Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
25 October 2022
“Opportunities in selective quality companies within the Developed Tech sub-sector”
The tightness in labour markets and elevated wage inflation will likely play an important role in the inflation outlook ahead, despite sub-par global growth that leaves GDP lower relative to its pre-pandemic capacity in both developed and emerging markets. This tightness should limit an expected fall in inflation, on top of structural shifts in the global economy including supply chain reconfiguration and undersupply in energy markets. Moreover, the acceleration in wages has been modest compared to the acceleration in inflation. Still-elevated inflation and increasing recognition that labour market conditions need to be eased should drive central banks toward further outsized rate hikes. US September core and headline CPI prints both showed remarkable persistence while payroll gains slowed but not enough to deter the Fed from its singular focus on inflation, with a fourth 0.75% hike in November likely.
For emerging markets (EM), the global backdrop remains one where EM countries and markets are dealing with ongoing financial conditions tightening led by the US. This drove a more intense sell-off over the last month as risk premia rose alongside higher US rates, with notable USD strength. EM Asia hard currency bond fund outflows increased to the highest level in 3 months, (-$326mm, from -$192mm). Although oversold conditions may trigger a near-term rebound, expect the overall trend remains intact. The process of financial conditions tightening is continuing against softer readings on global activity indicators, providing a challenging backdrop for EM. This has evolved beyond the most vulnerable countries, with PMI weakness focused now in Asia. With September manufacturing PMIs falling into contraction territory in both DM and EM, readings among North Asia manufacturers Korea and Taiwan were the lowest since mid-2020. This stress on EM assets likely has more to go as the tighter financial conditions needed to tame US inflation also raise growth and current account risks.
In China, official signals indicate the zero-COVID policy will remain in place for the remainder of the year. Any easing of the policy is expected in 2023, likely after 1Q, but the easing will likely be gradual. Before that, the lack of visibility will continue to weigh on consumption and investment, leaving China’s GDP growth muted. The property sector was shaken by news of loan interest extension talks at CIFI amidst expectations that the government’s China Bond Insurance guarantees could reverse liquidity distress. Offshore bonds of CIFI and other private developers deemed stronger that issued CBI-guaranteed bonds such as Country Garden fell sharply. Knock-on impact to other private developer bonds was limited, but the fall-through of another false bottom further erodes confidence in the sector. For the sector to rebound, it is probably necessary to see either policymakers adopt a reflationary stance on the property sector or meaningful progress made on restructuring of defaulted issuers. In the near term, neither is expected to occur.
Over the weekend, President Xi cemented his position as the most powerful leader since Mao Zedong, staying on as head of the Chinese Communist party and its powerful central military commission for another five years. China’s President Xi promoted his closest allies into the Communist Party’s top ruling body, further consolidating his grip on power as he secures a third term as party leader. According to some commentaries, China’s rich in particular are worried about rumors of an official wealth tax that would replace informal “common prosperity” donations.
Fixed Income Strategy
Reiterate the importance of prioritizing capital preservation and overweight high quality fixed income in portfolios. A large risk premium for investment grade compensates investors somewhat for inflation risk. Prefer shorter maturities because volatility in rates is likely to stay elevated. Downside risks pertain to the upcoming earnings season, particularly in high yield, as EBITDA estimates for full-year 2023 are likely revised downward. Anticipate continued HY-IG decompression.
Position for travel rebound in Hong Kong and Macau. Strong demand and passenger yields on the back of quarantine easing in Hong Kong are expected to boost airline earnings. The return of tour groups to Macau casinos supports operators with mass market gaming focus and non-gaming facilities. However, as concerns on the pace and magnitude of travel resumption between mainland and Macau SAR resurfaced recently, it is a reminder that the recovery may not be one-way and smooth, with disruptions in between.
Reduce exposure to metals & mining, on concern about slower growth in China, increased likelihood that higher power costs and lower energy availability in Europe constrain demand for industrial metals and signs of margin compression as companies work through high-cost inventory.
Position in selected European and US banks vs Asian banks with similar capital strength, on the back of attractive relative valuations. Reduce exposure to S$-denominated Singapore bank AT1s on rich valuations.
We argue that the risk-reward is increasingly skewed towards Global Equities, in particular, Greater China Equities despite the lack of market traction in Equities globally. Although energy, a key component of inflation has come off its highs seen earlier this year, it should remain elevated as the Northern Hemisphere enters the winter season. We encourage investors to gradually accumulate selected sectors on major significant market declines with a preference for Greater China Equities on valuation grounds. However, we like to highlight that any new Equity exposures (including existing exposures if required) should be considered alongside hedges (partial if not full).
