A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 4 March 2019 – 8 March 2019
US labour data comes in below estimates
The non-farm payrolls report published last Friday showed a mere increase of 20,000 new jobs for the month of February – well below consensus estimates of 175,000 and markedly down from the 311,000 increase in January.
Though the disparity appears to be somewhat extreme, the blip in payrolls data may be attributed to the impact of: the (i) temporary US government shutdown and (ii) seasonal adjustment of data amid the recent winter period. Nevertheless, the average increase of 166,000 new jobs over the past two months is still relatively healthy. Other parts of the report also indicated encouraging labour conditions, with employment rate falling 0.2% to 3.8%, and average hourly wages rose 0.4% on the month.
Most of the US stock indices closed the session lower, with the S&P 500 and Dow Jones Industrial Index both dipping by 2.2% respectively.
ECB relaxes monetary policy in response to slowdown
European markets endured yet another risk-off session last week, as investor sentiment were dampened amid ECB’s continued dovish remarks – hinting that slower growth as well as relatively subdued inflation could linger further down the road.
In its monetary policy statement, the ECB kept interest rates unchanged but slashed its growth and inflation forecasts for 2019 through 2021. The central bank now sees Eurozone growth to come in at 1.1% this year (revised downward from previous forecast of 1.7%), while inflation rate is expected to rise only to 1.6% in 2021.
Acknowledging that the slowdown could run longer and deeper – especially given the softer manufacturing data in Germany and continued weakness in Italy among other worries – the ECB has announced to offer a series of targeted longer-term refinancing operations (TLTRO-III) to help stimulate the Eurozone economy and boost favourable lending conditions. These loans will each have a maturity tenure of two years and will be launched starting from September 2019 till March 2021. The Euro closed the week lower against the greenback to 1.12, and is likely to remain under pressure for the near term.
Asian markets tumble as trade data disappoints
Coarse currents swept across Asian stock indices amidst concerns of slowing growth following a poor set of trade data from China that missed expectations. February exports fell 20.7% from a year earlier, the largest decline since February 2016, customs data showed last Friday. Imports fell 5.2% from a year earlier, widening from January’s 1.5% decline. Front-loading activities had initially propped up the trade figures towards the end of 2018, though we are now seeing a reversal of that trend which is more reflective of softening underlying demand. China’s A-share market crumbled by 4.0% on Friday. The Hong Kong Hang Seng Index fell 2.0% and the broader MSCI Asia ex-Japan index closed 2.1% lower.
Losses were extended following an issuance of a rare “sell” rating by Chinese brokerage Citic Securities on the shares of People’s Insurance Company of China (“PICC”). The brokerage cited frothy valuations in its report to clients with a potential 50% downside in its share price. This sent ripples across regional stock indices as market-watchers read this as a signal of Chinese regulators wanting to cool down its stock market by tacitly giving consent to brokerages. Chinese stocks have been on a steady ascent this year as the government announced a raft of stimulus measures, coupled with increased optimism surrounding US-China trade negotiations which has pushed up the market.
China is currently in the midst of a two-week annual parliamentary meeting, the National People’s Congress (“NPC”), which kicked off last Tuesday and ends this Friday (5 – 15 March). At the opening of the NPC, Premier Li Keqiang said the Chinese economy will likely slow this year, and revealed that the official economic growth target for 2019 will be 6.0% – 6.5%.
Towards end-March, trade negotiations are also set to recommence between US and China. Whilst dates are not yet finalised, a summit between US president Donald Trump and Chinese president Xi Jinping could take place on the 27 March, if the summit is confirmed. The current base-case is still for a headline positive outcome as both sides are incentivised to reach an agreement. US presidential elections are also slated to take place in end-2020, and as such Trump is incentivised to maintain a stable financial market as well as a buoyant economy to win elections.
Investors are likely to stay at the side-lines this week, as attention will soon turn to earnings season which begins in earnest. These include insurers like Ping An, AIA and other heavyweight counters where earnings expectation have been low. Investors would be gleaning closely on forward guidance by management and their tone that could set market direction. The volatile market underscores yet again the fragility of the current run in markets which appeared to have overshot itself on the upside and concerns that the pullback could be prolonged.
In light of higher volatility, we have decided to take some money off the table. We locked-in between 5.0% – 7.0% gains from our portfolio by trimming cyclical and tactical names including Chinese property developer Longfor Properties Co. Ltd., Samsung and also Chinese banks.
Updates on Malaysia
On the domestic front, the local market mirrored regional movements with the benchmark KLCI closing 1.2% lower. Oil and gas names may come back in favour on the back of a pickup in capex spending by Petronas that has guided for total capex to hit slightly above RM50 billion in 2019. Petronas delivered a decent quarter in its recent results owing to a recovery in L&G production which hampered the group previously. The boost in capex spending could translate to higher activities and new orders especially for upstream players, where the bulk of the capex would be spent on. Petronas further guided that RM14 – 15 billion of the total capex would be invested in Malaysia as opposed to internationally. The headline spurred a mild rally within small-cap O&G counters especially vessel owners, though any further upside could be capped by possible divestments from Norway’s sovereign wealth fund that is seeking to divest its upstream assets.
Palm oil prices are likely to find support as high inventory levels are expected to ease off in the 2H’18, as we enter into a seasonally weaker production cycle after strong growth in the last two years. According to industry experts at a palm oil conference last week, analysts also expect prices to be supported by demand from biodiesel. Palm oil, a key export commodity of Malaysia and Indonesia has been under attack from the European Union (“EU”) over allegations of deforestation and unsustainable practices. Though, last week we saw Malaysia inking an agreement to export 1.62 million tonnes of palm oil to China with a combined estimated worth of US$891 million (RM3.64 billion) according to The Edge.
There was some price action within the construction space as cement maker Lafarge Bhd share price hit limit-up last week. Cheaper valuations across the construction space coupled with news of Lafarge seeking to divest its Asean assets has spurred rumours of consolidation within the sector. Ongoing talks to revive the East Coast Rail Link (“ECRL”) project is also expected to continue until April when Prime Minister Tun Dr. Mahathir visits China to finalise negotiations.
Fixed income update & positioning
Positive momentum for the Asian bond space waged on last week as demand was propped up amid the broad risk-off tone across global equity markets. Evident flows into EM and Asian bond portfolios continue to be a cornerstone for the rally – which totals to US$17 billion YTD, and US$1.6 billion in just last week alone. In Asia specifically, the Chinese HY and property segment have performed notable well in recent weeks.
Positioning wise, our focus remains on improving the liquidity profile of our regional portfolios. Over the past couple of weeks, we have switched out from positions which ideas did not materialise, while also shoring up our investment holdings in quality and liquid names that we are comfortable with. For our AUD fixed income mandates, we have added some exposure into long-term ACGBs – in view that the Reserve Bank of Australia could potentially cut interest rates in the months ahead to combat its housing market decline.
Back home, BNM kept Overnight Policy Rates unchanged while projecting a more cautious tone in its latest monetary policy statement; noting that downside risks from unresolved trade tensions, as well as heightened uncertainties in the global and domestic environment could further weigh down on growth.
Local govvies rallied amid the dovish remarks, as yields for the 3- and 10-year MGS edged lower by 14bps and 6 bps respectively over the week. The 10-year MGS benchmark closed the week at 3.86%. From a technical standpoint, liquidity within the domestic bond space is still relatively strong and the gradual return of some inflows from foreign players should keep the said space well-buoyed in the months ahead.
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