A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 2 – 6 September 2019

 

Global equities rally amid renewed trade optimism & rising rate cut expectations

Following a difficult stretch in August, investor sentiment has turned more positive in this new month amid increasingly optimistic news flow surrounding US-China trade relation. While the removal of existing tariffs remains in question, both parties have confirmed that trade negotiations would resume in Washington in October 2019.

The resumption in dialogue saw US stock gauges – including the S&P500, Nasdaq and Dow Jones Industrial Average – inched closer to their respective record highs last week. Inversely, treasuries alongside other global government bonds saw yields trended higher amid the current risk-on environment.

In addition to warming signs on the trade front, the barrage of mixed data points from the US also bolstered expectations of looser monetary policy by the US Fed.

The ISM report was amongst the few in focus last week, where the Manufacturing PMI for August registered a 2.1% decrease from the previous month to sit at 49.1; suggesting waning business confidence amid the ongoing trade tariffs. On the flipside however, PMI for the service segment surged to a healthy 56.4 reading to mark its strongest expansion in three months. In other economic readings, US non-farm payrolls also disappointed with only 130k new jobs (vs. consensus estimates of 159k) for the month of August. Though, unemployment rate and average hourly earnings are still seeing healthy numbers.

At least in the eyes of the market, the recent array of mixed data points has set the stage for the US Fed to deliver a more dovish tone in the upcoming FOMC meeting next week. With a 25-basis point cut already widely priced in, the focus will be largely on the central bank’s key economic forecast projection and dot plot revision, if any.

In other central bank news, markets are also expecting more stimulus measures by the ECB in its upcoming meeting this Thursday – which will mark Mario Draghi’s final meeting as ECB President.

In the run-up to Draghi’s departure in October, the central banker has called for a final burst in monetary stimulus – including rate cuts and a new bond-buying programme – to prop up the European economy that is faltering under the pressure of trade tension and other factors. However, several central bank members have recently argued that the current state of the economy is not weak enough to warrant aggressive stimulus measures; contributing to the sell-off in the 10-year German Bund last week in line with other global govvies.

Nevertheless, market consensus is still expecting the ECB to deliver a 10 basis-point interest rate cut on Thursday, as well as the introduction of a new Quantitative Easing programme. Though considering Draghi’s bold remarks over the past couple of weeks, a less-than-dovish outcome by the ECB could prompt global government bonds to sell-off further.

Brexit: Diminishing likelihood of a no-deal withdrawal?

UK Prime Minister Boris Johnson fell under pressure last week as opposition MPs alongside several others from his own conservative party voted against his call for a no-deal Brexit.

The disjoint within the conservative party has prompted Johnson to rashly expel 21 members last week. While this ensures that all remaining conservative members are in favour of Johnson’s hard Brexit stance, the move has left the Prime Minister without a parliamentary majority ahead of the 31 October 2019 deadline. In a bid to regain his parliamentary majority, Boris Johnson has since called for a snap election on two occasions – though both of which were quickly dismissed by opposition MPs to block the much dreaded “no-deal” situation.

Without the snap elections, the UK Parliament is now forced to enter a 5-week suspension beginning 10 September 2019. On the bright side, a new legislation – that was granted royal assent on Monday – dictates that the Prime Minister must seek a delay to 31 January 2020 unless a deal or no-deal exit is approved by MPs by 19 October 2019. The UK Parliament is scheduled to reopen on 14 October 2019.

Though much uncertainty still looms, the diminishing likelihood of a hard Brexit should provide financial markets some form of solace – which could subsequently translate to near-term support for the GBP.

Asian markets recoup gains on trade optimism

Asian equities were buoyed by a relief rally last week as optimism surrounding trade pushed benchmark gauges higher as negotiations are set to resume in October. The MSCI Asia ex-Japan index gained 2.4% as markets turned risk-on. The Hong Kong Hang Seng index rallied by 3.8% as a controversial extradition bill was formally withdrawn by embattled leader Carrie Lam.

High level trade talks are set to restart in early October which cheered markets higher despite scepticism that any real breakthrough can be reached. Chinese Vice Premier Liu He agreed to a visit in October during a telephone call last week with US Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer.

