US-China Trade Talks: Down to the Wire

With just two weeks left until the trade truce deadline, will we finally see the US and China come around the negotiation table to strike up a deal and end a bitter trade conflict that has lasted over a year? In the following interview Huang Juin Hao, Senior Portfolio Manager shares the possible scenarios of the trade talks and market implications.

1) Trade negotiations between US and China are currently ongoing, but the 90-day truce period is set to end on 1 March 2019. What are your expectations of the talks and possible outcomes?

Our expectations have shifted. Towards the end of 2018, the market was expecting higher odds of an escalation or widening of trade tariffs against China. This was in part, due to the extremely short time period available for negotiations due to US Christmas holidays in December’18 and China’s Chinese New Year holidays in February’19.

However, the market has since moved their expectations towards a higher probability of a neutral or positive outcome for trade talks after more conciliatory signals from both China and US.

In latest news, US President Donald Trump has expressed willingness to extend the March 1st deadline, while Chinese President Xi Jinping and Vice Premier Liu He is reportedly scheduled to meet with key members of the US trade delegation including US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin in Beijing this Friday. We believe the meeting between the top trade envoys signals goodwill and firm efforts to come to a resolution that would be agreeable to both sides.

We are currently leaning towards a base case that sees the status quo remain (no further escalation or de-escalation of the current 25% tariffs imposed on USD$ 250bn worth of goods), and one where it would allow for the deadline to be extended and for talks to be stretched out towards the end of 2019.

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Fixed Income Outlook 2019: Asian Bonds Back in Vogue

In the following interview Esther Teo, Director of Fixed Income, Affin Hwang Asset Management shares her outlook for the Asian bond market as conditions start to ease after a turbulent 2018 and why credit selection is key in a late-cycle.

1) What are your expectations and outlook for the fixed income market in 2019?

The global fixed income space endured a challenging stretch over the past year as the US Federal Reserve continued to hike rates in 2018. Emerging market bonds sold off sharply due to a surge in the USD and specific EM country currency crisis such as in Turkey and Argentina, which prompted a reversal of flows from EMs back to the US. Heightened trade tensions between US and China also dampened sentiment in the region.

Looking forward to 2019, we expect to see some of these headwinds recede as we approach the end of the tightening cycle. More dovish comments from Fed Chair Jerome Powell suggests that the central bank would be more patient and accommodative in steering its rate-hike cycle and unwinding its balance sheet.

Currently, Fed funds futures are pointing towards zero rate hikes for 2019 and a chance of a rate cut in 2020. We expect fixed income to deliver positive returns in 2019 and we see attractive valuations in EM bonds. We also expect EM currencies to be more stable as USD strength is near its peak.

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Breaking the Cycle of Late-Cycle Investing

Late Cycle Approaches…

Markets notched one of its longest bull run in history last year, when the S&P 500 surged 323% posting close to 3,453 days of uninterrupted gains back in mid-August 2018.

But as headwinds from US-China trade tensions, higher interest rates and shrinking liquidity swirl around markets and threaten to finally put the brakes on this rally, investors are speculating if the cycle’s end is nigh.

So is a recession upon us? Should investors scale back exposure and flee the market? Is it time for caution or courage in 2019? Investors can heed lessons from history to keep perspective and understand the nature of boom and bust cycles.

Here are 3 ways investors can break free from the inevitable cycle of markets and learn to position beyond the cycle’s edge.

Take a Long-Term View

Many market soothsayers and economists have tried and failed to predict when a recession would hit. Some even fail to realise that they are already in a recession when it’s too late.

The remarkable run in markets was sparked from the embers of the 2008 Global Financial Crisis (GFC), when the S&P 500 rebounded from its 2009 low of 666 points and more than tripled to its current levels today.

This underscores yet again the forward-looking nature of markets where present beliefs are suspended and what matters more are projections about the future that gets factored into pricing today.

As long as you have a long-term investment horizon, take comfort that the average duration of a bull market would last longer than a bear market.

History has also shown that virtually every bull market in US stocks has ended at a higher point than the previous one, with the S&P 500 peaking at levels that are on average 68% higher than the prior cycle top (Source: Bloomberg, 2018).

