A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 4 – 8 November 2019
Trade optimism fuels global equity rally
Progress of the much anticipated ‘phase one’ trade deal between US and China dominated headlines last week. Though despite US President Donald Trump downplaying the possibility of any tariff rollback on Friday, most equity gauges still managed to close the session higher.
The S&P500 in particular recorded its fifth consecutive weekly increase with a 0.9% gain; while yields for the 10-year treasury benchmark edged 15bps higher to 1.94% amid the recent risk-on sentiment. In addition, EMs and Asia have also benefitted from returning inflows.
Investor sentiment faltered momentarily late in the week after President Trump said that he has yet to agree to remove the tariffs imposed on Chinese imports as part of the first phase of a US-China trade deal. Trump’s comments came a day after China’s Ministry of Commerce revealed that progress on a trade agreement is underway and both parties are working towards removing the additional tariffs implemented in phases; which was later confirmed by Trump’s economic advisor Larry Kudlow.
Despite Trump’s somewhat contradictory remarks, markets are still optimistic that a trade deal will eventually be signed in due course. While a complete rollback in tariffs may not be the case, a partial rollback would still be beneficial for both parties – especially so for Trump to bolster his position ahead of the 2020 Presidential elections – and of course the broad equity market. Several sources are now suggesting that the signing of a deal (if any) could potentially be postpone to early December 2019.
If a trade deal is pushed through, the likelihood for further interest rate cuts by the US Fed in 2020 would be low. Though having said that, current economic readings appear to suggest otherwise. Despite lowered interest rates alongside mortgage rates, mortgage applications have continued to decline. Moreover, US consumption spending – though still at a high level – is also seeing a gradual slow down.
In any case, the Fed should remain data-dependent in its monetary policy guidance; thus rate cuts aren’t entirely out of the picture especially if there’s a further deterioration in economic readings. Treading ahead, we will continue to keep a close watch on further developments on this front.
Asian equities were buoyed by continued monetary easing and positive trade developments last week as markets increasingly price-in the likelihood of the US and China reaching a partial deal. The Hong Kong Hang Seng index rose 2.0%, whilst the broader MSCI Asia ex-Japan index closed 2.2% higher. Indonesia led regional losses with the Jakarta Composite Index falling 0.5% dragged by financial stocks following calls by Indonesian President Joko Widodo for banks to lower lending rates.
Gold trended lower in line with risk-on sentiment in markets. The Asian dollar index (“ADXY”) also rebounded 2.0% from its low of 102 in September 2019 to 104 in November 2019. The US dollar strength could taper on signs of green shoots of economic data in EMs. PMI figures look to have bottomed out and new orders are starting to pick up again which drove inflows into EMs. Global equity flows have surged to a 7 week-high on renewed appetite for riskier assets as markets pin their hopes on monetary stimulus to boost growth.
On trade, whilst a partial deal could lead to a temporary relief in markets and drive risk-assets higher, uncertainty is expected to stay high as frictions between the two economic powerhouses remain. Structural issues to reaching a lasting trade deal including technology transfer, intellectual property and sovereignty have yet to be addressed. Geopolitical risk will also stay high heading into the US presidential election year in 2020.
On China property updates, the sector could see sales begin to taper next year due to a high-base effect. Whilst tier-1 and tier-2 cities remain stable, other lower-tier cities are starting to see signs of stress with no natural demand for housing in the area. Property developers have resorted to also lowering sales prices by 5.0-10.0% to sustain demand. Though, larger developers with a higher exposure to tier-1 and tier-2 cities are gaining market share as the industry consolidates.
On the earnings front, all constituents within the CSI 300 index have reported results which have surprised on the upside. 45.0% of companies reported an earnings beat led by financial stocks. China’s central bank had also recently cut the interest rate on its one-year medium-term lending facility (“MLF”) loans for the first time since early 2016, by 5 basis points to 3.25% from 3.30% previously.
Updates on Malaysia
On the domestic front, the local market took cues from regional gains with the benchmark KLCI closing 1.0% higher. Banking stocks are starting to claw back gains after having been beaten down this year. Impact on net interest margins (“NIM”) were not as bad as expected, despite cut in the overnight policy rate (“OPR”) by Bank Negara Malaysia (“BNM”) as deposit rates have come down more sharply.
On commodities, crude palm oil (“CPO”) prices have also recovered with Malaysia palm oil futures edging towards RM2600. A recent international palm oil conference held in the island of Bali forecasts prices to range even higher as the industry heads into a low cycle after 2 years of strong production.
Indonesia is expected to also roll out its B30 biodiesel mandate after successfully implementing B20 biodiesel. Industry players expect the move that would comprise a higher blend to boost palm consumption and support prices. Though, the rising prevalence of ESG factors may put a dampener on upside and derating of plantation stocks.
Fixed income updates & positioning
The risk-on sentiment over the week saw regional bond yields trend higher in line with treasury papers. Albeit the correction in pricing, credit spreads for the IG segment remains relatively stable. Primary issuances also held up well for the most part, though demand may soften slightly given that yields could potentially correct further from here.
In terms of our positioning, we have taken profit from our holdings in AUD govvies over the past couple of weeks; effectively bringing down our exposure to the said space to approximately 3.0-4.0%. We have also lengthened our portfolio duration slightly via Indonesian govvies which have rallied strongly as of late. Currently, duration for our Asian mandates sit around the 4-year mark.
On the domestic front, yields for local govvies bucked regional trend to edge lower by 2-6bps following BNM’s Friday announcement to cut its Statutory Reserve Requirement (“SRR”) ratio – from 3.5% to 3.0% – by 16 November 2019.
The announcement came a bit as a surprise given that the domestic financial system is still relatively healthy from a liquidity perspective. Following the reduction in SSR, markets can expect to see an additional liquidity boost of approximately RM7 billion; which may aid in stimulating lending activities at a time of moderating loan growth. According to reports, domestic loan growth has slowed to 3.8% in September from 7.5% in January 2019.
Nevertheless, BNM’s recent call for SSR reduction does not signal the central bank’s monetary policy stance as opposed to the OPR. Though, we could see the central bank deliver an OPR cut in early 2020 should domestic growth continue to wane.
On a separate note, a healthy pipeline of new issuances is expected to be rolled-out in the coming weeks; notably from the likes of Sarawak Energy Berhad, Gamuda, as well as Sabah Credit Corporation.
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