Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
12 September 2023
“Market forecasting another 0-25bps rate hike by the FED, more clarity to come at the next FOMC meeting”
Most analysts are forecasting another 0-25bps rate hike by the FED come the year end. With rate cuts to commence sometime in 1Q24. We will get more clarity come the 19-20 September FOMC meeting, where the FED is widely expected to hold rates. On Q4 market are pricing as continue hold as well with a possible additional hike, as most recent data has indeed been pointing to softer inflation and a slowing jobs market.
Gold has performed rather well this year, YTD +7%, outperforming most major equity/bond indices and only behind the US Indices. On both low and high rates, Gold has continued to act as a hedge and preserve value, this is because of its quality as a finite good. Gold prices ultimately depend on supply and demand. Since gold production is a lengthy process, markets have some visibility into the supply side of the gold market, but demand can fluctuate wildly. For instance, economic or political turmoil can send investors flocking to safe havens in gold. Central banks purchasing gold reserves, demand for jewellery, and concerns about inflation can also have an impact on gold markets. As investors seem to be pricing in the end of the rate hike cycle by the FED. In previous cycles when the FED was on hold/cutting, Gold continued to perform.
If recession in 1H24 is what most market participants has forecasted and if you agree with that view. Gold might still be suitable in a client’s allocation. As seen in figure 3, Gold also tended to perform well in periods 6months prior to and during the recession, returning on average 10.8% and 20% respectively this is because of mainly haven and hedging purposes.
The demand for Gold has also been on a steady uptrend since its lull during the COVID-19 pandemic this is due to Central banks’ demand reached its highest ever in 2022 and continues to remain strong in 1H23. Geopolitical developments such as the Russia-Ukraine war and the US-China trade tensions continue to push central banks towards Gold as a key component of their reserves. This is on the trend of possible de-dollarisation as well.
Some back testing in the period of period from January 2005 – June 2023. For a balance multi-asset portfolio (40% Equities, 45% Fixed Income, 15% Alternatives), the addition of Gold in various % added to the total return of the portfolios while decreasing volatility and max drawdown.
To further show the benefits of Gold in diversification, its low correlation to the Global MSCI Total return Index has persisted over various economic cycles over the past 30 years. This lowers overall portfolio volatility and increasing risk-adjusted returns. This is why as banks which lacks access to other alternative asset class still favour Gold as part of their model.
Fixed Income Macro
Recent US data continues to support a soft-landing scenario as the drag from monetary policy tightening fades. August nonfarm payrolls increased by more than forecast after significant downward revisions to the previous two months while the 0.3ppt increase in the unemployment rate to 3.8% was driven by increase in labour force participation. Average hourly earnings rising just 0.2% month-on-month seem to indicate wage pressures at bay. At the same time, PCE prints signal that price pressures are contained. The combination of a higher labour supply, slower wage growth and moderating core inflation should allow the more hawkish FOMC participants get comfortable with maintaining the Fed funds rate at its current level in the upcoming FOMC meeting while assessing whether further hikes are needed. Having said, Fed officials are unlikely to move quickly toward easier policy unless growth slows materially.
For Asia credit, spread volatility has been concentrated in the China subsector year-to-date and it is fitting that developments there triggered a sharp turnaround in price action. The Bloomberg Asia USD Credit spread snapped back to 247 bp from 266 bp over the past two weeks on the back of China policy easing. This occurred against a backdrop of overall EM credit asset outflows of $6.7 billion in August while core yields made new highs (particularly in the long end) and the curve re-steepened, which leaves less buffer to counteract any further rates sell-off. In primary markets, September is typically the second busiest issuance month of the year. Taken together with spreads near year-to-date tights, suggests constraints on further tightening. For now, this means that carry will be the dominant component of returns, with upside from spread compression likely to be muted.
In China, economic activity may have started improving modestly, as suggested by the August NBS PMI print (first increase in 5 months) and Caixin manufacturing PMI to above 50. Meanwhile, policymakers announced another series of easing measures, and signalled their intention to slow RMB depreciation. Specifically, policymakers reduced the minimum downpayment ratios and mortgage rate floors to support property transactions, and guided banks to lower interest rates on existing mortgages. Interest rates of fixed deposits were lowered as well to partially offset the drag on banks’ net interest margins from mortgage rate reduction. Tax deduction amounts will be raised to increase individual income taxpayers’ cashflow and encourage consumption. In response to RMB weakness, the PBOC will cut the foreign exchange reserve requirement ratio from 6% to 4% to increase FX liquidity onshore and slow RMB depreciation. All these measures signal continual if piecemeal policy support for the property market, currency and the overall economy.
