A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 4 – 8 June 2018
Asian markets stayed resilient ahead of G7 meeting; but uncertainty looms as trade tension intensifies
Despite the revival of trade tariffs – on steel and aluminium imports from Canada, Mexico and the EU – as announcement by Trump and his administration on the previous Friday, regional equities held up relatively well over the past week. The broader MSCI Asia ex Japan Index and the Hong Kong Hang Seng Index netted gains of 1.2% and 1.5% respectively.
The positive showing came at a period of softness for the broader EM, and can be attributed to EM fund managers who are largely reallocating out of the weaker Latin American markets (such as Brazil and Argentina) and redeploying into North Asia. For the HK market specifically, southbound flows have also turned supportive in recent weeks; where mainland fund managers are evidently investing into Chinese-listed names within the HK space.
However, caution remains a key theme still – as trade tension intensified further over the weekend following Trump’s rejection to endorse a consensus statement post the G7 summit in Quebec, Canada.
Shortly after a joint communique that had been approved by the other leaders of the Group of Seven allies was published, Trump – who left the summit earlier en route to Singapore for historic nuclear summit with North Korea’s Kim Jong Un – expressed dissatisfaction towards Canadian Prime Minister Justin Trudeau. At a press conference which Trump was absent from, Trudeau commented that Trump’s decision to invoke national security to justify the recently imposed tariffs was “insulting” to Canadian veterans who had stood by their US allies. Trudeau also further hinted that Canada will move forward with retaliatory measures by applying equivalent tariffs in July 2018.
Although a more palatable resolution on trade can still be reached, we remain cognisant that geopolitical noise and risk could remain elevated in the lead up to the US midterm elections – whereby protectionist rhetoric has helped boost Trump’s popularity among constituents in the US.
Given the current trying environment, we intend to maintain a sizable cash buffer of about 15.0-20.0% across our regional portfolios; and will look for high conviction ideas within the North Asian space – such as China, Taiwan and Korea – that have largely remained resilient. In addition, we continue to favour the domestic market given is healthy current account surplus, as well as its low correlation with the ongoing trade rhetoric.
Busy week ahead: FOMC & ECB meeting lined up
Global financial markets will be greeted with a rather data-heavy calendar this week; with the US CPI (Consumer Price Index) number – that will be released on 12 June – being the first item on the list. On the back of improving commodity prices, consensus are expecting an uptick in May’s inflation numbers to 2.6% from the 2.4% seen in the month before.
Moving into midweek, market attention will be shifted towards the US FOMC meeting on 13 and 14 June – where a 25 bps rate hike is widely expected to be announced. The hike will bring the US benchmark rate to a new rage of 1.75-2.00%. The focal point this time around will be on the Fed’s GDP and inflation projection; whereby a higher forecast could spell for an increased pace in monetary policy tightening.
Apart from the forthcoming hike this week, the US central bank has also guided for 1 more 25 bps hike by the end of 2018. But considering current inflation trend that is on the rise, markets have now priced in a 40.0% probability for an additional hike to come through. Should the US Fed revise its dot plot projection for another 2 hikes in 2018, we will likely see some upside pressure on yields. Hence market watchers will be focusing intently on this.
On the Europe front, the ECB will also look to move in tandem with the US Fed – as talks for a potential exit from its current Quantitative Easing (“QE”) programme is on the agenda for the central bank’s meeting this week. The ECB has embarked on its easing programme since January 2018; reducing its monthly bond purchasing rate from 60 billion Euros to 30 billion Euros. But with the evident growth in recent years as well as the wake of inflation, policymakers will now have to decide if they should dismantle the ECB’s purchasing scheme after years of liquidity injection.
Yields for German Bunds have been driven lower amid recent political uncertainty across the Eurozone as well as multiple data surprises on the downside. But should the ECB’s decision comes through, we expect to see a significant rise in Bund yields; which may subsequently spill-over to other rates markets as well. Nonetheless, the central bank has previously guided for rates to stay unchanged “well past” the programme’s conclusion, and any future moves will likely be more gradual and incremental in nature.
In terms of positioning for our fixed income portfolios, we are maintaining our defensive stance and will hold on to higher cash levels for the interim. As we head into the upcoming US Fed and ECB policy meeting this week, we will refrain from lengthening our portfolio duration at least until more clarity is seen.
Malaysian market buoyed by domestic demand
The domestic market has endured what is seemingly a long month following Pakatan Harapan’s surprising GE14 win. Foreign outflows from the equity market totalled to RM6.4 billion for the month of May; likely due to trimming of positions amid policy uncertainty which was exacerbated by the recent softness on the broader EM. But in wake of a new beginning, local support has proven to be resilient – whereby both retail and institutional investors were net buyers to the tune of RM1.6 billion and RM4.9 billion respectively in May.
Similarly, the MGS and GII space saw a substantial withdrawal of RM5.9 billion and RM4.0 billion respectively last month. But despite the initial surge in yields, MGS yields gradually recovered behind the support of ample domestic liquidity; ending the month at 4.16%. More importantly, the MYR has also remained fairly stable throughout the corresponding period – only losing 1.4% in value against the greenback.
While outflow risk remains, we take comfort that the country is operating on a healthy current account surplus that amounts to over RM50 billion in annualised terms. Newly appointed Finance Minister Lim Guan Eng has also provided further assurance during a meeting with local fund managers last week – stating that the fiscal deficit can be maintained at 2.8% of the domestic GDP for 2018 as the government look to achieve additional revenue by embarking on cost structure rationalisation on various projects.
Ultimately, while change appears to be painful for the short-term, we are optimistic that a solid framework of governance, coupled with forthcoming clarity on policies, should eventually bring foreign interest back to the local scene.
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