Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
06 September 2022
“Adhere to fundamentals and valuations and take a longer-term view on investment calls”
Inflationary pressures continue to feed into monetary policy. US Federal Reserve Chair Powell emphasized the need to restore price stability, sticking firmly to the assessment that the costs of failing to do so are far greater than those associated with near-term policy restriction. Keeping policy restrictive for some time given risks associated with premature easing lowers the odds that rate cuts for next year are realized. Upcoming payrolls and CPI releases will be key to yields in the near term. Decisive weakening in employment and/or a second consecutive month of cooling price pressures may support some moderation in the upward momentum of yields.
An increase in inventories is a sign of economic slowing to come, with US retail inventories spiking 19.7% year-on-year. This is likely attributable to consumer disposable incomes being eroded by the higher costs of non-discretionary items such as fuel, food and shelter, reducing retail spending. The euro area is exposed to surging energy prices, with consumer confidence falling to record lows in a number of countries, which does not bode well for consumer spending in the coming quarters. Firms are also reporting slower growth in output, with the euro area PMI in contraction territory since July. Despite this, with European inflation well-above target for some time to come, the ECB is likely to continue hiking rates. For Asia, reopening is a near-term growth offset, but a growth downturn will dampen export earnings.
In China, the economic recovery from the sharp slowdown in 2Q faces headwinds in energy rationing, continued rolling Covid lockdowns, and less impetus for large stimulus policies until after the CPC congress in October. Thus, the Caixin China August Manufacturing PMI was 49.5 vs 50.4 in July, and lowest reading since May. News that a number of the stronger private developers were preparing to issue RMB corporate bonds with guarantees provided by China Bond Insurance Company boosted prices of offshore bonds from the sector. Recent policy easings are efforts to limit systemic risk, rather than to reflate the property sector, and the provision of guarantees for onshore bond issuance is unlikely to be extended to the vast majority of the stressed private developers. Signs of stabilization and/or increase in property sales will be the main factor for a sustainable turnaround, however is yet to materialize.
Fixed Income Strategy
Overweight allocation to investment grade bonds vs high yield. With short tenor high quality credits yielding in excess of 4%, they offer both a potential diversification benefit and stable income opportunity for an economic slowdown scenario. In the event inflation becomes more entrenched, long end yields currently appear to not embed sufficient premium. Underweight medium to long tenor bonds.
• Prefer non-discretionary consumer issuers that can continue to deliver earnings and ability to pass on higher prices to consumers without eroding demand which is important in the current inflationary environment.
• Position in selected oil and gas producers that have robust earnings, disciplined capex, sufficient liquidity, and valuations that have lagged spread compression within the broader sector.
• Position in selected European banks vs Asian and US banks with similar capitalization ratios, on the back of attractive relative valuations.
One of our key focuses as a family office should entail strengthening core positions in our portfolio for future generations. In the coming weeks, we will present our findings on several market sectors that we believe are well positioned to benefit from macro trend tailwinds.
Given the current recessionary risks, healthcare has proven itself to be resilient as a defensive growth sector. The healthcare sector has experienced massive growth over the last decade primarily driven by an ageing global population with an increasing longer lifespan thanks to the advent of innovative medical technologies and pharmaceutical drugs. Life expectancy has increased by 4% between 2009 and 2019 and the population aged 65 will likely double to 1.5 billion by 2050.
Source: Oxford (2022)
However, this will also unfold new chronic and life-threatening diseases which will in turn be met with further innovations in healthcare. Research and development expenditure has increased multiple folds over the last 20 years in search of drugs to address new illnesses, early detection capability and non-invasive medical technologies. Healthcare is currently thus the most capital-intensive market sector for that reason.
Source: Congressional Budget Office
As demand for quality healthcare continues to outpace supply, the cost will inevitably increase as well. In 2021, the United States and Germany spent 15.95% and 11.02% of their GDP on healthcare expenditure respectively. We believe that this figure will continue to increase as there is a paradigm shift in society’s attitude towards healthcare – a greater emphasis on ensuring our well-being and early detection of diseases.
In sum, this highlights the ever-changing and innovative nature of the industry which henceforth makes it a defensive growth sector that remains resilient across business cycles.
