A Brief on Global & Local Markets, Investment Strategy. Week in Review | 15 May – 19 May 2017

President Trump in a bad light amid Russian scandal allegations

Pressure continues to pile onto the Trump administration – and the president himself – amid rising suspicions over Russia’s involvement in Trump’s presidential campaign last year. Although any concrete evidence is pretty much absent at this point, many are speculating that Trump’s decision to fire FBI Director, James Comey earlier this month was an attempt to halt the FBI probe on Russia’s possible interference in the US elections.

In light of the scandal, many have called for Trump’s impeachment last week; which inevitably introduced some volatility in global financial markets. However, we think that the volatility in markets will likely be short-lived given that Trump’s support base is still fairly strong. Besides that, impeachment of the current serving president may not be as straight-forward as one might think.

The news have kept treasury yields low at 2.23% for the 10-year UST paper. And given that the FBI has recently assign a special panel to investigate on the Trump/ Russia probe, the rising political uncertainty in relation to the investigation will likely cap bond yields at current levels in the near-term. In addition, the USD is expected to remain weak as well despite a robust US economy.

In separate news, political pressure in the Brazilian market also intensified following a leaked conversation recording; revealing a corruption scandal involving President Michel Temer. The scandal has led to widespread calls for Temur’s resignation,  with the Brazilian Bar Association further voted for his impeachment.

Indonesia’s credit rating raised to investment grade by S&P

S&P Global Rating upgraded Indonesia’s credit rating to BBB- from BB+ last week, which came after what seemed to be a long wait. They were the last to provide the upgrade after Moody’s Investors Service and Fitch Ratings. In the last 1-2 years, S&P had been more conservative in their re-ratings and chose not to upgrade them; cited that Indonesia’s corporate leverage were too high.

This time around however, S&P had a more positive outlook on their assessments of the nation’s debt; stating that the upgrade was due to better and more realistic budget and revenue management. In addition, budget deficits are expected to fall and be more realistic.

Thus far, any inclusion into major indices is not widespread. The only one that would change would be the JPMorgan GBI-EM Indices – which would see about USD1-2 billion worth of inflows of buying. Additionally, we could also see more investors participating into the Indonesian credit market. Nonetheless, any inflows would be more gradual in nature.

Following the news  of the upgrade, both hard currency and local currency bonds tightened by about 10bps and 20-25bps respectively. The Rupiah also strengthen by about 1%. Moving forward, we are quite optimistic on Indonesia’s fixed income space in the medium to long-term. Portfolio wise, we continue to like holding Indonesian government bonds as the carry is very attractive – close to 7% for the 10 year paper.

On the equity side, the Jakarta Composite Index surged by about 2.5%; in which a lot of the last hour buying (following the upgrade) was actually driven by local investors. Nonetheless, valuations are becoming less attractive. And despite the rerating, we do not expect to see much inflows into Indonesian equities moving forward. Hence, we are taking this opportunity to lock-in some of our profits and trim our holdings for some of our regional equity funds.

Malaysia 1Q2017 GDP growth strongest in 2 years

Domestic GDP for the first quarter came in at 5.6% YoY; a significant increase as compared to the 4.5% seen in 4Q2016. The surprising thing this time around was that the GDP growth was very much domestic-driven – including robust private consumption which grew by 6.6% YoY as compared to 6.1% from the previous quarter. Additionally, foreign spending in terms of tourism has also contributed 6% to the total GDP.

Both exports and imports also rebounded strongly following a weaker showing in 4Q2016; recording an increase of 9.8% and 12.9% respectively. Given the strong figures reported, growth seems to be more validated now, and the Malaysian economy will likely continue to be supported by stronger domestic demand. Following the report, economists have upgraded their numbers and are now expecting a 4.9% to 5.1% expansion for 2017.

On a separate note, the Malaysian small cap space continues to be fairly resilient; the FTSE Bursa Malaysia Small Cap Index remains as the strongest performing index on a YTD basis. The main driver within the said space is much reliant on the technology sector, which is underpinning the current strength seen in the MYR and the overall economy.

Adding on the robust export numbers – in which analysts are still quite bullish on – into the equation, the Malaysian small cap space will likely continue to be well-supported in the months ahead. In addition, more funds are expected to enter the space in the near- term – including the RM3 billion fund pledged by the government to invest in and stir interest in small and mid-cap companies.

Fixed income positioning

Investors have turned relatively more cautious given the rising political risks in US and Brazil last week. However, there was no real impact on the Asian fixed income market. On the other hand, Indonesia’s credit rating upgrade last Friday actually boosted sentiment and kept markets buoyed.

Nonetheless, we intend to be more cautious for our regional portfolios moving forward, as valuations are becoming more expensive. Given the recent rally in Treasury and also the Asian credit that have performed fairly well, we have taken some profit and have raised our cash levels to approximately 10%.

Moving on to the local bond market, while MYR bonds have underperformed other regional bonds in 1Q2017 due to the heavy outflows (following the maturity in March), the trend has been slowing down in this quarter and foreign inflows are becoming more evident. In addition, the new 10 year government bond auction last week received strong interest from a lot of foreign investors.

Comparatively, markets this year is expected to be softer as compared to 2016 which was driven by a number of risk-off events. Additionally, the corporate bond space in Malaysia are also seeing fewer high yield bonds this year. Despite so, we believe the MYR is still poised to strengthen gradually over the medium-term, and there are still opportunities within the Malaysian bond market.

Positioning wise, our current focus lies within the government bond space. And in view that BNM is unlikely to hike rates in the coming months, the duration for our domestic funds are kept at 5.5 to 6 years.

The emerging news sent shockwaves to the market, as Brazilian stocks plunged heavily on Thursday – which saw most stock indices down by more than 10%. The impact however, did not escalated to other Latin American markets and was constrained within Brazil itself.

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