.5% for the year of 2022).
We expect IG bonds credit spreads, except for Chinese issuers, to range bound over the coming months.
We expect sentiment in the HY bond market to remain relatively muted to range despite the recent injection of capital of approximate USD 6.5 billion by various Chinese financial institutions to Huarong, aiding it to serve its debts and prevent a debt default.
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 Sunshine 100 China Holdings, Fantasia Holdings, Sinic Holdings, Modern Land China, Evergrande, Kaisa, China Aoyuan. Evergrande also announced on 3 Dec 2021 that it planned to “actively engage” with offshore creditors on a restructuring plan.
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 2.5 – 3 years.
We recommend investors to stick to short dated high quality (BB Rated) High Yield bonds (ex-China)with a duration of less than 3 years and be prepared to hold the bonds to maturity. At the same time, reduce/control their exposure to highly leveraged BB-rated bonds (Greenland, RiseSun) and all B-rated Chinese real estate bonds. 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 and 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 2-3%, and 3-5-year low beta HY bonds are at 4.5-6.5%. Overall, with the expectation of rates going higher and more volatility going into year 2022, we recommend a balanced and more diversified portfolio, with short duration (less than 3 years) IG and high quality (BB rated) HY 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.
With the biases of global monetary leaning towards tighter conditions in 2022,expect risk of sharp volatility in risky assets at least into the first quarter of 2022.
Despite the belief that interest rate hikes are generally negative for Equities, we believe it will be the speed, frequency and magnitude of the upcoming Fed rate hikes will, to a large extent, dictate the direction and volatility of global Equities market throughout this year.
In the near-term, we anticipate a significant pullback in the equities markets, in particular, the Nasdaq (growth stocks in the US) in view of the relatively rich valuations vs other Global Equity markets as well as the looming interest rate hike cycle in 1H’22 will likely have a greater negative impact on growth stocks.
Fortunately, the US Fed has been providing sufficient clarity and indications with regards to their intentions in relation to monetary policies thus far, specifically on how they have been managing market’s expectations. Henceforth, were main constructive on Global Equities for the mid-longer term despite anticipating possible near-term volatility arising from the initial rate hike in the earlier half of this year.
With various headwinds on the horizon, we urge investors to adopt a more conservative approach prior to the initial Interest rate hike anticipated to materialize in the earlier half of this year and stay overweight selective blue chips to mitigate the risks of excessive volatility. It is recommended to reduce leverage in current market environment and maintain relatively higher levels of cash levels in portfolios to remain defensive as well as to capture market dislocations amid times of increased market volatilities.
Figure 3: 1-Year chart comparing S&P 500 Index and Hang Seng Index (Source: Bloomberg)
Geographically, we are inclined towards HK/Greater China Equities vs US and Europe Equities heading into 2022, mainly because of the relatively more attractive valuations and better risk/reward. The recommendation would be to stay more defensive initially by holding more cash prior to the initial rate hike by the US Fed and await better buying opportunities on further anticipated pullbacks during the same period.US stocks, in particular the Nasdaq, likely have room for further decline against looming rate hikes and global geopolitical tensions (Ukraine-Russia) as well as relatively richer valuations vs other major developed Equity markets.
Overall, we favor Cyclicals over Growth stocks. Fundamental bottom stock picking is crucial even within favored sectors. The decline in Growth or Tech stocks especially in the US may not be over. Specifically, we maintain overweight in Banks (Singapore, China & US), Chinese Telcos, Chinese Autos (in particular EV related themes), Alternative Energy and a lighter allocation to US and Chinese Technology sector and sectors to be avoided for now include Insurance (ongoing Covid restricts agency model), Chinese Property (regulation overhang), Oil & Gas (currently rich valuations).
It is important that investors adopt a well-diversified portfolio overall. Stay nimble by employing more tactical trading while mitigating anticipated volatility with a major overweight in selective blue chips. Maintain higher level of cash todo more tactical short-term trades to capture opportunities arising out of ongoing market volatility, as well as to remain defensive against a volatile market backdrop. Recommended to reduce leverage trading in current market environment.
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 8 February 2022. 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”).