A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 17 – 21 June 2019

 

Sentiment boosted by dovish policy signals & trade talks expectation

Dovish policy signals by major central banks last week spelled for a more inspiring session for investors. Global equity gauges were also supported by optimistic headlines on trade, where President Trump and his Chinese counterpart Xi JinPing are expected to renew talks at the G20 Summit this week. The S&P500 and the Dow advanced by 2.2% and 2.4% respectively, while the MSCI Europe closed 1.6% higher over the week.

Markets were lifted early in the week by Mario Draghi’s remarks that pointed to a potential rate cut by the European Central Bank. On Wednesday, the US Federal Reserve (“Fed”) also affirmed the same sentiment by shifting away from a neutral to an accommodative bias during its FOMC meetup. The US central bank kept interest rates were unchanged at 2.25-2.50%, though its revised dot plot chart now projects 1 rate cut in 2020.

Nevertheless, Fed fund futures pricing still reflects a rate reduction in 2019. Softer manufacturing PMI numbers reported late last week further reinforced the prospects of easing by the Fed this year. In our view, a rate cut in 2019 is still on the cards – especially considering that 8 out of 17 FOMC members were in favour of 1 rate cut before the end of the year.

In other central bank news, the Reserve Bank of Australia hinted that a follow-up cut in interest rates is expected in July 2019, after admitting that heavily indebted households have been a key detractor to its job market. Whilst, Bank Indonesia is also likely to join other central banks in cutting rates following a more dovish meeting outcome last week. In addition, the central bank revealed that it would lower the reserve requirement for banks by 50 bps beginning July to boost liquidity.

Asian markets extend gains on trade optimism

Asian markets held onto gains last week as investors pinned hopes on a highly anticipated trade meeting between US and China at the upcoming G20 summit as well as rate cut expectations by the Fed. The Hong Kong Hang Seng index gained 5.0%, whilst the broader MSCI Asia ex-Japan index closed 4.0% higher.

US President Donald Trump and China President Xi Jinping will attend the G20 summit in Osaka this week, where they will meet at the side-lines to reach a compromise and hopefully come to a trade truce. The base case is for a no-deal scenario, but neither are markets expecting a re-escalation in trade tensions. There are clear pushbacks from China in terms of demand from the US to narrow the trade gap, intellectual property rights and also sovereignty which China has so far refused to budge on.

Several large tech companies including Apple has written to the Trump administration opposing its plan for more US tariffs on Chinese goods arguing that it would harm its competitiveness and hurt growth. In its letter, Apple highlighted its contribution to the US economy, saying it is the largest US corporate taxpayer and is responsible for more than 2 million jobs across the country. The company said additional tariffs would reduce this contribution, and could also threaten Apple’s ability to compete with foreign technology companies.

Markets are expected to stay volatile as the two economic powerhouses kick the can down the road to reach an amicable solution as negotiations are prolonged. With few catalysts for markets to push higher as economic data stays weak and consumption slows down, we expect markets to stay flattish. However, downside risk is supported by easing policies from global central banks to shore up growth.

The US dollar weakness accelerated after the Fed’s monetary policy meeting as the central bank signalled a more dovish stance. The US dollar crossed below the 200-day moving average last week following the FOMC meeting. A weaker US dollar and a lower interest rate environment could help buoy risk assets within emerging markets (EMs) and support outperformance.

On commodities, crude oil price made notable gains rising by over 9.0% last week as tensions in the Middle East heated up after Iran claimed it downed an American drone that violated its airspace. Gold also extended gains last week breaking above US$1,350 level on the back of dovish comments by the Fed that guided for rate cuts.

On portfolio positioning, we continue to tilt towards a defensive stance with a preference for secular and dividend yield stocks. In terms of country allocation for our Asian portfolios, Hong Kong and China made up 40.0% of exposure, 20.0% in Singapore and another 12.0-14.0% in US.

Updates on Malaysia

Locally, the benchmark KLCI tracked regional gains, closing 2.7% w-o-w higher, largely on the back of positive macroeconomic news flow. Last week saw foreign net inflows of RM28.3 million into the local equities market, compared to net outflows of RM415.3 million in the prior week.

Key development over the past week was the government’s offer to take over the four toll highways owned by Gamuda Bhd and Lingkaran Trans Kota Holdings Bhd (Litrak Holdings) for RM4.5 billion cash. The timing was a surprise given the government’s fiscal constraints, nonetheless, the offer will likely be viewed positively by the market. This news continues the improving clarity on government policy and execution, which has already translated to market performance.

Fixed income updates & positioning

The Asian fixed income space enjoyed another vibrant showing last week, where high beta and high yield names in the region gained solid traction amid this current low yield environment. AT1s in particular enjoyed strong demand over the week, which drove prices higher.

The barrage of dovish remarks by central banks globally also translated to better support for the primary segment, which saw strong books for new issuances that rolled-out last week. Nevertheless, we are refraining from deploying into the credit market too heavily at this point given the less attractive yields and default concerns. Though having said that, the lower yield environment should keep the markets well-buoyed for the near to medium term.

Positioning wise, we continue to favour long-end govvies from Indonesia, Singapore, Australia and Malaysia which have performed well in recent weeks, as well as selective credit names that we are comfortable with. Duration for our Asian portfolios currently sits between 4-5 years.

Similarly, the domestic government bond space also enjoyed a strong session last week, as the 10-year MGS benchmark yield edged lower to 3.65%. On local news flow, Moody’s Investor Service downgraded PETRONAS’ credit rating to A2 (stable) last week due to its close credit linkage with the Malaysian government. Impact of the downgrade however was relatively subdued given that the company is still strong from a fundamental and financial position perspective.

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