Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
18 July 2023
“The June inflation data suggests the path towards a “soft landing” is slightly more likely”
Fixed Income Macro
In June, US inflation fell to the lowest in more than two years, suggesting that the rate cycle may be at a turning point. Year-on-year, headline CPI eased year-on-year to 3% from 4% and core to 4.8% from 5.3%. Month-on-month, both measures climbed 0.2%, 0.1 ppt below forecasts. Meanwhile, resilience in the labour market and services sectors continues. Although nonfarm payrolls data was below expectations, coming in at 209k as last month’s tally was revised down from 339k to 306k, average hourly earnings were revised higher from 0.3% to 0.4%. The ISM services increased to 53.9, beating expectations of 51.2, as business activity surged to the highest levels since January. This backdrop is unlikely to prevent the Fed hiking an additional 25 bp at the upcoming FOMC meeting.
For credit, the near-term environment will be moderately supportive overall, as the recent data suggests the path towards a “soft landing” is slightly more likely and the bar to a “hawkish shock” looks quite high. Credit spreads continue to trade at the tighter end of the range. The Bloomberg Asia USD Credit spread is 256 bp currently, vs year-to-date and 12-month averages of 279 bp and 313 bp respectively. This can be attributed to 1H23 gross new issuance of Asia USD bonds falling 42% year-on-year to $62 billion, the reduced supply offsetting outflows from EM and Asia hard currency bond funds.
In China, since June a series of policy easing measures have been announced to stabilize growth, including tax and fee reduction/deferral for the corporate sector, modest interest rate reduction and targeted liquidity support for SMEs and rural area development by the PBOC, accelerated pace of special local government bond issuance. Further stimulus measures could be rolled out during 2H23, including further interest rate cuts and nationwide housing policy relaxation. So far, lack of sustained recovery in new home sales may require more than city-specific measures to support housing transactions, encourage land purchase and new home starts, especially from private developers.
Fixed Income Strategy
Markets are now about fully priced for a hike later this month, as well as roughly a 15% chance of another hike by November. Bond yields are currently near levels which persisted for short periods in October 2022 and March 2023. The June inflation data suggests the path towards a “soft landing” is slightly more likely. It appears that disinflationary data could become more prominent in 2H23 and further cooling in labour markets over coming months should allow the FOMC to go on an extended pause after this month. The debate will then turn to their next meeting in September, although it is unlikely for the Fed to start cutting until well into next year. Taken together, further extend rates duration of bond portfolios.
One driver for tight credit spreads has been postponement of US recession risk, inducing investors to abandon recession trades such as underweighting riskier issuers. The compression in high yield spreads is consistent with unwinding of recession trades, despite specific concerns around the HY refinancing wall. Most investment grade issuers are well positioned to cope with the risks, particularly those owned by governments, whose intrinsic support provides some buffer against disruption in financing access. For high yield corporates, the rise in downgrades year-on-year, including downgrade reviews by ratings agencies, potentially indicates a nascent credit cycle downturn. We are in the view of maintaining up in quality positioning.
We are in the view of trimming China property high yield positions. Recent months have seen property sales momentum stall, mortgage growth flatline, and notable increase in bond defaults. Since April, three more issuers have missed coupon and/or principal payments on their offshore bonds. Policy easing towards the sector continues to focus on ensuring project completions, with the industry experiencing sluggish demand from home purchasers and shrinking gross margins. Unless policymakers can restore confidence and provide additional financing support for developers, the sector default rate is tilted higher.
China Home Sales by Top Developers Decline Again
Source: Bloomberg Finance L.P.
We continue to maintain our view that the probability of any rate cut this year is low as key macro data such as a strong labour market and consumption are still holding up. Although we continue to favour large-cap and quality growth stocks in the US, it is important to be selective against a backdrop of extremely overbought AI related plays. In addition, we are also inclined to have positions in defensive and laggard sectors such as consumer staples and healthcare, which offers more attractive risk/reward should the US economy enters into a soft landing in 2H’23.
For HK/China, we continue to remain overweight in beneficiaries of the China reopening theme despite the slower-than-anticipated “reopening” thus far on hopes of potential stimulus from Chinese government in 2H’23 and attractive valuations. We favour Chinese airlines, domestic consumption-related, travel-related and F&B-related sectors. We are also skewed towards infrastructure-related names in view of an accommodative policy stance. These sectors are still trading at attractive valuations and deserve our attention be it from a longer-term fundamental perspective or that of a short-term swing trade. We also continue to be advocates of defensive sectors such as Telecoms and Utilities that provide reasonable dividend yields and valuation upside.
Last but not least, we recommend portfolios to remain nimble and defensive through holding higher cash levels or increase hedging.
William Chow – Deputy Group CEO
Mr. William 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. William 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, he 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.
William 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 – 16 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.
As an Ex-Portfolio Manager for ACA Capital Group, Derek managed 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
Mr. Tay 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, Ek Pon 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
Mr. 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 at Raffles Family Office, Sky 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.