Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
22 February 2022
“Market Recovery to be strong, but expect Volatility to be stronger”
“CPI and Core CPI (m/m) numbers rose 0.6%, the better-than-expected outperformance – shows signs of acceleration in the near term. The Fed may continue their more aggressive response on rate hikes, anticipations are on Fed to undertake a 50bps rate hike in March to kick start the tightening cycle.”
Figure 1: FOMC Dot Plot (Source: Bloomberg)
Geopolitical uncertainties arising from the Russian-Ukraine border will indefinitely trigger risk-off sentiments (negative impact on global equities) and drive up commodities, in particular oil prices.
We maintain the biases of global monetary leaning towards tighter conditions. As we countdown to the Fed first rate hike in March, the increased uncertainty will keep financial markets volatile in the near-term, especially in risk assets including growth stocks. We urge investors to adopt a more conservative approach, maintain higher cash levels and be highly selective in their investments.
Fixed Income Overview:
We anticipate FED Funds rate to be kept 0% – 0.25%, with three rate hikes each in 2022 and 2023 (FOMC dot plot median at 1.6% by the end of 2023) based on the16th December 2021 meeting. According to Fed Funds Futures, the first rate hike would be Mar 2022.
The credit default swap (CDS)index for Asia ex-Japan Investment Grade entities surged to 101 as at 22 Feb 2022 from 97 as at 8 Feb 2022.
Asia IG credit spread rebounded to 128 as at 8 Feb 2022 from 126 as at 18 Jan 2022.
Asia HY credit spread dropped to 891 as at 8 Feb 2022 from 1036 as at 18 Jan 2022.
10-yr Treasury dropped to 1.85 % as at 22 Feb 2022 from 1.93% as at 8 Feb 2022 (expect to be around 1.5% to 2.5% for the year of 2022).
We expect IG bonds credit spreads, except for Chinese issuers, to range bound over the coming months.
We expect sentiment in the HY bond market to remain relatively muted to range despite the recent injection of capital of approximate USD 6.5 billion by various Chinese financial institutions to Huarong, aiding it to serve its debts and prevent a debt default.
Figure 2: CDS Asia ex-Japan Index 1-year Chart (Source: Bloomberg)
Highly leveraged HY bonds (B rated) may face refinancing/default risks – several onshore/offshore bonds have defaulted recently including bonds issued by Sunshine 100 China Holdings, Fantasia Holdings, Sinic Holdings, Modern Land China, Evergrande, Kaisa, China Aoyuan. Evergrande also announced on 3 Dec 2021 that it planned to “actively engage” with offshore creditors on a restructuring plan.
We caution investors holding marginal investment graded bonds (BBB-, Baa3) to be wary of downgrades. For investors with an investment grade bond portfolio mandate, we recommend bonds with BBB+ ratings or higher, and portfolio duration of 2.5 – 3 years.
We recommend investors to stick to short dated high quality (BB Rated) High Yield bonds (ex-China)with a duration of less than 3 years and be prepared to hold the bonds to maturity. At the same time, reduce/control their exposure to highly leveraged BB-rated bonds (Greenland, RiseSun) and all B-rated Chinese real estate bonds. Geographically, we are overweight Emerging Markets’ bonds (Investment Grade and High Yield with BB ratings excluding China) and neutral on Developed Markets and Chinese bonds.
Further, we recommend investors to match their exposure of high-beta bonds such as: CoCo Bonds, Perpetuals, and high yield bonds to their respective risk appetites. It is also recommended for investors to hold a more diversified fixed income portfolio and to reduce leverage of portfolios due to various uncertainties across sectors. We advise investors to dive deeper into the issuer’s stand-alone fundamentals to ensure the strength of the company.
We recommend investors to continue to monitor low beta bonds. For reference, the purchase yields for 3–5-year low beta IG bonds are at 2-3%, and 3-5-year low beta HY bonds are at 4.5-6.5%. Overall, with the expectation of rates going higher and more volatility going into year 2022, we recommend a balanced and more diversified portfolio, with short duration (less than 3 years) IG and high quality (BB rated) HY bonds. Although the absolute returns in the fixed income market may be low, it is still advised to maintain a portion of the portfolio in fixed income given the heightened volatility of the markets.
