Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
23 August 2022
“Continue to favour defensive equity against the backdrop of recessionary risk”
The S&P 500 continued to perform strongly, with the index now up more than 12.6% from its annual low in June. The rise was boosted by new hopes of a soft landing for the economy following slowing US inflation and strong employment data. But the Fed needs to see more evidence that the inflationary threat is over before changing policy, and believes recession risks remain. Against this backdrop, we continue to favour defensive equity exposures.
The fundamental economic outlook has improved, but downside risks remain. Strong employment data and expectations that most inflation indicators will continue to decline have revived hopes for a soft landing. But it is also premature to think that the risk of a recession is now almost non-existent. The Federal Reserve still wants growth to slow so it gets closer to its 2% target, and hitting around 1% leaves the economy vulnerable to all risks.
Concerning sentiment in the Chinese real estate sector is troubling. However, there were signs of stabilization with government promises to ensure the implementation of stalled projects. A coordinated policy response could ensure the containment of the housing crisis and will not impact China’s overall post-COVID recovery. However, the real estate market could remain in turmoil for the coming few months.
Home loan boycott news dampened sentiment in the Asian high yield (HY) market. A default in China’s property sector will continue to put pressure on Asian high yield bond yields in the near term. While we don’t view mortgage developments as a systemic risk, they are weighing on homebuyer and lender sentiment and could slow prospects for a sales recovery.
Signs of a divided market are increasing. Broadly, investors fall into one of two camps; 1) Inflation remains high alongside strong macroeconomic data, Fed hikes aggressively, inflation slows but economy also slows and weakens due to high borrowing costs and eventually leading to recession or 2) Inflation remains high alongside strong macroeconomic data, Fed hikes aggressively, inflation slows but economy also slows and weakens due to high borrowing costs. Fed stops rate hikes, inflation normalizes at acceptable level and economy stabilizes. The key determinant, in our opinion, of which path will eventually materialize, hinges mainly on the pace and magnitude of Fed rate hike decisions. With all due respect, we fear the Fed is likely to overshoot and fall behind the curve once again based on the Fed’s past track record, i.e., the probability of path 1 is currently higher. That said, the jury is still out. We believe the more prudent way is to continue to monitor macro and inflation data from the US and the corresponding Fed actions. We are conscious of the fact that it has been approx. 5-6 months since the Fed first hike rates. We mentioned previously that there is a lag time of 3-6months between fed actions and actual impact to economy and economic data. We are expecting the Sep/Oct inflation data to better reflect the impact of Fed rate hikes. Come that time (in Sep-Oct period), we believe there should be greater clarity with respect to whether inflation is under control as we head into September. In the meantime, we recommend to stay cautious (refrain from major and aggressive portfolio rebalancing within the portfolio) while gradually buy selected sectors and stocks on major market pullbacks.
Geographically, our preference is still inclined towards HK/China mainly from a valuation perspective. Notwithstanding, we acknowledge that a lack of major catalysts, regulatory and macro risks as well as geopolitical tensions serve to undermine our call. As investors with mid-longer term investment horizons, we adhere to fundamentals and valuations and take a longer-term view on our calls. Accordingly, 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 (including Chinese and US Telecoms) 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.
In general, we recommend investors to:
- Refrain from major portfolio rebalancing actions over the next few weeks unless there are major unforeseen events. 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 investors may consider selectively accumulate 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.
- Overall, continue to employ more tactical short-term trades in order to capture opportunities arising out of ongoing market volatility; do consider to put on partial hedges as well as hold sufficient levels of cash in the portfolio (no less than 15%) 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.