So an investor that remains resolute and charges ahead through a recession would not only recoup back losses, but also reap higher returns than at the start.

No doubt hanging on to your portfolio holdings during a recession can be painful especially when the slowdown in the economy starts hitting your pockets.

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Investor Resolutions for 2019: De-risk, Do Less and Diversify

2018: When Volatility Returned

As we close the chapter in another year, there is no better time to trawl back through the pages and ponder on the year that was. For investors, 2018 will be remembered as the ‘reset year’ for markets. When things finally took a pause and markets remembered to take a breather after consecutive rallies.

Investors attempting to chase after the highs and lows of the stock market were also left breathless amidst the frenzy. But as the late-cycle approaches, how should investors position themselves then for 2019 as returns expectations are pared down and global central banks continue to normalise monetary policy?

If you’re still stuck on resolutions, here are 3 ideas to consider on how you can position your portfolio to ride through the volatility ahead.

Resolution 1: De-risk your Portfolio

Amidst a litany of concerns, markets see-sawed between gains and losses throughout the year as a protracted trade conflict between US and China kept investors on edge. Mixed signals from US President Donald Trump and his penchant for Twitter diplomacy didn’t help things either.

The temporary trade truce brokered between US and China may prove to be fragile and mercurial as the President’s infamous tantrums. The resolve for both parties to reach a middle-ground and agree to make concessions will be tested when the trade ceasefire ends on 1 March 2019.

In the same month, the UK will also officially exit the European Union and it’s still uncertain if markets can expect a hard or soft-Brexit. Or if a deal can even be reached at all.

If this is any indication on what 2019 would portend for markets, it is that volatility would persist. It could be a front-loaded market next year as the Capricorn/January effect begins to dissipate and reality sinks in for investors of the challenges ahead in terms of tricky US-China trade negotiations, softening growth and shrinkage of liquidity.

Against this backdrop, investors may want to look into areas to de-risk their portfolio by tilting more exposure towards fixed income to provide a ballast for one’s portfolio and a steady income stream. Correction in bond prices are typically less severe compared to equities in a market sell-off and can help preserve capital.

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Emerging Market Outlook 2019: Mind the Yield Gap

In the following interview Lim Chia Wei, Portfolio Manager, Affin Hwang Asset Management shares his outlook for emerging markets (EM) and what 2019 would herald for investors.

1) It’s been an eventful year for EMs in 2018. From the US-China trade war, rout in EMs stemming from the Turkish lira plunge and Argentina debt crisis, What’s your take of markets for 2018 and how would you sum-up the year?

2018 was a reset year for markets. After a strong rally, the markets is finally catching its breath and are beginning to reprice growth and expectations.

The EM market started 2018 strong, but subsequently weakened materially in the year. Many were caught off guard by how far the US-China trade dispute escalated and how quickly the economic growth slowed down momentum within EMs. The deceleration of growth began even before the negative impact of trade tariff took place.

2) Looking forward to 2019, what are some of the key investment themes and risks that you are monitoring for EMs?

There are three risks that stand out. The first is the event of a protracted and escalating geopolitical tension between the US and China. The geopolitical tension could evolve beyond trade to South China Sea territorial disputes. At this current juncture, we think the probability of such a bleak scenario is low. But it’s something that we are keeping a close eye on.

The second risk will be rising global bond yield in the US and its knock-on effect on global bond yield levels. So far, rising bond yields has not created a significant problem. However, higher bond yields essentially makes it more expensive for consumers to purchase property with a mortgage, as well as for businesses to fund their expansion through borrowings and for the government to fund fiscal spending. Any party with excessive borrowings will find themselves squeezed in a rising bond yield environment.

The third risk will be sooner-than-expected US recession. In our view, a US recession is unlikely to take place in the next 12 months. But history has shown that it is hard to predict the timing of a recession. If the US were to go into recession, the EM market would likely fall too.

