Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
15 August 2023
“We do not foresee an immediate pivot from the FED this year…”
The US Dollar (Figure 1) has fallen ~10% from its high in Oct 2022 and has been consolidating in a weakening range. This is due to the Market pricing in an aggressive FED rate cut policy starting Q1 2024. Most analysts forecast a weakening of the US Dollar moving into the end of 2023 and into 2024.
We do not foresee an immediate pivot from the FED this year – as it would adopt a “wait and see” and data-dependent approach which could see rates higher for longer.
There are currently split bullish and bearish views on the currency which may result in an overall neutral view of the USD.
For the mid-long term, we still view the USD as the staple/preferred safe-haven currency compared to the traditional alternatives such as the Swiss Franc, Japanese Yen and even the RMB. Despite there being signs that the USD may be losing its share of global dominance, it still forms >50% of global foreign-exchange reserves, and >40% of international payments.). Another factor currently working in favor of the USD is its high yield of >5% compared to other safe haven currencies which are mostly <2%.
Certain bearish views include: US to lose its petrodollar privilege, FED rate cuts are more aggressive especially in midst of possible recession and continuous challenge of USD’s position of primary global reserve currency.
Fixed Income Macro
Economic data in the US depicts a rosy picture, based on healthy but not overly strong payrolls while business activity continues to indicate momentum is intact. The main takeaways from the July employment data were that job growth has moderated recently and that the labour market remains tight. July PMI prints continue to show steady consumer demand for services. While manufacturing PMI is in mild contraction under the weight of rising interest rates, the service sector, a larger sector of the economy, is proving more resilient. Core CPI for July increased 0.2% month-on-month, making back-to-back soft monthly prints. In terms of year-on-year data, core CPI peaked at 6.6% last September, then slowed to 4.8% in June and 4.7% in July. To the extent that employment and business activity remain healthy with inflation cooling, the risks of a US recession occurring this year have decreased.
Credit has been relatively resilient over the past two weeks, with the Bloomberg Asia USD Credit spread at 246 bp currently or 9 bp tighter since end-June. This can be largely attributed to positive fundamentals as 1H earnings are overall beating expectations and positive technicals as supply remains rather muted while demand for investment grade remains healthy. While fundamentals and technicals are expected to be supportive in the coming weeks, the negative at this juncture is valuations, with spreads inside both the year-to-date average of 274 bp and past 12 months’ average of 306 bp. As well, August returns are typically negative, which aligns with the observation about valuations. Expect this grind tighter is probably limited in scope though being cognizant of how strong technicals remain for now.
In China, deflationary pressures appear broadening from producer prices to consumer prices. July PPI fell 4.4% year-on-year, the 10th consecutive month of decline since October 2022, largely due to the high base last year in commodities such as coal and crude oil. These dynamics are already pushing export prices down at a 21% annualized rate in 2Q23 and should have contributed to global goods disinflation. July CPI fell 0.3%, the first year-on-year decline since 2020. The drop in CPI partly stems from a prolonged downturn in China’s property sector that has reduced prices for rent and consumer goods. Meanwhile, trade plunged with July exports declining 14.5% from a year earlier while imports fell 12.4%. Asia was among the worst hit regions from China’s falling demand, with imports from South Korea, Taiwan and Southeast Asian countries falling by double digits. Having said, the current quarter potentially marks the trough of China’s domestic demand and price growth, as recent policy loosening on property and credit may help boost demand in coming months.
Fixed Income Strategies
Over the past two weeks, 30-year Treasury yields have increased 26 bp, approaching the highest levels since 4Q 2022. The moves can be attributed more to release of Treasury’s quarterly refunding announcement of larger than expected increases to coupon issuance and the corresponding rise in duration supply that will be hitting markets over the coming months, but less to Fitch’s downgrade of the US sovereign rating from AAA to AA+, since Treasuries continue to be regarded in the market as the dollar “safe haven” asset. As far as recalibrating away from a recessionary base case is concerned, the lack of material moves at the front end suggests that market-implied recession probabilities have not changed much. If the US economy is indeed strong, the Fed should not be expected to ease, which would mean yields can continue repricing higher. We look to shorten rates duration of bond portfolios.
For credit, near-term US economic optimism is generating higher rates, with tight spreads less able to absorb this repricing. This likely sets up for some profit taking and a pullback in credit markets which is probably worth stepping aside for, in an otherwise supportive environment for risk assets. The prospect of a higher-for-longer Federal Reserve means issuers which have less liquidity and/or funds from operations are more vulnerable to higher costs of leverage and rating downgrades. Issuers that have ample cash balances and better capacity to refinance are less of a concern, while offering reasonably attractive yields over 5.5% and spread widening on any selloff likely to have smaller valuation impact. We are inclined to reduce credit beta tactically, maintain positions in short dated quality credits to earn carry and wait for the next opportunity set.
Macau gaming operators’ 2Q23 results have so far come in either beating (MGM and Wynn) or in line (Melco and Sands) vs elevated expectations. For 3Q23, the industry’s positive trajectory appears on course as July gross gaming revenue (GGR) increased 9.6% month-on-month to MOP 16.66 billion (US$2.07 billion). The amount exceeds the May GGR result, which had been the best monthly performance since January 2020, at the start of the Covid-19 pandemic, when GGR was MOP 22.13 billion. The latest data take Macau’s GGR for the seven months of 2023 to ~MOP 96.8 billion, +263% year-on-year. Although Macau has more hotel rooms than in 2019, hotel room rates continue to rise in summer indicating robust demand. S&P Global Ratings now expects Macau’s mass-market GGR this year to be in the range of “85% to 90%” of 2019 levels, up from a previous forecast of mass GGR recovering within a range of 75% to 85% of 2019. Most operators are expected to use the increased cash from operations to pare debt. In the event of a broader sell off, that presents an opportunity to increase positions in Macau gaming operators.
Macau Hotel Occupancy May Remain Elevated in 3Q23 Based on Advance Room Rates
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 slowdown in inflation, 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 overbought AI related plays. We recommend to position to buy the dip at more reasonable valuations in US technology sector, in particular the AI-related names should a pullback materialise, as well as 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 further 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. We also begin to see value emerge from the Chinese technology sector as the market continues to pullback. While we continue to monitor the market for positive data points that will support a rebound, investors should stay more vigilant in the near-term as a result of the recent overhang related to the suspension of trading of Country Garden’s onshore bonds amid talks of debt restructuring. Do initiate or accumulate positions gradually and in phases.
Last but not least, we recommend overall portfolios to remain nimble through tactical swing trades and consider the use of some structured products with downside protection.
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.