A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 27 – 31 August 2018



Argentine Peso & Turkish Lira remains in hot water

The incessant economic turmoil in both Argentina and Turkey continues to keep investors on toes last week – as the further plunge of the Peso and Lira stoked fears of a heavier contagion effect across emerging markets. The 10-year Treasury note hovered around the 2.8% level as markets stayed largely risk-off.

What happened last week?

In a misguided attempt to calm markets, Argentine President Mauricio Macri announced on Wednesday that the government has reached a deal with the International Monetary Fund (“IMF”) to accelerate the disbursement of a USD50 billion financial loan. The news however sowed panic over the nation’s fiscal position and ability to finance debt repayments; which saw the Peso dipped to an all-time low.

Officials of the Argentina central bank voted unanimously in an emergency meeting on Thursday to raise borrowing rates to an astonishing 60.0% (from 45.0%) and vowed not to cut for the rest of the 2018. The rate hike however did little to stem the bleeding as the currency still ended the week down more than 15.0% and nearly 50.0% YTD.

In a separate development, the Turkish Lira also came under pressure and fell by more than 10.0% last week following the resignation of the Turkish central bank’s deputy governor, Erkan Kilimci. Considering how badly the Lira has been battered, a radical interest rate hike may be on the cards in the central bank’s next meeting slated on 13 September 2018.

Europe: Uncertainty looms over Brexit deal & Italy’s fiscal position

It has been an unsettling period for European markets, as investors – alongside the mass public – nervously await for more clarity over the Brexit agreement that was initially slated to be revealed in the EU summit this coming October. However, negotiators from both the EU and UK has recently floated with the idea of extending discussions till a later part of 2018; prompting market jitters in the process.

Both parties struck a relative positive tone in a recent press conference; hinting on mutually beneficial terms as well as the avoidance of a hard border relationship. Cheers were however short-lived as markets corrected shortly after.

On the Italy front, increased concerns over the nation’s budget plan and debt load translated to heavy outflows from its government bond space last week. Credit spreads between the 10-year Italian bond and the benchmark German bund widened by more than 150 bps since May 2018; which was when the populist Five Star/ League coalition government was formed.

The new government – on several occasions – had advocated large-scale fiscal reforms; including tax reductions, higher pension as well as wages among others. These expenditures would likely conflict with the EU’s spending limits, and further weigh down on Italy’s already mounting debt of approximately 2 trillion Euros. While we will likely see an eventual compromise between Italy and EU on the former’s budget plan, investors are not discounting out potential fiscal slippage or worse, an exit ultimatum. Italy’s budget plan is expected to be revealed in October 2018.

Mixed week for Asia markets

Asian markets were broadly mixed last week as it reeled from developments in Argentina and Turkey. The softer outing was exacerbated by outflows from global emerging market funds who were de-risking portfolios. The Hong Kong Hang Seng Index ended 0.8% higher, whilst the broader MSCI Asia ex-Japan Index rose by 1.1%.

Countries with twin deficits such as India and Indonesia will be more vulnerable with their currencies under pressure. The Indonesian rupiah slid to 14,700 against the greenback nearing its 20-year low during the 1998 Asian financial crisis. The currency pain widened to India and the Philippines with the rupee and peso tumbling to record-lows this year. Though, we see currency outliers with strong fundamentals like the Thai baht which have strengthened YTD.

Trade worries continued to persist as a major overhang in EMs stoking concerns. This week will see the end of the public consultation period for further US tariffs on China, following which the Trump administration plans to impose tariffs on another US$200billion worth of Chinese goods. In a tit-for-tat response, China has vowed to impose US$60 billion of retaliatory tariffs on US products. The consultation period seeks to gather public feedback from industry groups especially US exporters who are impacted from the tariffs, especially if US President Donald Trump refuses to dial-back on his trade protectionist stance.

Tencent shed almost 5.0% last week as the tech giant ran into additional regulatory hurdles following a directive by China’s Education Ministry who released a note on its plan to curb the increasing rise of myopia among the country’s youth population. In its recommendations, the Chinese education ministry suggested controlling the number of approvals for new online video games, implementing an age ratings system for games, as well as restrictions to the amount of time minors are allowed to play games online.

It was a particularly busy period for Chinese lawmakers who pressed-on further and also tightened regulation within the e-commerce space. Over the weekend, regulators passed a law targeting e-commerce websites such as Alibaba to curb unethical sales practices aimed at protecting consumers. The new law shifts responsibility to e-commerce sites, if say a consumer suffers from health problems as a result of a consuming health supplement products bought online. Such online platforms could be held accountable if business qualifications of the sellers on the platform were not properly audited.

On portfolio positioning, we remain cautious given the volatile nature of markets with protection of capital taking precedence. Cash levels across our Asian portfolios range between 20.0% – 30.0%. We expect markets to stay volatile as binary outcomes concerning trade and diverging economic strength with a tightening rate cycle embarked by the US Federal Reserve and broad dollar strength that will continue put pressure on EMs.  Valuations within EMs stood at a standstill with the MSCI Asia ex-Japan trading at 11.9x forward P/E which is below its long-term average mean of 12.2x.

Updates on Malaysia

On the domestic front, the local market tracked regional movements with the benchmark KLCI closing slightly higher at 0.6%. A tepid reporting season did little to provide an uplift for markets, with less than 10.0% of firms reporting earnings that surprised on the upside for the 2Q’18. A decent reporting season would typically have 20.0% – 30.0% of firms reporting an earnings beat.

The banking sector was the only one that broadly met expectations, despite poor top-line growth but still posted strong results due to lower provisions and cost-cutting measures. The lukewarm reporting season was also attributed to most stocks incurring a one-off marketing and contribution expenditure following the 14th General Election which took place during the quarter.

Nonetheless, there was little correction seen last week with strong liquidity washed in the system that shored up markets. We see a growing disconnect between the strong broad market outperformance with the KLCI pushing above the 1800-level and individual fundamentals that has deteriorated. On portfolio positioning, we remain cautious and prudent in our stock selection given demanding valuations and high volatility.

Fixed income updates & positioning

The Asian credit space had a relatively softer showing last week, as the broader EM weakness prompted by fractious developments in Argentina and Turkey dictated sentiment in the region. From a technical standpoint, we are also witnessing some rebalancing activities by regional fund managers ahead of the robust pipeline of primary issuances that are forthcoming this month.

On a positive note, Chinese regulators revealed its plan to waive taxes – including VATs for foreign investors – imposed on interest income for a period of 3 years. The new measure should breathe some life back into the Chinese bond market, and encourage foreign inflows for the near-term.

This week, a sizeable AT1 deal – issued by the Bank of China (Hong Kong) – is expected to be on the market. We think that most fund managers would participate in the new issuance considering that it’s one of the few IG names available relative to other Chinese banks that are mostly non-IG. We will be looking to subscribe the said bond as well for some of our portfolios.

With more new issuances rolling in, there may be repricing opportunities which could push yields higher. Hence we are refraining from redeploying too heavily at this point, and shall await for more attractive entry. Across our regional portfolios, cash levels sit between 5.0% and 10.0% while duration is maintained within 3 to 3.5 years.

At home, the Malaysia government bond space stayed flat for the week; with the 10-year MGS benchmark hovering around the 4.05% range. Sentiment for the corporate segment, on the other hand, was relatively stronger. Last week, TNB issued a 15- as well as a 20-year Sukuk; both of which saw healthy participation and support.

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