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Budget 2019 – Awakening the Tiger

Not as Bad as Expected

Local markets breathed a collective sigh of relief last week as the much awaited Budget 2019 proved to be less harmful than initially expected. Severe austerity measures to cut costs as well as rumours of new taxes did not materialise. Instead, Pakatan Harapan’s (PH) maiden federal budget was a mildly expansionary one which stuck to fiscal consolidation, whilst providing a social safety net to the vulnerable B40 group.

In a 2-hour speech in Parliament, Finance Minister YB Lim Guan Eng outlined 12 strategic thrusts to return Malaysia’s economic position as an Asian Tiger focusing on 3 areas including institutional reforms, shared economic prosperity and fostering a culture of entrepreneurship.

The government had forecasted lower GDP growth of 4.9% for 2019 amidst uncertainty in the global economic landscape. Expectations of lower growth have already been well telegraphed to the market and this lower growth projection had limited impact.

To shore up its revenue base, the government expects to collect a RM30 billion special dividend from Petronas which sends a clear signal to investors that the government would be the one assuming its massive debt burden instead of the Rakyat. The corporate tax rate was also reduced to 17% from 18% for SMEs with paid-up capital below RM2.5 million and businesses with annual taxable income below RM500,000.

Other measures to boost the national coffers include the proposed setting-up of an airport REIT, where the government hopes to raise RM4billion via a 30% equity stake sale. Complications behind the ownership of Malaysia Airports Holdings Bhd (MAHB) which is also currently undergoing a restructuring and yield levels that are required to launch such a REIT given its limited lifespan may be a challenge.

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What to Expect from US Midterm Elections – How Would Markets React?

In the following interview Huang Juin Hao, Senior Portfolio Manager of Affin Hwang Asset Management shares his thoughts on what to expect from US midterm elections and its implications to markets.


1. When is US midterm elections and what will the electorate be focusing on?

Less than a week, the US will hold its midterm elections that could have major implications to markets depending on the results. The American electorate will head to the polls on 6th November 2018 where they would weigh their political vote on a wide spectrum of issues ranging from the economy, immigration, trade, gun control, climate change, etc.


2. What are the likely outcomes and implications to markets?

According to September polling data, the Democrats could make inroads and wrest back control of the House of Representatives whilst the Republicans would retain control of the Senate. Assuming that happens, this could stifle legislative progress and policy aims of the Trump administration which would impair US President Donald Trump’s ability to pass legislation, possibly leading to a freeze in domestic fiscal policy and register as voter disagreement over trade-tariffs. This could set the stage for a weaker US dollar and a slower pace of Fed rate hikes as growth wanes from a lower fiscal impulse.

Conversely if the Republicans retain control of both the House of Representatives and Senate, this would be an endorsement of Trump’s tax cuts and aggressive trade tariffs, leading to an accelerated pace of rate hikes and a stronger US Dollar.

The outlook for emerging markets (EMs) would hinge on the strength of the US dollar and pace of Fed tightening. We’ve seen EMs bear the brunt of a global selloff this year as investors turn away from risk-assets and plough back money into the US on signs of quicker growth, higher interest rates and a stronger greenback. Escalating trade tensions and geopolitical risks stemming from Turkey and Argentina also spooked investors leading to a selloff in EMs.

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Wild Ride in Markets Driving You Up the Wall?

Are Markets Making you Sick?

Investing can be a mentally stimulating excursion. At once a highly regimented art form deeply rooted in technical analysis & financial theory, but also reliant on gut feel, grit and plenty of gumption.

So when markets vault and fall, some investors can get overwhelmed and be swept away by the volatility.

Studies have shown that stock market volatility has a direct correlation to increased hospitalisation rates and incidences of mental health disorders.

A research produced in 2014 which tracked hospitalisation health records close to three decades (1983 – 2011) found that daily fluctuations in stock prices has an almost immediate impact on the physical health of investors, with sharp price declines increasing hospitalization rates over the next two days.

In a chilling example, on October 19, 1987 otherwise known as Black Monday, the US stock market plunged by over 25% which led to hospital admissions spiking by over 5% on the same day (Source: “Worrying About the Stock Market: Evidence from Hospital Admissions” by Joseph Engelberg and Christopher Parsons, University of California- San Diego, October 2014). 