The trade talks would be the first in-person, high-level discussions since a failed US-China trade meeting at the end of July prompted US President Donald Trump to proceed with fresh tariffs on virtually all remaining Chinese imports. However, prospects of reaching a trade deal will be challenging in the near-term with the trade tariffs still in effect and no indication that they will be removed yet.

The Trump administration had previously announced that the existing 25.0% tariffs on US$250 billion of Chinese imports will increase to 30.0% beginning 1 October 2019. On 15 December 2019, the Trump administration is also scheduled to impose a second round of 15.0% tariffs on US$160 billion of imports.

China appears to be on the path of a new stimulus programme after concluding a recent state council meeting which emphasised its “Six Stability Principles”. These include stable employment, financials and trade, amongst others. Policymakers will also begin to frontload local government bond quotas as part of efforts to inject growth in its economy on the back of a bruising trade war with the US.

Policymakers had also pledged to implement targeted cuts in its reserve requirement ratio (“RRR”) in a “timely manner”. This was swiftly followed by a move from the People’s Bank of China (“PBoC”) last week to lower the RRR for local banks to stimulate lending and credit growth.

Meanwhile, a contentious extradition bill that sparked months of mass protest in Hong Kong was formally withdrawn. A full withdrawal of the bill is just one of five demands by protestors which have turned the ongoing demonstrations into a democracy movement including the right of universal suffrage for the country’s elections.

Over the weekend, Saudi Arabia appointed a new energy minister last week naming Prince Abdulaziz bin Salman to the role. His appointment replaces Khalid al-Falih amidst reports of dissatisfaction over delays in the initial public offering of Saudi Aramco.

On portfolio positioning, we reduced our inverse ETF holdings as markets turned risk-on. We also bought into Hong Kong Exchanges & Clearing Limited (“HKEX”) as a beta-play for our portfolios with trading volumes return to the exchange. We took the opportunity to add to our existing positions in Ping An and Tencent. Cash levels range between 15.0-20.0% for our Asian portfolios.

Updates on Malaysia

On the domestic front, the local market stayed tepid and lagged behind regional gains as the benchmark KLCI traded 0.5% lower week-on-week amidst a lacklustre reporting season.

Further news that the proposed Axiata and Digi merger fell through dragged down sentiment as the corporate exercise was expected to reinvigorate growth and bring interest back into the market. According to The Edge, both companies stated that due to complexities involved in the proposed transaction, the parties have mutually agreed to end the discussions.

Various political and social reasons cited in reports including job losses, possible foreign interference and loss of sovereignty may have also stalled negotiations and prevented the merger. The share price of both Axiata and Digi fell by over 15.0% following news that the corporate exercise was called off.

Earnings season for the 2Q2019 also just concluded for the local market. On a net-basis, there were more earnings disappointment across sectors with a 4.0% downgrade in profit growth. Similar to 2016, valuations haven’t come down despite the fall in the stock market since earnings have deteriorated.

Fixed income updates & positioning

The Asian bond space endured a softer session last week amid the sell-off in treasuries alongside other global government bonds. But despite the adjustment in global bond prices, credit names in the region still held up relatively well for the most part.

In terms of our portfolio action last week, we have taken the opportunity to add on further exposure to several credit names that we are comfortable with amid the recent pullback in bond prices. The bulk of our portfolio is made up of a combination of short-dated credit names – largely tilted towards the IG segment – as well as longer-dated govvies from the likes of Malaysia, Singapore and Australia among others; while portfolio duration is maintained at around the 5-year mark. As for the currency portion, we have increased the USD exposure for some of our portfolios to around the 10.0-15.0% range.

While bond yields are expected to correct / rise higher in the near-term, we do not see any alarming factors that would cause a significant sell-off in the regional bond space. Treading ahead, we intend to add exposure to selected names upon any correction in prices.

Back home, the domestic bond market tracked global movements last week as MGS yields surged by some 5 to 6 bps across the curve. As of last Friday, yields for the 10-year and 30-year MGS benchmarks stood at 3.25% and 3.83% respectively.

On corporate news flow, DanaInfra Nasional Berhad’s new bond issuance last week received substantial traction; covering a size of approximately MYR5 billion. In the coming weeks, we are expecting activities for the corporate segment to be propped up by a healthy pipeline of new issuances from the likes of IJM Land Berhad and Ahmad Zaki Resources Berhad among others.

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