Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services
28 June 2022
“Continue to favour Value over Growth stocks against a backdrop of uncertainty”
Chinese equities have bucked the recent decline in global markets, buoyed by signs that the world’s second largest economy is on the brink of recovery as reopening gathers pace. Better-than-expected economic data in May was the latest driver to propel Chinese stocks higher. We expect the economic recovery to be stronger in June, favouring cyclical and value sectors, as well as select reopening beneficiaries.
The outperformance of Chinese equities has been notable in recent weeks as global markets have fallen on concerns that rapid central bank rate hikes to curb inflation may harm economic growth. Given that, until a few weeks ago, Chinese stocks had been under a lot of pressure owing to new COVID-19 breakouts, which resulted in extended lockdowns and stringent restrictions in major cities, the advances in the MSCI China index have been particularly apparent.
Chinese stocks, meanwhile, have started a rocky rebound since mid-May as a result of indications that the economy hit a trough in April. The MSCI China gained 1.7% in June, while the MSCI All Country World index declined 10.5% and the MSCI International All Country Asia Pacific index lost 7.5%. We continue to hold a most preferred rating on Chinese equities within our Asia strategy amid recent positive developments.
Despite short-term hiccups, China’s reopening process is still ongoing. Since COVID-19 cases have increased once more in recent days, Beijing last week postponed the reopening of the majority of schools. Near the epicentre of the most recent outbreak, businesses such as restaurants, pubs, and gyms were closed. However, the city announced that the outbreak was under control during the weekend. High frequency data, such as indexes of traffic congestion and subway ridership, have improved in the meantime.
Additionally, despite the fact that people of a few of Shanghai areas were locked down for two days of mass testing a week ago, the exercise did not involve wider restrictions. Indexes relating to logistics have also risen. Rolling mini-lockdowns could become the new standard for the remainder of the year. We anticipate these to be less disruptive to economic activity as long as they do not reach the magnitude we experienced in April and May. In our opinion, China’s recovery in the second half will go as planned.
Recent round of regulatory restrictions on technology stocks near its end. The current outperformance of Chinese equities was powered by technology stocks as Beijing’s policy messaging has improved this year. Following the Politburo’s call for a “healthy development” of the industry, state-run media have stated that authorities anticipate to implement steps to assist the technological innovation of internet platform companies. Leading Chinese tech names remain in our optimistic medium- to long-term outlook, and we think that a stable regulatory environment will cause the sector to rerate.
So, as policy support begins to take effect and economic activity continues to increase due to the momentum of reopening, we anticipate China’s economic recovery to accelerate in June. We anticipate 2022 earnings growth of 9.8% for the MSCI China. In addition to cyclical and value sectors, we see opportunities in reopening beneficiaries with quality income growth, including select names in the new economy, consumption, auto, tech, industrial, and renewable energy sectors. In particular, we prefer companies that can rerate significantly due to a sequential recovery in revenue and stronger bottom lines despite inflationary cost pressures.
According to Bloomberg News, John Lee, the upcoming leader of Hong Kong, said he intended to “rapid review” the necessary quarantine requirements for arriving travellers, including the recommendation to isolate at home or shorten the amount of time they must stay in approved hotels. Individual point-to-point travel in the form of a “closed-loop” arrangement may be one of the temporary measures. We consider this to be very good news, and China may be giving John Lee a “present” in the form of this information.
More Fed speak. Federal Reserve Governor Christopher Waller on Saturday said he expects support for another 75-basis-point hike in July, adding to the hawkish “whatever it takes” remarks from Atlanta Fed President Raphael Bostic. Separately, the Fed’s twice yearly monetary report to Congress characterized the FOMC as having an “unconditional” commitment to restoring price stability. Fed fund futures are currently pricing in an 84.7% chance of a 75-basis-point hike in July.
Our view: Pressure on equities has increased as a result of a combination of high inflation, Fed rate increases, and slower economic growth. The near-term prognosis is still unclear, but we believe that stabilizing equity prices will be aided by a significant slowdown in inflation. That would enable the Fed to pause rate hikes, which would ease some of the pressures facing the market. Alongside value exposure in equities, we recommend several defensive strategies and ways to prepare for further volatility.
We reiterate, in line with our views in the previous update 2 weeks ago, that it is crucial for China to reopen its economy in the summer (i.e., June/July period) as that would help ease some of the cost-pushed inflation that we have previously mentioned a few months ago. That opening up is materializing albeit gradual and risk of a re-tightening of measures undoubtedly exists should sudden spikes in infections occur. In the nearer term, the magnitude of the Fed July rate hike and the tone of Fed officials with regards to future rate hikes will set the tone for global equities market. Between now and then, the Equities market, China/HK in particular, took the opportunity to rally on the re-opening theme and from relatively attractive valuations. We believe any further rebound in the Global Equities market, will rest heavily upon US July inflation numbers and the corresponding Fed decisions.
Major near- and longer-term themes to focus: (i) to continue to monitor the chances/probability of Chinese economy reopening from loosening of pandemic measures in June/July; (ii)further policy support to achieve full year 5.5 GDP growth target; These includes infrastructure buildout across the nation, subsidies on auto sales for individual buyers, cooped up domestic demand for consumer spending; (iii) progress on Russia-Ukraine war
a. Overall, continue to favour Value over Growth stocks against a backdrop of uncertainty over the control of heightened inflation, market sentiment over the looming quantitative tightening (“QT”) in the US in mid-June as well as the continuation of Russian-Ukraine war;
b. Specifically, maintain overweight in Banks (Singapore banks) on longer term rate hike cycle theme; Chinese Telcos (defensive with dividend), Chinese Autos (in particular EV related themes) remain an attractive multi-year theme and they are beaten down amid current macro-overhang and headwinds;
c. Continue to employ more tactical short-term trades in order to capture opportunities arising out of ongoing market volatility; put on partial hedges as well as hold a sufficient level of cash in the portfolio to remain defensive and to stay nimble amid continued market volatility.
Bear Market – Risk Management Strategies
1. Inverse ETFs are very useful on a short-term perspective to hedge against a falling market index
2. Moving to safe-haven Currency such as USD, potentially AUD or CAD.
3. Cherry picking defensive stocks – Non-Cyclical, Consumer Staples, HealthCare and Infrastructure
4. Dollar cost-average
5. Write Calls/ Sell Covered Calls
6. Put Strategies with KO features as hedge
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 the stated date on page 1 (top left corner). 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.
William Chow – Deputy Group CEO
Mr. 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. Mr. Chow 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, Mr Chow 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.
Mr. Chow 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 – 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.
Sky Kwah – Director, Investment Advisory
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, he 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.