Sounds alarming, but that’s what the data shows.

However, the important lesson here is that whilst markets are bound to recover and benchmark gauges will recoup their losses, your health may take a turn for the worse and deteriorate beyond the normal course of recovery.

In conjunction with World Mental Health Day, Affin Hwang Asset Management spoke to experts about the link between mental health and investing, as well as the importance of financial wellness as part of a holistic health plan.

Quelling Anxiety and Panic Attacks

So is there is a link between periods of high volatility and mental health afflictions like anxiety or panic attacks?

Rajen Devadason a licensed financial planner with Manulife Asset Management Services Berhad and also CEO of corporate mentoring consultancy RD WealthCreation Sdn Bhd believes that there could be a link between the two, but he notes that it is important not to mix them both as the two conditions are not mutually exclusive.

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Unpacking US-China Trade Tensions: Brace for Further Escalation

In the following interview Huang Juin Hao, Senior Portfolio Manager of Affin Hwang Asset Management shares his views on the brewing trade tensions between US and China, as well as its implications to markets and global supply chains.


1. We’ve seen tensions escalate between US and China amidst newfound allegations of hacking by Chinese authorities. Help us unpack what happened this week in the latest string of incidents that have tested relations between the two countries?

Reports by Bloomberg Businessweek show that investigators have found Chinese microchips were being implanted into servers sold by US-based Supermicro, a leading supplier of server motherboards. These chips were supposedly inserted at factories run by Supermicro’s subcontractors in China and reportedly ended up into almost 30 US companies, including Apple and Amazon, and in the latest news, an undisclosed major US telecommunications company.

As a result of the allegations, Supermicro shares have fallen by over 40%, and the 3 named companies, Supermicro, Apple and Amazon have replied with strong statements disputing the allegations. Technology experts have expressed doubts that China could have performed the allegations as detailed according to Bloomberg, and the US Department of Homeland Security and UK’s National Cyber Security Centre, have also sided with Apple and Amazon.


2) Would this cause a further deterioration of US-China relations and tensions escalating beyond trade?

The likelihood that tensions would escalate has been increasing given the increasingly harder statements and postures struck by both US and China, as well as the involvement of military activities in the South China Sea. Actions from both sides have become increasingly antagonistic and the allegations of spy-chip insertions into the supply chain of US tech companies and the US arrest of a Chinese senior intelligence officer would certainly add fuel to the already heightened tensions existing between US and China.

This raises the risks of a geo-political incident occurring and spiralling out of control, and we while we hope that tensions can be prevented from escalating further, there is no denying that the risk level in the markets has increased.

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100 Days: Move Past Kitchen Sinking to Gain Clarity on Growth

In the following interview Gan Eng Peng, Director of Equity Strategies & Advisory, Affin Hwang Asset Management discusses the market outlook for Malaysia as Pakatan Harapan (PH) approaches its 100-day term in office.


1. Pakatan Harapan (PH) will soon approach its 100th day term on Aug 18 – what’s your assessment so far of the new government and has it sent the right signals to the market?

The way we look at this government is like a new management coming in, taking over and kitchen-sinking. Thus, the first 100 days is about pressing the reset button. But eventually, we need to move beyond this phase. Investors are very clear about what’s wrong with the country; the 1MDB scandal, high debt levels, and the fiscal deficit.

Where there is less clarity now is policies the government has to promote growth. For this, we are waiting for the 100-day Government of Malaysia Symposium which will be held for the first time in September and Budget 2019 that will be tabled on 2 November 2018.


2. PH has a long list of issues to address. From the RM1 trillion debt, narrower revenue sources, capital outflows and brain drain – what are the more pressing challenges ahead for the country and are we addressing them?

There is no doubt that Malaysia has high debt and a narrower revenue base. To allay these concerns, the government needs to show clear evidence of curbing wastages and leakages. We need to start to see this being reflected in better expense/capex control for government departments and government linked companies.

In addition, the government needs to be pro-growth as the risks of high debt and a narrower revenue base subsides significantly as GDP gains momentum. The key concern of the market is whether the country can continue to grow amidst all the kitchen-sinking.

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