A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 23 – 27 March 2020

 

Markets Rebound on Stimulus Hopes

Global equities staged a mild rebound last week on stimulus optimism across major economies with the US leading the way with an unprecedented US$2 trillion relief package intended to cushion its economy from the fallout of the coronavirus. The S&P500 index advanced by 10.3% over the week; while positive effects were also felt in Asia in which the Hong Kong Hang Seng and the broader MSCI Asia ex-Japan index rose by 3.0% and 5.0% respectively.

The relief package also comes as the US reports the most number of Covid-19 cases, making it the country with the largest outbreak in the world surpassing that of Italy and China. The number of confirmed Covid-19 cases in the US surpassed the grim 100,000 mark as testing is ramped-up in the country and the administration begins to acknowledge the severity of the outbreak and imposing more drastic lockdown measures.

While the US$2 trillion stimulus package would undoubtedly provide some temporary relief to its economy, a turnaround in terms of the ongoing virus outbreak needs to be seen before consumption can gradually normalise. Considering the current severity of the crisis, US unemployment rate is expected to surge. In fact, initial jobless claims have jumped to 3.3 million, which is 5x more than the previous high of 695,000 claims recorded in 1982. Some economists have suggested that the US unemployment rate could potential double from its current 3.5% mark. We are closely monitoring developments on this front.

Meanwhile in Asia, China is easing on mobility restrictions within the country, and it is expected to lift the lockdown on Wuhan, the epicentre of the outbreak on 8 April. Work resumption levels have also picked up with 80.0-90.0% of factories starting back operations. That said, subway and traffic congestion level data points are showing a slower pace of normalisation. Property sector in China has also shown encouraging trend, with sales posting strong week-over-week improvement.

China observers will be closely monitoring when the annual plenary session would take place after it was postponed due to the coronavirus outbreak. The annual meetings of the National People’s Congress (“NPC”) and the Chinese People’s Political Consultative Conference (CPPCC), known as the “two sessions”, were initially scheduled for early March but looks to be postponed towards late April.

In the annual plenary, the country’s top policymakers will set the tone for the country’s economic targets and projections for spending. Market expectations are that the world’s second largest economy would unveil a swathe of stimulus measures to prop-up growth once lockdown restrictions are lifted and there is easing of mobility.

On portfolio positioning, we have started to nibble into the market and increase our existing positions including large-cap and liquid names such as Samsung and Taiwan Semiconductor Manufacturing (“TSMC”) that have come down to attractive levels. We also see opportunities to participate into China domestic-centric names that would benefit from a resumption of activities in the country.

Updates on Malaysia

On the domestic front, the local market mirrored regional gains on the back of stimulus optimism with the benchmark KLCI closing 3.1% higher. Last week, Prime Minister Tan Sri Muhyiddin Yassin unveiled a RM250 billion economic stimulus package to soften the economic blow due to the impact of Covid-19.

Called the Pakej Rangsangan Ekonomi Prihatin Rakyat or Prihatin, the package comprises RM128 billion to protect the welfare of the people, RM100 billion to protect the welfare of small and medium enterprises (“SMEs”) and RM2 billion to strengthen the country’s economy according to The Edge. This was on top of the RM20 billion stimulus that was earlier announced on 27 February.

Whilst RM250 billion seems like a massive amount on the surface, the actual fiscal spending outlay amounts to 10.0% or RM25billion. The rest of the relief package comes in the form of loan guarantees, moratorium in loan repayments, EPF withdrawals, among others.

The budget deficit is expected to widen to 4.0% from 3.2% with the new stimulus package. The government will have to tap into the country’s coffers including relying on dividend payments from GLCs like Petronas to help fund the package. However, this also comes on the back of depressed oil prices that may put additional fiscal constraints. The revised deficit figure of 4.0% is based on the assumption of the new oil price range between US $30-40 per barrel.

