Investment Roundup

09 April 2024

“While US equity valuations remain elevated, international markets present compelling opportunities for diversification”


US equity valuations have reached relatively high levels as the S&P 500 forward P/E ratio hit 21x by the end of March 2024. Optimistic growth projections of 11% and 13% for 2024 and 2025 EPS respectively, however, may seem to justify these valuations. Regardless, investors should exercise caution regarding its potential impact on long-term average returns and consider diversification as a prudent strategy.

International equities present a contrasting scenario with the PE ratio for ACWI ex US standing at 13.7x and lower in comparison to the S&P 500. This discrepancy, coupled with a discount of slightly under -2 standard deviation versus US, therefore highlights an increasingly compelling case for diversifying into international equities.

Specifically, MSCI Japan has risen 16.22% YTD driven by favorable conditions for investment. MSCI Europe has also similarly risen by 6.95% YTD, following our earlier GRANOLAS call in February. Notably, peak MSCI EAFE outperformance relative to MSCI USA was observed in April 2023, with the former outperforming the latter on total cumulative returns by -6% over the last 2.3 years. Should this outperformance trend persist for the next 12 months, it could indicate a potential regime shift by April 2024 as investors rebalance their portfolios away from the US starting in Q2. Factors contributing to this shift include historically high S&P 500 forward P/E ratios correlating with lower 5-year annualised returns, corporate reforms in Japan unlocking shareholder value, and the relative attractiveness of European large-cap quality stocks.

Research by Bridgewater Associates further highlights Japan as the most significant opportunity for diversification outside of China, boasting a diversification score of 93%. Similarly, India offers attractive diversification benefits, albeit with a lower diversification score of 79%, attributed to its smaller market size compared to Japan. Conversely, while Europe possesses the largest market outside of the US, it exhibits the lowest diversification score due to its high linkage to US conditions.

In conclusion, while US equity valuations remain elevated, international markets present compelling opportunities for diversification, particularly in Japan and India. Investors should consider recalibrating their portfolios to capitalise on these opportunities while being mindful of associated risks.

Fixed Income Strategy

Markets are pricing ~65 bp of Fed rate cuts in 2024, compared to the 75 bp signalled by the median estimate of projections at the March FOMC. At first glance, this suggests room for yields to decline, but note that US Treasury 10-year yields are still 50 bp lower than their 4Q23 peak. Concurrently, a risk from tighter BoJ policy will be if long-end JGB yields rise much more significantly than they have to date, which would create more domestic alternatives to buying foreign fixed income assets. Meanwhile, the Federal Reserve will reassess whether the neutral policy rate is still as low as 2-2.5% assumed and as the dot plot implies. The short-run neutral rate could be higher still because the fiscal deficit is much larger than usual, broad financial conditions have not tightened commensurately with the rise in the funds rate, limiting transmission to the economy, and import tariffs that presumptive Republican nominee Trump plans to impose are expected to increase consumer inflation. We are inclined to shorten duration of bond portfolios.

US 10-Year Yield Still Well Below 4Q23 Peak

Source: Bloomberg Finance L.P.

Notwithstanding the BoJ’s termination of negative interest rate and yield curve control policies, credit quality amongst Japanese corporates remains solid. Recent years have seen the ratio of credit rating upgrades far exceeding that of rating downgrades, with very few corporate bond defaults. This is attributable to 1) Abenomics and relaxed financial regulations, 2) low interest rates and 3) weaker JPY. Despite the changes to monetary policies, higher rates and this spring’s negotiated wage increases being the largest since 1993, expect that that the negative impact on corporate credit quality should be quite small. Amongst financial companies, most are expected to benefit from rises in Japan bond yields. Japan life insurance companies generally have longer duration on their liabilities than on their assets, and hence rising JGB yields should have a net positive impact on their financial performance. For banks, higher rates help improve net interest margin, and as duration on large Japanese banks’ JGB holding are relatively short, any unrealized losses from JGB holdings due to rising yields should be manageable.

In Hong Kong, the recent lifting of real estate duties and more relaxed financing rules are expected to help boost Hong Kong residential property activity from relatively low levels. The Hong Kong property market is probably transitioning from a low-price, low-activity period to one characterized by low-price and normalizing activity within an environment of negative price action to clear unsold inventory over the course of 2024, before moving into a period of sustainable price improvement from 2025 onwards, albeit with upside risks post Budget FY24 measures. Furthermore, the Hong Kong retail outlook is less negative with the cyclical recovery of inbound tourist spending, and office take-up has returned to positive in 2H23, which is expected to slow the pace of decline in office rentals. Major developers have lowered dividends during their latest results to conserve cash with some disposing assets to increase liquidity and reduce debt. We look to position in Hong Kong property developers.

This document contains material based on publicly-available information. Although reasonable care has been taken to ensure the accuracy and objectivity of the information contained in this document, Raffles Family Office Pte. Ltd. (“RFOPL”) and Raffles Assets Management (HK) Co. Limited (“RAM”) make no representation or warranty as to, neither has it independently verified, the accuracy or completeness of such information (including any valuations mentioned).  RFOPL and RAM do not represent nor warrant that this document is sufficient, complete or appropriate for any particular purpose. Any opinions or predictions reflect the writer’s views as at the date of this document and may be subject to change without notice.
The information contained in this document, including any data, projections and underlying assumptions, are based on certain assumptions, management forecasts and analysis of known information and reflects prevailing conditions as of the date of publication, all of which are subject to change at any time without notice. Past performance figures are not indicative of future results.
Not an investment recommendation, offer or solicitation to any particular person
This document should not be regarded as an investment recommendation, offer or solicitation to any particular person to transact in any product mentioned. Before deciding to invest in any product, you should seek advice from your financial, legal, tax or other professional advisers on the suitability of the product for you, taking into account your specific investment objectives, financial situation or particular needs (to which this document has no regard). If you do not wish to seek such advice at your own decision, you should consider and assess carefully whether any product mentioned is suitable for you after having received and read in detail the specific product information and relevant risk disclosure statements.
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This document and its contents are only intended for Accredited Investors (as defined in Section 4A of the Singapore Securities and Futures Act (Chapter 289)) in Singapore and Professional Investors (as defined in the Hong Kong Securities and Futures (Professional Investor) Rules (Cap. 571D)) in Hong Kong. This document and its contents have not been reviewed by the Monetary Authority of Singapore or the Securities and Futures Commission of Hong Kong.

Portfolio Managers:

William Chow – Deputy Group CEO

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

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

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

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.

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