Investment Roundup

30 November 2022

“While disinflation should produce moderation, conditions to allow a Fed pause are not yet in place.”


The signal from one monthly data point is limited, but the October US inflation prints align with a range of indicators pointing to a downshift in global inflation that should spur a moderation in the pace of monetary policy tightening at the Fed and elsewhere. Supply chain disruptions and shipping congestion eased in 2022, and inventories of cars and consumer goods have rebounded from tight levels, which should contribute to a slowdown in overall core inflation. For the US, this is amplified by the impact of a rising dollar on import prices. Ongoing labour market rebalancing is moderating wage growth, particularly in sectors with large declines in the jobs-workers gap such as retail and leisure, which is expected to reduce upward pressure on services inflation. While disinflation should produce moderation, conditions to allow a Fed pause are not yet in place. The Fed will likely need to see a string of core inflation readings at 0.3% month-on-month or lower, signs that labour market pressures are lower, to allow a sustained easing in financial conditions. This scenario is unlikely until 1Q23 at the earliest.

In terms of fund flows, the week saw Emerging Market (EM) hard currency inflows of +$745mm, from +$290mm the previous week. EM Asia ex-Japan hard currency bond fund weekly inflows were +$53mm. Year to date, flows to EM Asia ex-Japan hard currency bond funds are -$8.2bn vs -$30.3bn for broad EM hard currency bond funds. Separately, US HG fund inflows halved (+$1.4bn, from +$2.8bn) and US HY fund inflows were the largest since June 2020 (+$4.7bn, from +$4.0bn). Taken together, these indicate that investors have more clarity that the near-term path of Fed hikes is expected to be less severe.

In China, policymakers appear shifting to a more supportive stance towards the property sector. China’s National Association of Financial Market Institutional Investors (NAFMII), one of the regulators for China’s domestic corporate bond market, announced expanding bond financing support for private enterprises, including real estate companies. They expect these measures will support around RMB 250bn of privately owned enterprise (POE) bond financing, and capacity could be further expanded. Financial regulators also instructed banks to support POE and SOE developers equally; developers’ outstanding bank loans and trust borrowings due within the next 6 months can be extended for a year; restriction on bank lending to developers can be temporarily eased; bond issuance by quality developers will be supported. Whilst lending to POE developers is encouraged and there appears to be more leeway for loan extensions, the instruction specifically mentions that quality developers and those with sound governance should be supported. Bailouts of distressed developers seem unlikely.

Repricing Of Bond Yields To Highest In Over A Decade Offers Opportunities To Rebuild Income Streams

Source: CRIC, Bloomberg

Fixed Income Strategy

With inflation potentially peaking and terminal rates approaching, and policy makers appearing sensitive to financial stability risks, turn more constructive on duration. This is expected to drive a continued rally in investment grade paper, where all-in yields are attractive. Position in longer duration oil and gas, given low leverage and healthy free cash flow.

Although tail risks are lower, the risk of a mild recession over the next several quarters would increase credit stress on issuers with weaker balance sheets. Consequently, there could be some renewed weakness in high yield, especially in the single-B segment.

Position in China property IG as the main beneficiary of policy measures over this month. The policy support should help to ensure the stronger credits will receive sufficient access to financing and reduce the risk of credit events occurring. While China property HY bonds may rebound, the segment is likely to remain volatile with idiosyncratic defaults. Until signs of physical property market recovery, retain less exposure to China property HY.

Year to date, heavy issuance has been the driver of the US bank spreads underperformance vs corporates, despite generally robust earnings. In October, supply from the big US banks was $8.5bn, down from $29.25bn in July (after 2Q earnings) and $31.5bn in April (after 1Q earnings). As supply is waning during 4Q22, position in low cash price long dated US bank senior bonds to capture the improvement in technicals.

Equities Strategies

We believe the worst is over with regards to inflationary risks, in particular that from the US. As we head into 2023, the macro overhang, in the form of massive inflation, that has roiled global Equities markets will gradually be replaced by recessionary fears/risks as Fed’s rate hike actions begins to work its way into the economy, slowing it down substantially according to recent macroeconomic data. In that regard, our focus should also shift accordingly and portfolios should be position accordingly.

In the near term, we recommend to take profit by selling into the current strength of the broader Equities market, raise cash levels, while holding on to only certain core, longer term high conviction positions while waiting for the upcoming US December CPI data to get confirmation that inflationary risks are subsiding. Core positions should be skewed towards more 1) defensive and high dividend yielding names/stocks such as Chinese Telecoms as well as 2) China Consumer sector with respect to the ongoing China reopening theme and 3) US defensive sectors that are likely to do well in a recessionary environment such as US Healthcare and Consumer Staples.

Broadly and in positioning the Equities portfolios for 2023, our preferred approach constitutes asset allocation based on several key themes, namely 1) potential China easing of Covid restrictions and 2) Disinflation, to capture potential upside should inflation eases while remaining Overweight in defensive, high dividend yielding sectors should recessionary risks escalates as we head into 2023.

