Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
31 May 2022
“The 3Rs – rates, recession and risk remain the outstanding in order to evaluate the market”
“Three months on from Russia’s invasion, the war in Ukraine looks set to turn into a prolonged conflict. Uncertainty over energy flows from Russia to Europe continues. Finland and Sweden have applied to join NATO. Against this backdrop, markets are likely to remain volatile. ”
It is clear that the supply uncertainty is set to keep energy prices elevated. We expect economic stagnation or mild contraction in individual European countries due to higher likelihood of further interruptions of Russian Gas supplies. The prospect of NATO membership for Finland and Sweden is likely to increase the tension between Russia and NATO. Commodities and energy stocks are an effective geopolitical hedge. Please note that these sectors are the hedging tools for such geopolitical risk rather than main sectors to focus on.
We can correlate the current sell-off primarily due to soaring Inflation, driven by coronavirus-related supply chain issues and high fuel prices. Compared to 1 to 2 years ago, inflation correlation with US was not as significant as per the table below. Year 2022 correlation is white hot significant. Sometimes it really shows how fickle the market is.
Figure 1: Index Correlation Matrix (Source: Bloomberg)
Arguably the closest cousin to today’s S&P 500 decline is the early 1970-1980s. Led by Paul Volcker, the Federal Reserve cranked up interest rates relentlessly to fight skyrocketing inflation. CPI Inflation was 10-15% for consecutive years, leading the US market into recession during 1973-1975. Inflation was affecting every sector then – especially housing, on a double-digit YoY% increase. Back in 1970s inflation was multi-sector – even healthcare. Currently, the main high double-digit jump is observed from transport/oil, and low single-digits for food, housing, medical and clothing.
Figure 2: Sectorial inflation in US (source: voxeu.org)
Major US equity indices are at or near the bear market territory. We expect choppy markets until we have clarity on the 3Rs. Given the hike in interest rates, inflation figures remain high along with uncertain geopolitical risk. We are quite bearish on US market as a whole, especially in the Tech arena. There will be a lot of results announcements coming out this month, and more bad news to come and some of them are already reflected in the market.
MSCI China Index is down 20.3% YTD due to headwinds from protracted COVID-19 curbs, a potential delisting of Chinese ADRs, and a selloff in the global tech sector. After rebounding earlier this year, March/ April economic data slumped due to lockdowns in Shanghai and increasingly strict mobility measures in Beijing. We expect faster monetary and fiscal policy support, including RRR and Interest rate cuts, infrastructure investment, and more flexible properties policies. Valuations are attractive, in our view, as they are near historical lows.
During the expansionary period of 1970s, the Nixon administration introduced wage and price controls as an alternative means to contain inflation. They apparently worked for a while, as inflation stayed below 3% and the unemployment rate declined from above 6% to just below 5%. However, once the controls were removed, prices again started their climb, aggravated by the supply shock of the 1973 OPEC oil embargo. There were multiple black swan events that escalated the situation. 1973 OPEC oil embargo, expensive war in Vietnam and etc. Currently, we experienced the Covid pandemic, and Ukraine/Russia conflict. The current events have a sense of similarity, thus, raising recessionary concerns.
Gazprom stopped all gas exports to Poland and Bulgaria. The real economic impact of Gazprom’s actions against Poland and Bulgaria is likely to be limited. Both countries had contracts that were set to expire at the end of this year with no plans to renew and should be able to weather the energy shock with the help of neighbouring states. It did lead to a climb of 20%. Russia will continue to use this to add further pressure to Euro.
(i) Chinese economy reopening from loosening of pandemic measures in June;
(ii) further policy support to achieve full year 5.5% GDP growth target; These includes infrastructure buildout across the nation, subsidies on auto sales for individual buyers, cooped up domestic demand for consumer spending.
Overall, continue to favour Value over Growth stocks against a backdrop of uncertainty over the control of heightened inflation, market sentiment over the looming quantitative tightening (“QT”) in the US in mid-June as well as the continued escalation of Russian-Ukraine war;
Specifically, maintain overweight in Banks (Singapore & US banks) on longer term rate hike cycle theme; Chinese Telcos (defensive with dividend), Chinese Autos (in particular EV related themes) remain an attractive multi-year theme and they are beaten down amid current macro-overhang and headwinds, Chinese Infrastructure related themes from more fiscal stimulus and support;
Continue to employ more tactical short-term trades in order to capture opportunities arising out of ongoing market volatility; overall to reduce or remove leverage in portfolio.
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 the stated date on page 1 (top left corner). 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.
William Chow – Deputy Group CEO
Mr. Chow brings over two decades of asset management experience and currently oversees Raffles Family Office’s (RFO’s) Advanced Wealth Solutions division while also serving on its Board of Management and Investment Committee.
He joined RFO from China Life Franklin Asset Management (CLFAM), where as Deputy CEO from 2018 to 2021 he oversaw $35 billion in client investments. Mr. Chow also chaired the firm’s Risk Management Committee and was a key member of its Board of Management, Investment Committee and Alternative Investment Committee.
Prior to CLFAM, Mr Chow spent 7 years at Value Partners Group, the first hedge fund to be listed on the Hong Kong Stock Exchange, where he was a Group Managing Director.
He started his career at UBS as an equities trader and went on to take up portfolio management roles at BlackRock and State Street Global Advisors from 2000 to 2010.
Mr. Chow holds a Master’s degree in Science in Operational Research from the London School of Economics and Political Science, and a Bachelor’s degree in Engineering (Hons) in Civil Engineering from University College London in the UK.
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.
Sky Kwah – Director, Investment Advisory
Sky Kwah has over a decade of work experience in the investment industry with his last stint at DBS Private Bank. He has achieved and receive multiple awards over the years being among the top investment advisors within the bank. He often deploys a top-down investment approach, well versed in multiple markets and offering bespoke advice in multiple assets and derivatives.
Prior to his role, he worked at Phillip Capital as an Equities Team leader handling two teams offering advisory, spearheading portfolio reviews and developing trading/investment ideas.
He has been interviewed on Channel News Asia, 938Live radio, The Straits Times and LianheZaobao as a market commentator and was a regular speaker at investment forums and tertiary institutions.