Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
14 June 2022
“Peak Inflation? – Market sentiments are mixed”
“The 50 BP uptick for June is already fully priced in in the market and should not be unexpected by both street and wall street. Going forward entering the Q3 Would be upper bound 2.25 meaning base case is 25 BP every month.”
The key data here is inflation, if we do not see signs of tampering, that’s when Fed will come in aggressively again at 50 BP higher.
Figure 1: Inflation Forecast (Source: Bloomberg)
So, is the peak inflation moderating or behind us? Two side of the coin
^Images on appendix.
As China further relaxes restrictions amid falling COVID situations, initial data has started to show sequential improvement in economic activity from the trough in April. We continue to expect a recovery in the second half of this year and see opportunities in cyclical and value sectors for near term equity positioning.
The latest Caixin purchasing managers’ index showed that China’s services activity contracted for a third straight month in May, as Shanghai remained in lockdown last month and mobility restrictions were in place in multiple other cities including Beijing. The May print came in at 41.4, well below the 50-point mark that separates growth from contraction.
However, the economic indicator has already shown sequential improvement from April’s 36.2, following a similar pattern in the official survey by National Bureau of Statistics last week. There are also signs that a recovery is on track into the second half of the year, barring any fresh prolonged lockdowns in major cities from significant COVID resurgence.
COVID-related curbs are easing gradually. Indoor dining in most of Beijing has resumed this week, with traffic bans lifted. While residents still need to show a negative COVID test before entering public spaces, working-from-home is no longer a requirement. In Shanghai, people took almost 2.4 million rides on the subway last Saturday as the financial hub emerged from the two-month lockdown, well above the 30,000 level a week ago. Shops have reopened and some students are expected to return to classrooms this week.
Travel and tourism activity recovered from April-May trough. While the omicron outbreak has hit people’s willingness to travel long distance, domestic air travel recorded an uptick during the Dragon Boat Festival holiday over the weekend. Tourism activity during the three-day holiday period also saw an improvement from the Labor Day holiday in early May and Qingming Festival in April, with number of tourists reaching close to 90% of pre-COVID level and revenue at over 65% of that in 2019. We still expect consumption and services to recover more slowly than industrial production and infrastructure investment, as they are more affected by social distancing measures, existing employment pressure and slower income growth.
Supply chain companies point to better consumer demand. Sales from companies including Hon Hai Precision and Largen Precision in May grew from those in April on the back of robust shipments of consumer smart products, reflecting improving demand for mobile phones and personal computers. The companies have also guided for further upside in June as COVID curbs ease. We expect recovery in economic activities to be more visible from June as Shanghai is scheduled to reopen fully by the end of this month. While China’s zero-COVID strategy and rolling mini-lockdowns may continue to weigh on economic growth against a backdrop of headwinds including geopolitical tensions and potential regulatory surprises, we do expect the growth momentum to pick up in the next six months with more policy support coming through. We are slightly more positive on China equities within our portfolio, forecasting a still-decent earnings growth of 9.8% this year. We favor cyclical and value segments in the near term, and continue to like digital economy for the mid to long term.
Consensus estimates for US CPI release, which is a 0.7% month-over-month rise in headline CPI with risks skewed to the upside, have raised worries about the Federal Reserve’s ability to bring inflation under control while avoiding a recession. The outlook for the Fed is consistent with market pricing for 50bps hikes at each of the next three FOMC meetings. Still, we expect inflation to moderate by year-end but remain well above central bank targets. And while the CPI releases grab more headlines, when determining monetary policy PCE inflation is the measure that the Fed focuses most on. April’s release showed a month-over-month increase of 0.2%, the smallest since November 2020.
As recent data on the labor market and consumer spending have been positive over the past two weeks, markets have become less worried about near-term recession risk. This is consistent with our view that economic growth should slow to around or below trend but remain above zero. But consumer sentiment is still fragile, especially during high inflation pushing up the cost of living, and the risks are skewed to the downside. As growth fears have ebbed, inflation has resumed its role as the primary market driver. This is evident in equities and bonds both selling off after the May CPI data release.
With central banks in most major developed countries taking aggressive action to bring down inflation, risky assets are likely to remain volatile and struggle to sustain the rally. This dynamic will persist until there is clear indication that inflation is trending downward, which may not occur until well into the second half of the year. On top of this, geopolitical risks: Russia’s invasion of Ukraine looks increasingly set to turn into a prolonged conflict, adding to the potential for more severe disruptions of energy and food supplies and thus higher commodity prices. Meanwhile, China’s commitment to its zero-COVID policy means that brief targeted lockdowns could continue to weigh on economic activity and investor sentiment.
It is crucial for China to reopen its economy in the summer (i.e. June/July period) in our opinion as that would help ease some of the cost-pushed inflation that we have previously mentioned a few months ago. With the summer looming, a peak period for energy (oil & gas usage in the US), energy prices and in turn, inflation data will continue to rise if no relieve is seen on the supply chain bottlenecks (which we believe is a key driver of global inflation rather than demand). We do not expect the Russia-Ukraine war to ease anytime soon, adding to sustained inflationary pressures if China doesn’t reopen in summer. The combination of both seasonal energy demand and continued supply bottlenecks may exacerbate inflationary concerns.
Major near-and-longer-term themes to focus:
(i) to continue to monitor the chances/probability of Chinese economy reopening from loosening of pandemic measures in June/July;
(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 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; put on partial hedges as well as hold a sufficient level of cash in the portfolio to remain defensive and to stay nimble amid continued market volatility.
Figure 2: Freightos Index Global(Source: Bloomberg)
Figure 3: Used Car Index (Source: Used Vehicle Value Index)
Figure 4: Private Housing Authorized by Building Permits Index (Source: Bloomberg)
Figure 5: Oil Demand (Source: Bloomberg)
Figure 6: Widening Divergence of Job Vacancies (Source: Bloomberg)
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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.