Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
10 August 2022
“Asia region likely to remain highly favourable”
A strong US dollar, recession risks in the US and Europe, China real estate uncertainty, and high energy prices have put Asia in an uncertain situation. The Asia region equity and high yield bond benchmarks are down nearly 19% and 22%, respectively, this year.
As a major hub for trade and industry, Asia will also have to contend with a slowing of global demand. In order to stop currency outflows and fight inflationary pressures, local central banks are likely to keep tightening.
China should recover in the second half, aiding the region’s growth to exceed 4% for the year. There is still a wide range of potential outcomes given the adverse risks. Therefore, it is important to maintain a diverse portfolio while keeping an eye on the prospects we perceive in many fields.
First, we remain cautiously bullish on China. While the real estate market issue poses a threat to the short-term outlook, we anticipate that it will eventually be resolved. Beijing is taking urgent action to strengthen banks and assist developers’ liquidity to help them continue operations, and we believe the financial sector will be able to handle any potential increase in non-performing loans. However, we also urge caution on Chinese property bonds and stocks.
We anticipate a recovery in China’s equity market as tangible signs of government backing appear and the housing market becomes more assured. We prefer leaders in China’s digital economy, consumer services, discretionary spending, automotive, and green technology industries.
Second, income strategies are drawing more and more attention. With strong free cashflow dividend cover, a selection of Asian dividend companies can provide a yield of about 7%. Asian investment grade bonds with short durations are likewise preferred; we suggest names with yields over 4% and short periods under five years.
Lastly, many secular growth companies have seen their valuations waning as a result of the general stock market downturn. We believe that this is a perfect moment to learn more about the value chain for electric vehicles in Asia as well as the leading providers of renewable energy in the area.
We anticipate that the markets will remain volatile in the upcoming months. However, we are confident that there is still room for growth and alpha opportunities in the Asia regions.
In a rising interest rate environment, we are seeing USD loan rates of more than 3% on the 1-month tenor which we expected to remain elevated in the near term (3 to 6 months).
Assuming a client draws a 3-month loan of USD1m at 3.45% pa (2.7% excluding spread), he will be required to pay USD8,625 in interest. To hedge against said increased borrowing costs, we recommend a normal sell put CHF call option with or without barrier. This strategy aligns with our view that USDCHF is near its peak after the USD rally – we would want a lower conversion while receiving yield. The yield thus serves as a margin of safety to fund the loan interest.
We selected USDCHF as our reference currency because CHF is a weaker or at best a moderate currency. We considered EUR and YEN – however we run the risk of an improving EUR and YEN as the Ukraine Russia conflict improves and BOJ shifting from a moderate to aggressive stance to address inflation respectively. Therefore, CHF is our preferred currency. SGD or HKD might also be a good consideration given how neutral SGD is and HKD’s role as a hedge against HK equities.
The strategy involves selling USDCHF at strike 0.95 over a 3-month contract. If the currency pair falls below strike after 3 months, you will have to buy USDCHF at 0.95 regardless of its future price. The client stands to earn 1.37% (inclusive of spread) for 3 months (5.48% annualised). As a result, we can enhance yield across asset classes while offsetting borrowing costs.
Additionally, you can also include a knockout function. The client earns a higher yield at the expense of locking in loan rates for a longer period while there is a faster rotation with KO. However, the downside includes running the risk of a weakening CHF and counter party risk. Furthermore, there is also reinvestment risk if USD continues to appreciate on fixing – it would be difficult to roll the trade after 3 months.
The strike price of 0.95 is at the pivot support of the 0.948 region while AKO is based on the SMAVG 50. As long as it touches, the sell put USDCHF call option KOs and you can decide to redo the trade. You can refer to the scenario analysis breakdown of the trade below.
Escalated tensions across the Taiwan Straits have once again risen to the fore of on-going US-Sino trade friction. The escalation has spooked Equities market across the globe, in particular, China and US. Fortunate for most investors, the direct impact to Equities market has been short-lived although the on-going overhang from such tensions will linger for a while longer. Overall, it remains a non-event for now. More important, markets remain edgy ahead of US inflation data and key earnings releases. Despite a strong set of macroeconomic data released recently, inflation undoubtedly remains one of the top if not the top factor driving Fed rate decisions and in turn, Equities market sentiment globally. The upcoming US inflation data is likely to lead investor sentiment. For now, the market remains in range bound trading. Clearly, impulsive and short-term sector rotations will continue to drive investor behavior and mindset. Indeed, there’s a need to capture as much of these short-lived opportunities as possible, however, as investors with mid-longer term investment horizons, we remain advocates of fundamentally sound secular themes in the likes of the electrification of vehicles, and digitalization of the global economy.
Notwithstanding, we also recommend to hold defensive names with material dividend yields and strong cashflows should the global economy fail to fend off potential recessionary risks as anticipated by more cautious market participants. Overall, we remain cautiously bullish on China and recommend to gradually allocate on dips on US technology sector.
Over the past 2 weeks, the US technology sector has rebounded while that for China has declined. We believe the positive trajectory for US technology stocks will likely continue against a backdrop of better-than-expected earnings releases and macroeconomic data. We should also gradually accumulate on increasing fair valuations into selected Chinese technology stocks that continue to face indiscriminate selling pressures albeit gradual.
In general, we recommend investors to:
a. Despite the recent rally in certain sectors, we maintain mid-longer-term overweight in Banks (in particular Singapore banks, lesser extent on Chinese banks) on longer term rate hike cycle theme; Chinese Telcos (defensive with material dividend yields), Chinese Autos (in particular EV related themes) and Chinese Healthcare. These sectors are fundamentally attractive over the longer term and may consider accumulating on major pullbacks; Unless inflation shows signs of abating in the US, i.e., take cue from upcoming US inflation data, we remain Neutral on US equities overall.
b. Overall, 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 sufficient levels of cash in the portfolio (no less than 10%) to remain defensive and to stay nimble amid continued market volatility.
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.