A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 5 November – 9 November 2018
US midterm elections concludes with a divided Congress, as expected
Results of the closely-watched US midterm elections on Tuesday night were pretty much in line with what consensus had expected. The Republicans – i.e. the President party – retained its influence over the Senate by adding on to its majority, while the Democrats took back control of the House of Representatives for the first time in 8 years.
With the restoration of a “check and balance” system in Congress (previously both Chambers were held by the Republicans), the current gridlock may prove to be a hindrance to the Trump administration’s ability to pass new legislations and policies. This could potentially blunt any further fiscal expansion plans – such as tax cuts and infrastructure spending – by Trump. In any case, more policy conflicts can be expected between the Senate and the House moving forward.
Considering a divided Congress, the impeachment of President Trump remains unlikely at this point given that the Senate is still much controlled by echelons of the Republican Party. Nevertheless, Democrats would now have access to documents / investigations with relation to Trump; which could subsequently bring forth more negative headlines that may not bode well with the President.
The USD retreated slightly following the election results; allowing most of its G-10 and Asian peers to claw back some gains. Regional markets also saw a brief relief rally shortly after. Gazing further ahead however, the US greenback may continue to be underpinned by economic and monetary divergences between US and the rest of the world, which could again weigh down economies in the region.
US Fed signals strong support for December rate hike
On the monetary policy front, the US Fed concluded its November meeting without raising rates. Nevertheless, the central bank remains on course to deliver its fourth hike for the year in December amid robust expansion of the labour market and overall US economy. The next hike would bring the US benchmark rate to a new range of 2.25-2.50%.
With a December hike widely priced in, market attention will be zoomed in on the central bank’s GDP and CPI (Consumer Price Index) estimates, as well as the economic outlook for 2019. Currently, consensus are only expecting 2 hikes for next year as opposed to the Fed’s guidance of 3 hikes. And should the Fed continues to strut a hawkish stance, it could translate to more upside pressure for treasury yields and USD alike moving forward.
Asian market slips despite temporary boost from US election results
Despite having a positive start to the week, regional markets – led by China – surrendered gains on Friday following a further announcement by the Chinese government to increase bank lending to private firms. The news prompted concerns over rising debt among SMEs; which saw banking names bore the brunt of the sell-off.
Chinese markets were moderately down, as the Shanghai Shenzhen CSI 300 Index fell slipped by 3.7% while the Hong Kong Hang Seng Index fell 3.3%. Regionally, the broader MSCI Asia ex Japan fell by 2.3% over the week. On a more positive note, flows into the region have begun to turn positive last week following several sessions of net outflows; which saw EM and Asian funds added on an aggregate of US$1.7 billion.
Oil were also in focus last week, which saw Brent oil prices retreated to below US$70 per barrel last week. Concerns on lower supply – due to the US sanction on Iran – initially prompted OPEC members to increase production in a bid to make up for the potential shortfall. This however was reversed last week as eight jurisdictions were given temporary exemption to the said sanction, including China, India and South Korea among others. Following the exemption, OPEC swiftly hinted that a coordinated effort will be in place to reduce production for the coming months – allowing Brent oil prices to rebound back to above US$70 per barrel at market opening this week.
In terms of our positioning, we currently hold an overall exposure of approximately 5.0% in oil and gas – through regional players like PetroChina and CNOOC among others. We remain quite comfortable with these names given their solid fundamentals as well as support from stabilising global production and prices.
Nevertheless, we are inclined on employing a cautious view still moving forward. While the US midterm election results have provided a much needed relief to regional markets, trade negotiations between US and China remains a crucial event that would dictate the outlook for EMs and Asia. Markets will be looking for more clarity at the G20 Summit scheduled end-November, where a trade discussion between US President Trump and China President Xi could be on the cards. Though expectations for an immediate conciliation is low, warming relations and further dialogue between both parties should provide some comfort to markets.
Moody’s revises PETRONAS’ outlook to negative
Subsequent to the announcement of a RM30 billion special dividend payment – to be paid by PETRONAS to the Malaysian government – during the 2019 Budget tabled earlier this month, Moody’s Investors Service (“Moody’s”) lowered the company’s rating outlook from stable to negative.
The rating agency attributed the revision to a potential risk of deterioration in PETRONAS’ financial profile given that higher dividend payment would translate to lesser cash buffer to cushion volatility should oil prices decline. Nevertheless, any impact were fairly muted following the news, and the national oil company swiftly affirmed continuity in its ongoing operations and future expansions.
Currently, PETRONAS still holds a credit rating of A1 which is two notches above the sovereign rating – which we believe will remain so supported by solid fundamentals, sizeable net cash and robust liquidity position.
Fixed income updates & positioning
It was a rather quiet week for the Asian credit space, as investors were largely side-lined ahead of the US midterm elections on Tuesday. Even after the election, market liquidity stayed fairly tamed in part due to profit-taking activities, where most fund managers have opted to hold more cash and not redeploy too heavily at this juncture of the year.
On the primary segment, regional markets saw several new issuances rolled-out last week; in which we have participated in a few short-dated papers that we are comfortable with. Nevertheless, our cautious stance remains a key theme still – with approximately 8.0-10.0% cash, and a duration of 3-4 years across our Asian portfolios.
Disclaimer: This content has been prepared by Affin Hwang Asset Management Berhad (hereinafter referred to as “Affin Hwang AM”) specific for its use, a specific target audience, and for discussion purposes only. All information contained within this presentation belongs to Affin Hwang AM and may not be copied, distributed or otherwise disseminated in whole or in part without written consent of Affin Hwang AM. The information contained in this presentation may include, but is not limited to opinions, analysis, forecasts, projections and expectations (collectively referred to as “Opinions”). Such information has been obtained from various sources including those in the public domain, are merely expressions of belief. Although this presentation has been prepared on the basis of information and/or Opinions that are believed to be correct at the time the presentation was prepared, Affin Hwang AM makes no expressed or implied warranty as to the accuracy and completeness of any such information and/or Opinions. As with any forms of financial products, the financial product mentioned herein (if any) carries with it various risks. Although attempts have been made to disclose all possible risks involved, the financial product may still be subject to inherent risk that may arise beyond our reasonable contemplation. The financial product may be wholly unsuited for you, if you are adverse to the risk arising out of and/ or in connection with the financial product. Affin Hwang AM is not acting as an advisor or agent to any person to whom this presentation is directed. Such persons must make their own independent assessments of the contents of this presentation, should not treat such content as advice relating to legal, accounting, taxation or investment matters and should consult their own advisers. Affin Hwang AM and its affiliates may act as a principal and agent in any transaction contemplated by this presentation, or any other transaction connected with any such transaction, and may as a result earn brokerage, commission or other income. Nothing in this presentation is intended to be, or should be construed as an offer to buy or sell, or invitation to subscribe for, any securities. Neither Affin Hwang AM nor any of its directors, employees or representatives are to have any liability (including liability to any person by reason of negligence or negligent misstatement) from any statement, opinion, information or matter (expressed or implied) arising out of, contained in or derived from or any omission from this presentation, except liability under statute that cannot be excluded.