Whilst the new stimulus package does help allay some concerns amongst the M40 and B40 group with direct cash handouts, there is a need to ease the cashflow burden of businesses and SMEs. Since the start of the movement control order (“MCO”), we’ve seen the shuttering of outlets and businesses that are struggling to cope with the payment of wages and rentals.

Amongst the measures announced include a move by the government to subsidise wages by RM600 per month for workers earning below RM4,000 for 3 months. However, this is only provided to companies that can prove that their income has halved since 1 January.

Other measures such as loan moratoriums as well as tax deferrals for SMEs would only help in terms of reducing the cash outlay. However according to various industry & trade organisations, the announced measures still fall short in helping SMEs sustain their cashflows and stay afloat to pay salaries.

Contrast this to Singapore that will help subside employees’ wages by co-funding through a tier system via its Jobs Support Scheme. Sectors that are worst hit by the coronavirus pandemic such as aviation and tourism will get aid up to 75.0%, whilst food services will get 50.0% according to The Straits Times. The scheme has also been extended until the end of the year.

As the backbone of the economy, SMEs generate two-thirds of employment in Malaysia. There may be long-term implications for employment and job security in the country if SMEs are not provided the support they need. Activity levels are likely to remain subdued with the MCO still in order as Ramadan season approaches that will continue to put a strain on traders and businesses.

Fixed Income Updates & Positioning

Similar to its equity counterpart, the fixed income space also exuded some signs of stability over the week as effects from stimulus packages and easier monetary policies across the globe began to trickle down into respective economies. The added boost in liquidity helped breathe life into both the govvy and credit space. The 10-year treasury benchmark in particular closed the week 20 bps lower to 0.72%.

Measures taken by central banks around the world have already surpassed those of the global financial crisis back in 2008, with the US Fed leading the way. In addition to the US Fed’s massive bond purchasing programme which includes the buy-back of treasury papers and mortgage-backed securities, the US central bank further authorised two corporate credit facilities on 23 March:

  1. The Primary Market Corporate Credit Facility (“PMCCF”) – provide credit for new bond and loan issuances by directly purchasing eligible corporate bonds from IG issuers. These bonds must be rated BBB-/Baa3 and have a maturity of 4 years or less.
  1. The Secondary Market Corporate Credit Facility (“SMCCF”) – provide liquidity for outstanding corporate bonds and eligible exchange-traded funds (“ETF”) by buying them in the secondary market. The bonds must be rated BBB-/Baa3 and have a maturity of 5 years or less; while ETFs must be US-listed and whose investment objective is to provide broad exposure to IG corporate bonds in the US.

Essentially, these facilities were introduced to alleviate some pressure off the credit market amid an evolving crisis created by the Covid-19 pandemic and will run till 30 September 2020.

The Fed’s announcement prompted numerous IG issuances that were previously shelved to roll-out into the primary market, in which majority of them were over-subscribed by 5.0x to 8.0x. In addition, credit spreads for the US IG segment tightened by some 100 bps in the week after widening by over 270 bps since the beginning of March 2020. On the other hand, support for the US HY space – that is more energy-sector heavy – remains relatively muted.

Outside the US, European AT1s as well as regional credits within the USD space saw support returning throughout the week. Whilst, the Asian HY segment – which mainly comprises of Chinese property names – also enjoyed a more encouraging week amid improving sentiment.

Positioning wise, we are continuously monitoring the credit risk of our portfolios and performing stress-tests to our holdings. It is apparent that we will see more downgrade risks within the bond market given the severe shock to demand and supply dynamics, as well as the sharp contraction in corporate growth and earnings. But we believe that most of these downgrade risks have largely been priced-in by the market; and these risks are more pronounced within sectors that are highly geared such as the US energy sector, single B credits and sectors that are directly impacted by the current pandemic.

We have started nibbling into names – with preference to the IG space – as valuations become more attractive; while some of our portfolios have also increased their USD position to above 10.0%. Nevertheless, caution remains a key theme of ours and we are refraining from chasing too aggressively at this juncture. Cash level across our portfolios current ranges between 15.0% and 21.0%

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