A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 13 – 17 January 2020


Improving economic sentiment fuels market rally

Global financial markets stayed risked-on throughout the week as investors cheered to the much-anticipated signing of the Phase 1 trade deal between US and China, as well as the de-escalation of political tensions between US and Iran. The semblance of clarity has fuelled investors’ appetite for riskier assets; pushing global equities to hit new highs. The S&P500 in particular closed the week with a 2.0% gain.

Better-than-expected macroeconomic readings — especially for US and China — also help reignited market sentiment. In the US, consumer confidence and business outlook have markedly improved from previous readings, while its manufacturing segment also looks poised for a turnaround following a softer outing throughout 2019. Whereas in China, industrial production for December 2019 beat estimates to come in at 6.9% (Forecast: 5.9% | October: 6.2%) while fixed asset investments for the same month was up 5.4% (Forecast: 5.2% | October: 5.2%). Retail sales also saw a slight uptick at 8.0%.

The emergence of green shoots on the global macroeconomic data front should ultimately bode well for financial markets moving forward. Moreover, the Evercore ISI Global Economic Diffusion Index — which measures the number of positive news vs negative news in relations to markets — are indicating more positive contributors as compared to negative ones thus far in 2020. Coming off from a year ridden by geopolitical tensions and grappling uncertainties, these positive indicators should provide some support and comfort for markets in the near-term.

In terms of fund flows, investors are evidently moving away from money markets to put their cash to work amidst an improving backdrop. Global equity ETFs have seen their third consecutive week of inflow; adding on roughly US$12 billion last week alone. Japan and US added on approximately US$4 billion and US$3 billion respectively; while regional markets such as China (US$1.3 billion) and Hong Kong (US$320 million) among others have also attracted sizable inflows — largely skewed towards the financial, information technology, and industrial sectors.

In any case, there remains much to be seen for the remainder of the year, and we are cognisant of looming risks and potential complacency in markets.

Asian markets gain on trade optimism as data improves

It was another positive week for Asian equities as trade optimism bolstered sentiment with recent economic data from China also pointing to a pick-up in industrial production and activity. Both the Hong Kong Hang Seng and broader MSCI Asia ex-Japan index posted respective gains of 1.5%.

Risk sentiment improved after the US and China signed a phase-one trade deal last week which sought to diffuse tensions after a protracted trade conflict that has lasted 18 months. US President Donald Trump and Chinese Vice Premier Liu He signed the pact that will roll back some tariffs as well as see Beijing boost purchases of US goods and services by US$200 billion over two years. This include purchases of US agriculture products by US$32 billion over the next two years by China.

On tariffs, the US will cut by half the tariff rate it imposed on September 1 on US$120 billion worth of Chinese goods to 7.5%. Tariffs that were scheduled to go into effect on December 15 on nearly US$160 billion worth of Chinese goods including electronics goods were suspended indefinitely. China’s retaliatory December 15 tariffs including a 25.0% tariff on US-made autos were also suspended.

However, US tariffs of 25.0% on US$250 billion worth of Chinese goods put in place earlier will remain. These could be rolled back as part of a Phase 2 trade negotiation according to US Treasury Secretary Steven Mnuchin. Negotiations for the second phase of the trade deal is expected to commence before the presidential election in November.

Ahead of the signing, the US had also removed China from the currency manipulator list. Even before it was removed from the list, the Chinese yuan have been strengthening against the greenback edging towards the 6.90 level.

However, the interim trade deal did not fully address some of the structural differences that led to the dispute including issues surrounding sovereignty, intellectual property and technology transfer. Tensions between the two economic powerhouses remain very much at play as the two countries vie for tech leadership position in the global arena.

It was also reporting season with tech bellwether stock Taiwan Semiconductor Manufacturing Co. (“TSMC”) reporting better than expected earnings owing to better operating leverage which contributed to improved margins. Forward projections were also higher than analyst’s estimates with a visible product pipeline of higher quality goods as the company ramps up its exposure to 5G.

On portfolio positioning, we remain invested for our Asian funds as we tilt towards cyclical names owing to an uptick in economic growth. Income-centric funds will be anchored by dividend yielders for stability as well as holdings in large and liquid names when market direction sways. Technical signals as seen in Bank of America Merrill Lynch (“BofAML”) Bull & Bear indicator point to some frothiness in markets and bullishness amongst investors. We may consider lightening our portfolios when markets reach such overbought positions.

Updates on Malaysia

On the domestic front, the local market lagged regional gains with the benchmark KLCI closing only 0.3% higher despite warmer trade relations between US and China.

Locally, it was status quo for PLUS Malaysia Bhd after the government decided not to sell stakes in the highway concessionaire to the private sector ending speculation within the sector. According to The Edge, the Prime Minister’s Office of Malaysia (“PMO”) said there will be no toll rate hikes on PLUS Malaysia Bhd’s highways as PLUS’ concessions will be extended for 20 years from 2038 to 2058. The government will also implement an 18.0% reduction in toll charges on private vehicles plying PLUS-owned highways as early as 1 February 2020. Khazanah Nasional Bhd and the Employees Provident Fund will remain as shareholders of PLUS.

The Pakatan Harapan government suffered its fifth straight loss at the Kimanis parliamentary by-election. Barisan Nasional (“BN”) retained the seat after its candidate Datuk Mohamad Alamin won by a majority of 2,029 votes, defeating Datuk Karim Bujang of Parti Warisan Sabah.

Fixed income updates & positioning

Albeit the recent rush into riskier assets, regional bonds and credits have also held its own ground; where the slew of supplies which came into the market last week were propped up by healthy demand.

We have also taken the opportunity to pick a few new issuances for our global / regional mandates, namely Nippon Life Insurance (one of the largest insurance player in Japan), SMC Global Power (a power company under the San Miguel conglomerate), PT Bank Tabungan (Indonesian state bank), PT Bayan Resources (Indonesian coal producer), as well Jollibee (Philippine fast food chain) among others. Positioning wise, our funds remain light in terms of duration, and we’ll look to add on quality names that we are comfortable with should the opportunity arise.

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