A Brief on Global & Local Markets, Investment Strategy. Week in Review | 10 April – 14 April 2017

Weak CPI causes slip in Treasury yields and USD

The 10-year US Treasury yield saw a dip of 14bps last week to close at 2.24% amid less than inspiring US CPI data – dropping about 0.3% for the month of March. Retail sales were equally disappointing; which fell by about 0.2% vs. expectation of a rise of 0.1%. Stacked with the poor labour data from the week before, the picture painted seems to depict a slower moving US economy. To add on, the USD also weakened by about 0.7% week-on-week.

The dip in UST yields and the USD is also likely caused by Trump’s remarks during an interview with the Wall Street Journal – indicating that he favours lower rates and a lower USD. Markets took his statement as a hint that any reflationary policies to take place will likely be delayed.

In addition, Trump has also expressed willingness to consider reappointing Janet Yellen to a second term as chairwoman of the US Federal Reserve, despite having differing opinions previously. As Yellen is considered as a more dovish member within the Fed, Trump’s remarks actually reinforced the dovish environment of lower rates and weaker dollar, at least for now.

The other key event was the US Treasury report which came out last week. In the lead up to the report, it was speculated that Trump and his administration were going to label China as a currency manipulator – which ultimately did not happen. Regardless of political agendas, we perceive the news to be a positive development for global trades; lowering the likelihood for any trade war to escalate.

On the Europe front, a key agenda to watch out for in the coming week is first round of the French elections. The latest poll shows that Le Pen (far-right extremist and nationalist) and Macron (a pro-Euro, independent centrist) are the two likely candidates to progress to the second round of voting in May.

Geopolitical rifts seemingly more apparent

The US military engaged in yet another strike last Thursday, unleashing their most powerful non-nuclear bomb – the Mother of all Bombs (MOAB) – on Afghanistan, in an attempt to halt the movements of ISIS militants. Many have assumed this to be Trump’s warning signal to North Korea, especially following their missile launch attempt during their military parade early last week.

As opposed to the tomahawk missile launch in Syria, the unleashing of the MOAB was more of a military decision and Trump was not directly involved in the move. It is more likely that the US military is given a freer hand to use more powerful weaponries to stop ISIS development in Afghanistan.

As for North Korea, Trump has indicated that he won’t be exercising US military options, but rather, work together with China to handle the rising political tension. However, given that North Korea proceeded with its missile launch exercise despite protests from the China, the US and Chinese government may want to play their cards more carefully moving forward to avoid the worst from happening.

Russia on the other hand, may not be as interested to intervene affairs involving North Korea as compared to Syria. Currently, Russia is working to expand its key logistics hub in Tartus, Syria into a full-fledged naval and military facility. Should the Assad regime fall, the Russian Navy’s influence in the Mediterranean Sea may weakened significantly.

Fixed income positioning

We are establishing long position on the 10-year US Treasury paper for our bond funds as markets are seemingly taking a breather from riskier assets given the rising geopolitical tension. The shift of focus toward safe haven instruments will potentially see bond yields edge even lower in the near-term. However, this is not a long-term call as we believe that the US Fed is still adamant on hiking interest rates two more times this year – which is expected to come in June and December.

Although credit spreads did widened slightly last week, we think that the bond market in general is holding up relatively well – bond prices are still high due to the lowered UST yields, and there wasn’t any sudden sell-off within the credit space.

While there have been a lot of new issuances since the beginning of the year, we intend to be more selective moving forward as valuations are becoming increasingly expensive. Our portfolio duration currently stand at about 4-4.5 years. On the currency side, we are more bullish on the MYR and have hedged some of our USD position back to MYR.

Last Thursday, BNM has announced further liberalisation with regard to its foreign exchange administration rules; providing additional hedging flexibility for financial market players. BNM has removed the 25% cap (imposed last December), which will now allow registered non-bank entities to fully hedge their underlying assets. The added flexibility may potential attract foreign interest to come back and provide further support for the domestic bond market and the MYR.

In addition, BNM’s short-selling framework has also been liberalised to allow resident investors to participate in short-selling transactions in the MGS space. While any immediate impact is unlikely, we think that these easing measures will add liquidity to the bond market in the longer-term and potentially ease risk management for banks and fund managers.

Equity updates and positioning

The equity space was relatively quiet in the past week as market consolidation continues to be apparent. With valuations becoming increasingly expensive, we intend to hold more cash in the interim and have raised our cash levels to approximately 10-15% across our regional portfolios.

We will be keeping a close watch on upcoming earnings report for 1Q2017 as the numbers will likely dictate the flow, or rather sustainability, of the bullish sentiment seen in the equity space. Nonetheless, we are expecting some pullbacks in the near-term and hence we intend to tread ahead with more caution.

On the domestic front, one of the bigger news last week was PNB’s financial support for SP Setia’s acquisition of I&P Group – a move to extract more value from land development, as both companies have large assets in terms of investment properties and valuable land-bank. The merger will create the largest property group in Malaysia; with more than 9,000 acres of land combined.

On a separate note, Maybank is looking to unlock value by listing its insurance arm, Etiqa International Holdings. Currently, the largest listed insurance company on Bursa Malaysia is Syarikat Takaful Malaysia. However we  are expecting more insurance company to be listed in Malaysia by next year; which will likely  lead to a better understanding and valuation of insurance companies.

Overall, the Malaysian market has been down about 1.4% from its peak since 23 March 2017. However, domestic exports has been growing in recent months and the monthly trade surplus has rebounded strongly to hover around RM8-10 billion. To add on, Trump’s statement on the USD has opened a window for the MYR to strengthen; currently standing at around 4.40 against the greenback. While we do not expect to see a sharp spike in the MYR, we do expect the currency to gradually appreciate in the near- term; which will in turn provide some support for domestic equities.

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