Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
22 March 2022
“The projected seven 25bps steps for 2022”
“Another rollercoaster ride in markets for the past 2 weeks, as we see energy prices and risky assets continue to whipsaw from developments in the Ukraine war.”
Progressions on peace plan between Ukraine and Russia were dashed with Russia calling out the reports as “incorrect”. Tension between US and China renewed, adding to the volatile mix. Hang Seng Index dropped to six-year low as fears on Chinese firms sanctions sparkled with Russia reaching out to China for war in Ukraine.
Chinese ADRs rallied massively playing catch up to local shares after Beijing said it would move to “invigorate the economy”, issue policies that are “market favorable” and that they supported overseas listings. China Securities Regulatory Commission (CSRC) will continue communications with US regulators. To try to reach audit supervision agreement with the US asap, encourages listed firms to step up share buybacks. However, the continued covid outbreak in China has caused forceful lockdowns in several states; prolonging the logistic/supply chain issues.
As the Russia-Ukraine war extends, the duration of the conflict and sanctions will directly impact the commodity markets (near-to-medium term). The odds of Russia defaulting on its foreign currency debt obligations have increased especially with the latest sanctions.
Figure 1: FOMC Dot Plot (Source: Bloomberg)
The Fed has clearly signaled that tightening of monetary policy to combat decades-high inflation would be the direction ahead. Fed fund rate increased by 25bps for the first time since 2018, leaving a hawkish outlook for interest rates – projected 7 rate hikes for 2022.
We maintain the biases of global monetary leaning towards tighter conditions. The Russia-Ukraine war is pressuring commodities prices upwards, near-term prices are especially volatile. Stay wary of sudden turn in risk sentiments, resulting in market flashes. We urge investors to adopt a more conservative approach, maintain higher cash levels and be highly selective in their investments.
Fixed Income Overview:
First rate hike materialised alongside market consensus of 25bps during March 2022 FOMC and market anticipating 50bpsin the next hike, with another 6 more to go in 2022 and 3 rate hikes in 2023. Russian bonds are at risk of default as a result of US and EU sanctions and possible spill over risk to EM bond.
The CDS index for Asia ex-Japan Investment Grade retraced to 104 as at 22 Mar 2022 from 124.5 as at 07 Mar 2022.
10-yr Treasury is expected to be around 1.5% to 2.5% for the year of 2022;
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, it is suggested to reduce / control portfolio exposure in high leverage BB-rating & all B-rating Chinese real estate bonds due to the ripple effect on possibility of Russian bond defaulting. 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, purchase yields (3-5 year low beta IG bonds: 2.0% – 3.0%; 3-5 year low beta HY bonds: 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.
Fed initiated the first rate hike of 25bps which was in line with market consensus. Fed sounded hawkish with regards to future rate hikes and market anticipating 50bps in next hike with 6 more to go in 2022, 3 rate hikes in 2023. FOMC meeting was more hawkish than market anticipated; inflation expectations fell and Powell asserted that the US economy is strong enough to withstand higher rates.
The global Equities market have pulled back significantly as anticipated, 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.
US Inflation is expected to test new highs at levels around 9% and inflation is rising rapidly around the world amid escalation of Russia-Ukraine war with little signs of easing in the near term.
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 further possible near-term volatility arising from the initial rate hike in the earlier half of this year alongside the Russian-Ukraine war.
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 overweight selective blue chips and maintain higher levels of cash to mitigate the risks of excessive volatility. Nevertheless, we believe investors should be buying the dips during this pullback due to the Ukraine-Russia war.
Year To Date, the Nasdaq, S&P500 and Dow Jones Industrial Average declined 11.7%, 6.4% and 4.9% respectively, CSI300, Nikkei and the Hang Seng Index declined 13.5% and 7.1% and 6.5%.
Figure 3: 1-Year chart comparing S&P 500 Index and Hang Seng Index (Source: Bloomberg)
Geographically, we remain constructive on both HK/China and US equities; valuations are more reasonable post the steep declines over the past week.
Overall, we still favour Value over Growth stocks although the preference gap is closing as tech stocks pullback further from the recent geo-political tensions. Fundamental bottom stock picking is crucial even within favoured sectors. Further regulation on Chinese tech is anticipated. Specifically, maintain overweight in Banks (Singapore, China & US) on rate hike cycle theme; Chinese Telcos (defensive with dividend), Autos (in particular EV related themes), Alternative Energy.
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 sufficient levels of cash (20% – 30%) to do more tactical short-term trades to capture opportunities arising out of ongoing market volatility. Overall to reduce or remove leverage in portfolio.
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 March 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.