A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 14 – 18 May 2018
Asian equity ends mix as trade war put “on hold”
Asian markets ended mix last week, as trade tensions between US and China appear to have eased as negotiations between the two countries gain traction. The Shanghai Shenzhen CSI 300 index was barely unchanged at 0.8%, whilst the Hong Kong Hang Seng Index was down just 0.2%. US bond yields were also in focus, as the 10-year Treasury yield nudged higher to 3.12%, though Asian equities largely stayed resilient holding its ground.
On portfolio positioning, our effective cash holding is approximately 15.0% inclusive of 3.0% inverse ETFs that our Asian portfolios carry. We have left the portfolios currently unhedged in terms of currency exposure, as the Ringgit has held up strongly post-election. On sector allocation, our portfolios are still tilted towards domestic-oriented themes and sectors including healthcare and education. While trade talks between US and China appear to have progressed, specifics are still not forthcoming with both countries hinting at more talks before a conclusion can be reached.
Additionally, we remain invested in the tech space as well, focusing exposure on specific sub-segments of the tech sector that is seeing strong demand for specific components and chips of which there is a shortage in supply. We are also adding Korean tourism-related names over perceived improving relations between South Korea and China, where the latter has in the past imposed sanctions and travel bans on agencies for holiday packages to South Korea.
Updates on Malaysia
On the domestic front, the benchmark KLCI is up 3.4% YTD in line with other regional markets that were broadly up. We expect markets to be treading water lightly in the upcoming months as markets soften momentarily, with policy implementation gradually gathering momentum before markets pick up. Malaysia 1Q2018 GDP grew 5.4% y-o-y, underpinned by continued expansion in private sector activity and strong support from net exports, according to an economic update by Bank Negara Malaysia (“BNM”).
Headline inflation declined to 1.8% in 1Q2018 compared to 3.5% in 4Q2017, reflecting the smaller contribution of domestic fuel prices and smaller increased in global oil prices as compared with the previous quarter.
Markets will be focusing its attention on listed concessionaires this week as the new government is slated to make an announcement over the revamp of the existing toll structure which could result in the eventual abolishment of tolls. Toll operators including Lingkaran Trans Kota Holdings Bhd (“Litrak”), Gamuda and Ekovest Berhad bore the brunt of the sell-off with their share price coming off sharply last week. While it remains unclear which route the new government will take – i.e. whether to remove toll charges entirely or in stages – this will have some impact on concessionaires, bondholders and the government’s fiscal position.
The new government also pledged to reinstate petrol subsidies in its manifesto, albeit on a targeted basis. Users of motorcycles below 125cc and cars below 1,300cc will get to enjoy subsidies at a monthly fixed quota. Initial forecast provided by Pakatan Harapan estimated that fuel subsidies will cost over RM3 billion for 2018. Last week, Prime Minister Tun Dr Mahathir Mohamad announced that the price of fuel will longer be floated on a weekly basis and will be pegged to the present price of RM2.20 per litre for RON95 momentarily, until the targeted fuel subsidy structure is implemented.
On portfolio positioning, we are adding to our Malaysian portfolios at the margins. Valuations still appear expensive post-election, as the correction was not deep enough for us to accumulate and scoop up stocks. We remain cautious of the construction sector as it is expected to see broad weakness as ongoing contracts are reviewed by the new government. On the flipside, we are turning positive on the consumer and healthcare space, as both industries stand as beneficiaries of the new government’s social policies to alleviate burden of the B40 and provide access to healthcare.
Fixed income update & positioning
It was a softer week for global bond markets as the 10-year US Treasury yield flirted with the 3.10% level last week. However, violent swings – such as the one seen during the surge from 2.50% to 2.90% level earlier this year – were absent this time around given that markets are now fairly in line with the US Fed’s rate hike guidance of another 2 more hikes in 2018; which will likely see yields gradually trend higher.
Similarly at home, we’re still seeing some pressure within the Malaysia bond space alongside its EM peers; with the 10-year MGS yield touching 4.30% last week. Bleak headlines with regards to Argentina’s century bond plunge as well as the Indonesian Rupiah sell-off among others, have translated to weaker sentiment for EM currencies and bonds.
For Malaysia specifically, investors have remained side-lined amidst policy uncertainty as well as concerns over rising deficit; although Moody and S&P have both reaffirmed its A- rating on Malaysia respectively following the change of regime. However, from a technical standpoint, there aren’t too many MGS maturities coming up for rollovers – hence any new supply would assert further pressure onto the domestic bond market; which would see MGS yields move higher for the interim.
Despite near-term headwinds, we believe that demand would gradually come back as more clarity is seen from the new administration’s policy implementations. Positioning wise, we have previously lightened up our MGS holdings for our domestic portfolios prior to GE14. While the 10-year MGS benchmark yield have corrected by about 40-50bps since the announcement of the election date in mid-April, we intend to stay put at the moment. Nonetheless, we’ll look to trade the MGS benchmark should its yield breaches beyond the 4.40% level which we think is an attractive point for domestic institutional investors to come back.
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