  • Our most favored sector is Telecommunications Operators, in particular Chinese Telco operators that offer high dividend yields at attractive valuations alongside smaller price and hence P&L volatility
  • We continue to prefer certain Consumer Discretionary sector that serve as natural hedges to inflation like certain high end luxury consumer brands that can continue to deliver earnings and ability to pass on higher prices to consumers with minimal impact to demand
  • Position in selected Banks, in particular, Singaporean Banks higher credit quality and NIM expansion amid improving macro outlook and SEA growth prospects
  • For mid-longer-term exposures, position in sectors levered to the China reopening theme, including but not limited to Sportswear, Auto as well as Airlines
  • We also like more defensive selected names in the US in sectors such as Healthcare and Consumer Staples/Durables as the probability and fears of recession escalates

Consider hedging your Equity exposures if you haven’t already done so, in particular, new exposures, i.e.. for every dollar of Equity exposure you put on, hedge with downside protection instruments such as inversely correlated ETFs (E.g. 7300 HK, 7500 HK, PSQ, SQQQ, etc.)

Continue to employ shorter-term tactical trading across both core and peripheral positions to capture market dislocations and volatility

Cash Levels: Keep at least 15% cash on hand to remain defensive


Figure 1: Lower and widening dispersion of P/E ratio against S&P 500

Source: Bloomberg, data as of 15 November 2022

Unlike the equities sell-off during the Covid-19 pandemic, we currently observe the spread between the price-to-equity ratio of SPX against its price beginning to widen. The median price-to-equity ratio over the last 5 years was 21 – however, SPX is currently trading below 18. The pricing of market pessimism creates opportunities for equity investments, particularly in high-quality value stocks overgrowth stocks given the current market environment.

Figure 2: S&P 500 returns 12 months after peak inflation

Source: BlackRock (2022)

Historically speaking, the S&P 500 has shown an average positive return of 11.5%, 12 months after inflation has peaked – of which only 4 out of 15 periods were when the S&P 500 closed lower. We remain positively cautious that US CPI peaked in June albeit against the backdrop of quantitative tightening headwinds.

Figure 3: Growth Equites Fund vs Benchmark (1, 3 & 5Y)

Source: Bloomberg, data as of 15 November 2022

For this week’s investment outlook, we revisit the role of equity funds in our portfolio allocation strategy. On the assumption that US CPI has peaked, and only recessionary risk headwinds remain, we favour a tilt towards single growth stocks in the short term. However, if there is a preference for a more diversified approach with a maximized return, we have shortlisted several equity funds for consideration.

In the short term, active fund managers are incentivised to outperform the benchmark over 1-year period – this would mean better management of downside risks against macro headwinds. However, in the long term, the outperformance evens out and is similar to the benchmark. As a result, we recommend the use of equity funds as a short-term tactical strategy.

Figure 4: Income Equites Fund vs Benchmark (1, 3 & 5Y)

Source: Bloomberg, data as of 15 November 2022

Figure 5: Growth Equity Funds Sector Breakdown

Source: Bloomberg, data as of 15 November 2022

In the selection of equity funds, we favour certain thematic funds that capitalise on long-term megatrends – the healthcare sector has displayed outperformance in this market environment. Across most of the growth equity funds, we observed a high allocation towards the technology sector, which accounts for higher returns at the expense of greater downside risks.

Figure 6: Income Equity Funds Sector Breakdown

Source: Bloomberg, data as of 15 November 2022

This is particularly the case for income equity funds. A private bank portfolio allocation typically has a strong tilt towards the technology sector due to structures or direct positions. The allocation overlaps among the funds in the portfolio greatly skew the overall exposure towards the technology sector and result in concentration risks. Given a disinflationary environment and potential de-escalation of the Russia-Ukraine War, we prefer the AB Low Volatility Equity Portfolio which has a lower downside risk against the MSCI AC World Index.

The Robeco Global Premium Equities fund is a clear winner with respect to their risk management due to their heavy exposure to the healthcare sector. In addition, the fund may benefit in the short term as we see a rotation of capital into growth stocks when the FED pivots. The fund is sufficiently defensive in industrials, energy, and materials in a prolonged inflationary environment with adequate high beta Technology exposure to capture the upside.

On the income equities fund space, we prefer the AB Low Volatility Equity Portfolio funds for their superior risk-adjusted returns and adequately diversified holdings.

On the income equities fund space, we prefer the AB Low Volatility Equity Portfolio funds for their superior risk-adjusted returns and adequately diversified holdings.

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.

Portfolio Managers:

William Chow – Deputy Group CEO

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

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.

Ek Pon Tay – Head of Fixed Income

Ek Pon Tay – Head of Fixed Income

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, he 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

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.

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