With the biases of global monetary leaning towards tighter conditions in 2022,expect risk of sharp volatility in risky assets at least into the first quarter of 2022.
Despite the belief that interest rate hikes are generally negative for Equities, we believe it will be the speed, frequency and magnitude of the upcoming Fed rate hikes that will, to a large extent, dictate the direction and volatility of global Equities market throughout this year.
In the near-term, we anticipate a significant pullback in the equities markets, in particular, the Nasdaq (growth stocks in the US) in view of the relatively rich valuations vs other Global Equity markets as well as the looming interest rate hike cycle in 1H’22 that will likely have a greater negative impact on growth stocks.
Fortunately, the US FED has been providing sufficient clarity with regards to their intentions in relation to monetary policies thus far, specifically on how they have been managing market’s expectations. Henceforth, we remain constructive on Global Equities for the mid-longer term despite anticipating possible near-term volatility arising from the initial rate hike in the earlier half of this year.
With various headwinds on the horizon, we urge investors to adopt a more conservative approach prior to the initial Interest rate hike anticipated to materialize in the earlier half of this year and stay over weight selective blue chips and maintain higher levels of cash to mitigate the risks of excessive volatility.
It is recommended to gradually buy the dips in the US/HK markets; keep in mind that fundamental bottom stock picking is crucial even within favored sectors.
Figure 3: 1-Year chart comparing S&P 500 Index and Hang Seng Index (Source: Bloomberg)
Geographically, we are inclined towards HK/Greater China Equities vs US and Europe Equities heading into 2022, mainly because of the more attractive valuation and better risk/reward. The recommendation would be to stay more defensive initially by holding more cash prior to the initial rate hike by the US FED and await better buying opportunities on the anticipated pullbacks during the same period.US stocks, in particular the Nasdaq still have room to decline against looming rate hikes and global geopolitical tensions (Ukraine-Russia).
Overall, we favor Cyclicals over Growth stocks. The decline in Growth or Tech stocks especially in the US may not be over. Specifically, we maintain overweight in Banks (Singapore, China & US), Chinese Telcos, Chinese Autos (in particular EV related themes), Alternative Energy and gradually begin to add or accumulate to US and Chinese Technology sector on major pullbacks and further weaknesses. Sectors to be avoided for now include Chinese Property (regulation overhang), Oil & Gas (currently rich valuations; take profit on existing positions).
It is important that investors adopt a well-diversified portfolio overall. Stay nimble and defensive by employing more tactical trading while mitigating anticipated volatility with a major overweight in selective blue chips. Maintain higher levels of cash (30% – 50%) todo more tactical short-term trades to capture opportunities arising out of ongoing market volatility, as well as to remain defensive against a volatile market backdrop. Highly recommend to reduce leverage in current market environment.
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 22 February 2022. 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.
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.
Lawrence Chan – Head of Fixed Income
Mr. Lawrence Chan is Head of Fixed Income of Raffles, where he is responsible for credit and fixed income investments.
Mr. Chan has over 15 years of experience in the fixed income industry. Prior to joining Raffles, he was Chief Investment Officer (Fixed Income Investment Department) of Taiping Assets Management (HK) Co. Ltd. to manage China Taiping Group’s offshore bond investments and co-manage MPF & ORSO funds for China Life Trustees. His co-managed China Life Guaranteed Return Fund won various awards from Bloomberg Businessweek (2015-2017), BENCHMARK (2015) and MPF Ratings (2015-2016). He had worked for various financial institutions, including Taikang Asset Management (HK) Co. Ltd., Deutsche Bank AG (HK Branch) and Hong Kong Monetary Authority.
Mr. Chan graduated with a Master’s degree in Finance from The Chinese University of Hong Kong and a Bachelor’s degree in Accountancy (with First Class Honours) from City University of Hong Kong (formerly known as City Polytechnic of Hong Kong). He is a CFA charterholder, Hong Kong CPA, and a Fellow of the Association of Chartered Certified Accountants (“ACCA”).