Fixed Income Strategies
There is probably limited room for yields to decline in the coming weeks, compared to prior Fed on-hold episodes, especially as the continued resilience of the US labour market and service sector suggests that the FOMC can upgrade its growth forecasts and/or reinforce a commitment to keep policy tight for an extended period. Any stronger and better data should reflect another 25 bp hike in November, which futures pricing currently features under 50% probability of occurring. Even with the recent moves in bond yields, markets still price in expectations that the Fed will start cutting rates in 1H24 against the risk that the dot plot could push expected cuts further out. Additionally, the move higher in oil prices to the highest levels since November amid increasing demand will draw attention from markets. Trim rates duration of bond portfolios.
Treasury 10-Year Yield Up on Resilient Data
Source: Bloomberg Finance L.P.
In credit, 2Q/1H earnings results generally indicate downward pressure on margins is fading, especially given the brighter prospects of a soft landing; limited spillover from higher rates to interest expenses for investment grade; liquidity ratios moving to the lower end of the post global financial crisis period range. The rollout of China policy support measures should provide support to market sentiment near-term. However, after several disappointments following previous rounds of policy easing, investors are looking for more concrete evidence that the housing market and the economy have stabilized. Sentiment remains fragile in high yield, while investment grade is better supported by fundamentals (excluding weak segments such as LGFVs). The relaxation of foreign exchange reserve requirements potentially releases more liquidity to commercial banks that may be invested predominantly in China USD investment grade. We are inclined tomaintain positions in China central SOEs and quality POEs vs underweight LGFVs.
Macau’s August gross gaming revenue (GGR) increased 3.3% month-on-month, to MOP 17.21 bn ($2.13 bn), which comprises mass GGR recovering to 93% and VIP GGR to 28% of pre-COVID levels. September GGR is expected to be down month-on-month, due to the typical post-summer holiday lull and the effects of Typhoon Saola this year. Further GGR upside is achievable from the “Golden Week” holiday period during 29th September to 6th October this year. Traditionally, these holiday seasons are times of peak demand for Macau’s gaming and general tourism facilities. The Macau gaming sector currently trades at circa z+400 bp, which is at the wider end of the pre-COVID range although by now mass GGR levels are near fully recovered. Most operators are expected to turn positive free cash flow this year which improves deleveraging potential. We are inclined to maintain positions in Macau gaming operators.
In the US, recent economic data indicates that we are another step closer to a pause in rate hikes alongside a healthy economic scorecard to date. Recent results of Big Tech counters have also been positive, driving a rebound of the positive momentum and market sentiment in US Equities post the recent pullback. In addition, the probability of recessionary risks has also greatly declined. Taken together, these market observations bode well for further positive momentum in the US Technology sector and US Equities in general. As previously reiterated, we recommend to gradually accumulate on any material market dips at more reasonable valuations in selected US technology counters as well as in defensive and laggard sectors such as consumer staples and healthcare, which offers more attractive risk/reward should the US economy enter a soft landing in 2H’23.
For HK/China, we were and still remain cautious of the inadequacies of the policies and smaller scale stimulus implemented thus far to revive the economy. Nevertheless, we note that the real estate sector is showing initial signs of stabilisation as the conscientious efforts of the Chinese government, lift hopes that they stand ready to provide the necessary relief/support should the economy continue to deteriorate. We believe the Chinese government will likely continue to monitor the outcomes of these implemented measures for some time before any major step-up in stimulus, if any, is considered. Hence, we are of the opinion that any further significant stimulus, if materialize, will likely come later rather than sooner. Against these backdrops, we recommend investors to consider gradually adding some selected Equities exposure in HK/China in a staggered approach on significant market pullbacks while patiently awaiting 1) signs of recovery in the Chinese economy as a result of the current slew of smaller scale stimulus implemented or 2) further major stimulus, in particular those targeted at the real estate sector, that could revive slowing growth. Furthermore, we recommend a significant portion of Equities exposure to be gained through Index ETFs rather than individual securities in order to mitigate market and P&L volatility and in the worst case, if further major stimulus fails to materialize.
Our preferred sectors are Technology, EV-related and Travel-related industries. We are also inclined towards infrastructure-related names in view of a potential accommodative policy stance. These sectors are trading at attractive valuations, 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 with decent valuation upside. While we continue to monitor key data points, in particular those that could lift the real economy, market sentiment and hence a rebound in Equities, we reiterate that portfolios should stay nimble and diversified.
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.