Given the numerous uncertainties we currently face, our preferred prudent approach constitutes asset allocation based on several key theme, namely 1) Potential China easing of Covid restrictions and 2) Disinflation, to capture potential upside should inflation eases while remaining overweight in defensive, high dividend yielding sectors should inflation continues to run away.
- Our most favored sector is Telecommunications Operators, in particular Chinese Telco operators that offer high dividend yields at attractive valuations alongside smaller price and hence P&L volatility
- We continue to prefer certain Consumer Discretionary sector that serve as natural hedges to inflation like certain high end luxury consumer brands that can continue to deliver earnings and ability to pass on higher prices to consumers with minimal impact to demand
- Position in selected Banks, in particular, Singaporean Banks higher credit quality and NIM expansion amid improving macro-outlook and SEA growth prospects
- For mid-longer-term exposures, position in sectors levered to the China reopening theme, including but not limited to Sportswear, Auto as well as Airlines
- We also like more defensive selected names in the US in sectors such as Healthcare and Consumer Staples/Durables
Consider to heavily hedge your Equity exposures if you have not already done so, in particular, new exposures, i.e., for every dollar of Equity exposure you put on, hedge with downside protection instruments such as inversely correlated ETFs (E.g., 7300 HK, 7500 HK, SQQQ, etc.).
Continue to employ shorter-term tactical trading across both core and peripheral positions to capture market dislocations and volatility.
Cash Levels: Keep at least 15% cash on hand to remain defensive
While structural tailwinds present an obstacle for the broader Tech sector, we observe opportunities in selective quality companies within the Developed Tech sub-sector. Within FAANG, the outperformance of Apple is clear with its share buyback thanks to its fortress balance sheet. Their ability to reduce debt also makes them an ideal investment choice to weather this winter. Additionally, META is also starting to present an undervalued opportunity as they continue to reduce their debt and increase FCF yield albeit with weak EBITDA growth.
Source: Bloomberg, data as of 17 October 2022
In a high-interest rate and inflationary environment, we prefer Developed Technology companies with a strong moat and pricing power to tide through suppressed valuations and earnings. However, we remain positive on Emerging Technology companies as we position ourselves for the start of a new market cycle and enter high beta trades.
Firstly, the cloud computing sector is projected to be worth US$830bn by 2025 with a CAGR of 17.5% – an investment opportunity too big to be ignored.
The increase in industry-specific use cases of cloud technology will be the primary driver in persuading lagging sectors to adopt it. Adoption rate is relatively low across industries and therefore double-digit growth is still highly possible which in turn improves revenue and/or EBITDA.
Source: McKinsey (2022)
There are 3 types of cloud architecture namely public, private and hybrid. A private cloud is a service that is completely controlled by a single organisation and not shared with others. On the other hand, a public cloud is similar in services but offered to all customers as its name suggests. A hybrid is a combination of the two.
Another emerging-developed sector which is closely tied to the cloud would be 5G technology. Its adoption rate is rising globally due to the launch of new smartphones (i.e. 5G iPhone). The market value of 5G smartphone subscriptions is projected to hit 1 billion by the end of 2022. With 3-5x faster internet speeds, consumers use 2-3x more data and are willing to pay an average of 20% premium on 5G over 4G. Northeast Asia (i.e. South Korea, China and Japan) leads the global adoption of 5G technology.
Source: Statista (2022)
China and the US are currently the global leaders in research development and patents on 6G technology. As compared to 5G, 6G has a higher data transmission rate with lower latency. Moving forward, the need for 6G is important for edge and core computing which will be prevalent across industries. For example, edge computing can allow data storage to be geographically positioned nearer to the source of transmission which will in turn reduce latency.
Source: Nikkei Asia (Nov 2021)
On the high beta short term trades for cloud side, we observe interesting names such as Datadog and sell PaaS services in addition to monitoring and access of data across different cloud providers. Furthermore, Crowdstrike is one of the leaders in cyber security for cloud-native platforms which is pivotal in this day and age where data is so prevalent.
On the 6G side, we hold the view that regardless of who wins in the 6G patent or adoption race, we will still be dependent on China and Us infrastructure to operate wirelessly and broadcast communication. Qualcomm was a front-runner for 4/5G products and thus favoured to be the leader in 6G. Their chipsets are important in enabling wireless transmission and hence their patents are critical to mobile communication standards.
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.