Source: Oxford (2022)
Within the healthcare sector, there are several sub-sectors namely (1) Pharmaceuticals, (2) Biotechnology, (3) Healthcare Providers and (4) Medical devices and supplies.
As aforementioned, the healthcare sector continues to evolve with the advent of innovative drugs within the pharmaceuticals sub-sector. For example, drugs that are required to be consumed multiple times in a day could see improvements in efficacy duration or with lowered side effects. With that being said, the pharmaceuticals sub-sector possesses higher risks due to the uncertainty surrounding drug patents and the long process required to clear all 3 drug trial phases. The sub-sector is currently allocating more capital towards oncology research and development to address the need for cancer treatment.
Source: Statista (2022)
Biotechnology may seem like complicated jargon but is prevalent in our daily lives. Insulin is a drug that is widely used for diabetic treatment and is a product of biotechnology. The hormone was originally derived from the pancreas of cattle or pigs. Today, genetically engineered bacteria can produce large quantities of synthetic insulin at a lower cost. Biotechnology is one of the fastest growing sub-sectors because of the limitless possibilities of effective drug creation. However, the high costs involved also make it the riskiest sector among the four.
Grand View Research (2022)
Healthcare providers are a basket of different services varying from insurers to the management of hospitals and private clinics. They form the bedrock of the healthcare system and receive the highest allocation of cost. In recent years, its traditional brick-and-mortar business model has seen increased digitalisation efforts to bring forth telemedicine solutions i.e.WhiteCoat. As a result, this sub-sector is still positioned for growth given its relatively small market share even within the United States.
Grand View Research (2022)
Medical Devices and Supplies
Medical devices and supplies play an important role in healthcare services but may not be at the front of everyone’s minds. This sub-sector has the strongest recurring revenue due to the constant replenishment of supplies for hygiene purposes. However, the sub-sector has slow growth in CAGR among the four due to tight margins.
Technavio Report (2021)
During our last update a fortnight ago, we reiterated our views that the key determinant or general equities market sentiment hinges heavily on the pace and magnitude of Fed rate hike decisions and fear the Fed is likely to overshoot on reigning in inflation and fall behind the curve once again. Since that time, the global geo-political situation has deteriorated; US-Sino tensions have escalated on the back of news that US chipset maker Nvidia is restricted in their supply of chipsets to China and Russia and Russia has announced that it will stop supplying gas to Europe through one of the major pipelines until the West removes sanctions imposed on them. These untimely events, we believe, have thrown a wrench into the works of cross border relations that is here to stay. The announcement of a substantial EUR65 billion relief packages by Europe’s largest nation, Germany speaks volume of the pain inflicted on the EU from rising energy prices. Clearly, this will be a bitter cold winter for Europe and any spillover effect to the rest of the world will likely be felt in the coming months. With the emergence of such negative events hijacking any hopes of a soft landing with respect to rising global inflation, alongside the tough resolve displayed by the US Fed in fighting inflation, we turn more cautious on the macro front and in turn on Equities overall. We reiterate the more prudent way is to continue to monitor macro and inflation data from the US and the corresponding Fed actions. As mentioned previously, we believe there should be greater clarity with respect to whether inflation is under control as we head into late September/ early October. 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.
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.
In general, we recommend investors to:
1. Refrain from major portfolio rebalancing actions over the next few weeks unless there are major unforeseen events. 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.
2. 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. With heightened geopolitical risks, we turn cautious on US Technology overall, in particular, companies and sectors that may be used as political pawns in US-Sino trade war.
3. 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.
Ek Pon Tay – Head of Fixed Income
Ek Pon is responsible for fixed income investment management at Raffles Family Office. He has over 20 years of fixed income experience across Singapore and Japan.
Prior to joining Raffles Family Office, he was a portfolio manager at BNP Paribas Asset Management since 2018, responsible for Asia fixed income mandates. From 2016 to 2018, Ek Pon led the team investing in Asian credit at Income Insurance. From 2011 to 2016, he worked at BlackRock, managing benchmarked and absolute return fixed income funds. Earlier in his career, he held several positions as a credit trader in banks for 9 years.
Ek Pon graduated from the University of Melbourne with a Bachelor of Commerce and Bachelor of Arts.
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.