A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 10 – 14 February 2020

 

2020 US Presidential Primaries

The 2020 US presidential primary election kickstarted is well underway as democratic delegates begin to cast support to their preferred party’s presidential candidate. With incumbent President Donald Trump being the only clear nominee for the Republicans, attention is locked in on the nominees for the Democratic Party — where Bernie Sanders and Pete Buttigieg have come out as the front-runners following the voting results in Iowa (3 February) and New Hampshire (11 February).

If history is any guide, either Sanders or Buttigieg will be the Democratic Party’s choice to compete against Trump for the presidential seat. Since 1972, no candidate that was placed below second in both Iowa and New Hampshire have gone on to win their respective party’s nomination. While Buttigieg is currently leading by a slight margin in terms of pledge delegates, Sanders led in terms of popular vote in both Iowa and New Hampshire. Former Vice President and an initial pundit favourite, Joe Biden placed fifth in terms of popular vote.

Michael Bloomberg — former New York City Mayor and businessman — is another potential candidate that markets are looking at for the Democrats. According to the NPR/ Marist Poll, Bloomberg is placed second behind Sanders with a 19% support nationally. Bloomberg will make his debut at the presidential debate in Nevada this week, as well as compete in the Super Tuesday election on 3 March.

We will continue to keep a close watch on developments on this front.

Regional equities edge higher as markets monitor virus impact

Asian equities managed to eke out gains last week even as investors continue to assess the economic impact stemming from the Covid-19 outbreak that has stalled production and caused disruption amongst businesses. The Hong Kong Hang Seng and the broader MSCI Asia ex-Japan index edged 1.5% higher respectively.

Investors continued to watch for developments of the coronavirus outbreak following last week’s spike in the number of cases after authorities in Hubei reclassified categories of diagnosis on patients. This led to a surge of over 15,000 cases including those that have been reported earlier. However, daily infection rates look to have stabilised with number of new cases on the decline thereafter.

Markets are drawing reference from 2003 SARS outbreak, with equity gauges rebounded sharply when incremental cases of infected plateau. Markets are likely to bottom out once the daily incremental number of cases peak out and show signs of stabilising.

Given the current run up in equities, there could be a sense of complacency in markets especially with the full economic impact of the outbreak still unquantifiable. China’s 1Q’2020 economic growth is likely to take a hit following the outbreak with possible spill-over effects to the rest of Asia given its extensive supply chain.

China has already embarked on targeted supportive measures on corporates, including easing financing channels and delaying tax payments, in cities which are severely impacted by the virus outbreak. There could potentially be further easing initiatives on monetary front, providing support to capital intensive sectors like Property.

There are expectations of further rate cuts and monetary loosening by China’s central bank. At the time of writing, the People’s Bank of China (“PBoC”) said it was lowering the rate on 200 billion yuan (US$28.65 billion) worth of one-year medium-term lending facility (“MLF”) loans to financial institutions by 10 basis points (bps) to 3.15% from 3.25% previously. The move is expected to pave the way for a reduction in the country’s benchmark loan prime rate (“LPR”).

Similarly, Singapore has also pledged to deliver a massive budget stimulus this week to cushion its economy from the effects of the Covid-19 outbreak. Prime Minister Lee Hsien Loong said the coronavirus’ economic impact on the island nation’s economy has already exceeded that of SARS in 2003. Singapore has been among the countries worst hit by the disease as it has one of the highest reported number of confirmed cases outside of China. It’s also an election year in Singapore and the government may seek to deliver an election-friendly budget with cash handouts and various sweeteners.

Meanwhile, reporting season continues to roll-in for US and Asia. Close to 77.0% of S&P 500 companies have reported earnings so far, with 71.0% of them beating analyst expectations. However, earnings growth was tepid at just 1.0%. In Asia, 25.0% of companies within the MSCI Asia ex-Japan have reported results with earnings growth of 2.0%. Whilst Asia has outperformed earnings growth in US on an absolute basis, a higher target expectation meant that Asia actually saw more earnings miss compared to the US which had a lower bar.

