A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 16 – 20 April 2018

US-China hints on trade negotiation; but geopolitics remain a key theme for 2018

Initial fears over a potential trade war between the world’s two largest economies are beginning to recede – as US Treasury Secretary, Steven Mnuchin hinted on a possible trip to Beijing to hold talks over the trade dispute, during his speech at the International Monetary Fund meeting on Saturday.

Although yet to be in the books, Mnuchin did add that he is “cautiously optimistic” about the chance for a bilateral agreement to set in place. To which, China’s commerce ministry has swiftly expressed welcome to the idea of discussing on trade and economic issues with the US.

Despite warming signs on the trade front, investors continue to stay wary over other issues that could derail the positive narrative – including last week’s ban on American corporates to do business with China’s telecommunications group ZTE, as well as pending restrictions on Chinese investments in the US.

On a separate event, friction between US and Russia remains pertinent still especially since the revelation of Russia’s alleged intervention in the US political space. The standoff has spiralled into a serious confrontation earlier this month – as the US government intervened in a Syrian chemical warfare by launching missiles to punish the Russian-backed government in Damascus. Although escalation to a full blown war is unlikely at this point, geopolitical events will remain a key theme that will dictate market movements moving forward.

Asian equities drift lower on tech sell-off

Asian markets stayed choppy last week, as investors digested earnings report whilst geopolitical risks continue to grip markets. Tech bellwether Taiwan Semiconductor Manufacturing (TSMC) forecasted lower revenue projections and guided for a more tepid sales outlook in the 2Q’18. This led to a broader sell-off within the tech space, as it rekindled concerns about weaker smartphone demand such as the Apple iPhone X and its implications to other component suppliers and chip-makers in the supply chain. The Hong Kong Hang Seng Index fell 2.0%, whilst the Shanghai Shenzhen CSI 300 Index tumbled by over 4.4% last week in local currency terms.

China tech-company ZTE Corp. was also in focus after the US Commerce Department found ZTE had violated the terms of a sanctions settlement in 2017, where regulators imposed a 7-year ban prohibiting ZTE from buying any components from US suppliers.

On the flip-side, the commodity rally shows no sign of petering out as aluminium prices continue to edge higher following U.S. sanctions against Russian producer Rusal. Crude oil prices is also up by 13.3% YTD, as a drawdown in global stockpiles by OPEC members who have largely remained discipline and have stuck to their agreement to roll-back production. Geopolitical noise from the fallout of the Syria conflict has also contributed to the uptrend in crude oil prices, over concerns of any possible disruption in crude flows in the region.

On portfolio-positioning, we have exposure towards the oil & gas sector through Keppel Corp, Sembcorp Marine, Sinopec, CNOOC and PetroChina. Oil & gas stocks have largely lagged behind the uptrend in crude oil prices, with still further room for growth once capex begin to pick-up and prices also stabilise. We are trimming some exposure within the tech-space and have taken profit from some names that have done well.

Updates on Malaysia

On the local front, the benchmark KLCI rallied to break above the 1890-level to close at an all-time high of 4.6% YTD last week. A surge in aluminium and crude oil prices drove index-linked stocks Press Metal and Petronas Dagangan higher which underpinned the benchmark index gains. Though, the KLCI dipped on Friday in-line with other regional markets on the back of broader weak sentiment and a tech sell-off.

Markets appear to be running ahead of the 14th General Election (GE14) results, as markets begin to factor-in the possibility of a status-quo governance that has taken off some election fears from the system. This drove also drove strong foreign flows where it was up close to RM1.2 billion in April. The sustainability of the benchmark KLCI index rally would depend on earnings growth to support a bull-run cycle that typically ranges between 10.0% – 15.0%.

We maintain our tilt towards large-cap names including financials and utilities such as Tenaga. We are approaching the small-cap space with a large dose of cautious despite cheaper valuations – where the challenge lies in finding names with strong conviction levels for our portfolio. Though, we continue to see opportunity for second and third-liner stocks, especially post-election once this event risk is out of the way.

Fixed income updates & positioning

A cautious mood continues to loom within the regional bond space, as prices fell under pressure last week amidst the sudden surge in yields – led by the 10-year treasury benchmark yield which hit 2.96% on Friday; its highest level since January 2014. The primary space have also not seen too significant a support and remains relatively supply-heavy, which to some extent, have muted performance of the secondary market.

Although recent primary issuances alongside the sharp rise in yields have brought forth slightly wider credit spreads, markets are still slowly readjusting to current pricing with most investors opting to stay side-lined at this point. Nonetheless, we think that buying activities will gradually pick up as we move into the second half of 2018 upon evident stability in yields and more attractive valuations.

Positioning wise, caution remains the key theme for our regional portfolios as we continue to hold on to our existing positions of mainly short-term tenures. Amid the widening credit spreads, we are also gradually redeploying into the IG segment on the primary market. Currently, duration across our funds are still kept short at about 3.5-4.0 years.

As for the domestic market, the 10-year MGS yield rose by about 5bps week-on-week to 4.05% as investors de-risked ahead of the upcoming GE14. Yield levels gapped up again at the time of writing (23 April 2018) by almost 10bps – as the 10-year treasury benchmark was testing the 3.00% level – led by foreign selling.

Meanwhile, the corporate bond market continues to remain well supported given the lack of supply in the near-term. Last week, we have participated in a UITM Solar Sukuk offering.

On a separate note, Malaysian CPI data for March came in lower than expected at about 1.30% vs. expectation of 1.60% – affirming our view that Bank Negara will keep OPR unchanged for the rest of the year.

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