Tech titan Alibaba delivered a 5.0% earnings beat with strong revenue growth by its cloud computing segment. However, its forward guidance was muted with management warning about headwinds due to the Covid-19 outbreak that may hurt its e-commerce sales as supply chains are hit. However, the outbreak could be a boon for its cloud business as strict quarantine policies may force employees to work from home via cloud.

On portfolio positioning, we remain vigilant and will continue to monitor the impact of the Covid-19 outbreak and infection levels. We took the opportunity to nibble into some positions that were hit by the outbreak including stocks within the tech supply chain as well as Chinese property names with strong balance sheets.

Updates on Malaysia

On the domestic front, the local market lagged its regional peers with the benchmark KLCI edging 0.6% lower as Malaysia’s annual GDP grew to its slowest pace in 10 years. Malaysia’s full year GDP moderated to 4.3% in 2019 which was below the government’s target of 4.5%. The country’s 4Q2019 GDP growth slowed to 3.6% dragged by poor exports as well as supply disruption within the commodities space.

Economists are less sanguine about 1Q2020 GDP growth with projections ranging between 2.5-3.0% as Malaysia also reels from the impact of the Covid-19 outbreak. The Pakatan Harapan government is slated to announce a stimulus package on the 27 February that will help cushion its economy and provide support to affected sectors like tourism that were hit by the outbreak. There also expectations of further rate cuts by BNM as reflected in banking stocks that came under selling pressure.

On portfolio positioning, we remain cautious for our portfolios and have trimmed our holdings in banks in light of weaker economic growth. With lower interest rates and a dovish tone by BNM, we have been deploying into REITs that would hold up well in this environment. Whilst the retail REIT sector could see a decline in visitor footfalls as a result of the outbreak, the REITs within our portfolios have fixed rentals with a stable dividend yield ranging 4.7-5.2%.

Fixed Income Updates & Positioning

Similar to its equity counterpart, the Asian credit space enjoyed a stronger showing last week amid support measures announced by the PBoC. The central bank revealed that it would reduce the interest rate of its MLF to ease the impact of the Covid-19 outbreak on the broad economy as well as businesses.

Chinese HY property names performed well across the board; whilst buying spirits have also returned to other the parts of the region such as the Indonesian HY space. In addition, the primary segment also showed signs of revitalisation where a slew of new issuances was rolled-out by the likes of Chinese and Indonesian SOEs.

In terms of portfolio action for our global / regional mandates, we have previously taken some profit from our position in treasury papers as well as other government bonds; and subsequently redeploying some cash into credit names for added carry. We have taken the opportunity to participate in a perpetual bond by China Communication Construction — which have done well following its issuances from the primary market last week — while some of our portfolios have also added exposure in an IDR credit through Jasa Marga, a toll road operator in Indonesia. Duration for our Asian portfolios currently sits at approximately 4 years.

Back home, BNM’s recent dovish remarks — following a softer 4Q2019 GDP print — supported a rally for both the government and corporate bond space last week. Local bonds in general have witnessed a strong start to the year, with yields having gone down by some 50bps on a YTD basis.

Demand for the MGS market remained evident over the week, as the 10-year MGS benchmark that was up for auction saw healthy participation from both local and foreign players; posting a bid-to-cover ratio of 2.1x. Yield level for the 10-year benchmark edged lower to sit just below 2.90% as of end-Friday. Considering that yield levels have come off significantly since the start of 2019, we expect the 10-year MGS yield to trend within the 2.80-3.00% range for the near to medium-term.

Markets can expect a healthy pipeline of primary issuances to roll-out in the coming weeks — including from the likes of Top Glove as well as Tan Chong Motor among others — which we believe will be well-supported given that the market is still plenty liquid. Positioning wise, our domestic portfolios are currently highly invested, while duration remains tilted towards the longer end of the spectrum at around 6 to 7 years.

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