Harris Fraser |
Research Insights - Cloned - Cloned
16 February, 2023
China – Buy the Dip

Hong Kong and China equities had an amazing start to the year, as market sentiment remains very positive, the pivot on COVID policy and sector regulation lifted the economic outlook. Over the month of January, the CSI 300 Index was 7.37% higher (9.64% in US$ terms), whilst the Hang Seng Index surged 10.42% (9.90% in US$ terms)


The push to return to normal continued, as borders reopen and economic activities resume to normal. The reopening is followed by the improvements in economic data, quantitative data during the Lunar New Year provided further evidence to the actual recovery in economic activity. With the other major issue of property crisis is also largely under control after the government intervened in late 2022, the outlook of China for the year is positive. The economy will buck the global trend of economic slowdown, the relatively loose monetary and fiscal policy also help with the economy and valuations.


That said, although the Chinese economy is expected to fare better than external markets in the year, the huge rally in recent months has reduced the upside potential; we also acknowledge the risks arising from policy changes. That said, we still expect the China market to perform in the year thanks to its relative insulation to the external markets. In the shorter term, we see risks of a market correction, the fair value of the upside potential currently does not fully justify the downside risks. We suggest buying the dips in the Hong Kong and China markets to achieve better risk adjusted returns.

0216CN1


 

Research Insights - Cloned - Cloned
16 February, 2023
US – Downside Risks Do Not Justify Current Valuations

US equity markets got off to a great start in 2023, markets turned optimistic and priced in a higher probability of soft-landing, sending valuations higher despite lukewarm economic data. Over the month of January, US equities gained across the board, the Dow, S&P 500, and NASDAQ gained 2.83%, 6.18%, and 10.68% respectively.


The US economy managed to grow in 2022 Q4, leading indicators such as PMIs have improved, but remain in contraction zone. More importantly, inflationary numbers showed continued easing in both headline and core numbers. However, the labour market remained red hot, with the lower jobless claims, higher payrolls and job vacancies, pressures on core inflation remains intact. Henceforth, monetary policy would likely continue tightening along its original path, the Fed raised Fed Funds rate by 0.25%, Fed President Jerome Powell said more tightening could be needed, which in turn could hit financing conditions and the economy itself.


In short, while we are confident on the general direction, i.e. the easing of inflation, economic slowdown, easing pace but continuation of rate hikes, and quantitative tightening to continue, a lot of uncertainty remains over the timing and the magnitude of the events. The US equity market is still exposed to further downside risks, corporate earnings could see further downward revisions due to the slowdown and possible recession, and valuations could be further compressed. Given the recent fierce rally to start off the year, we think that the downside risks do not justify the current valuations considering the high risk-free rates. We continue underweighting US equities before there is sufficient correction in the market.

0216US1


 

Research Insights - Cloned - Cloned - Cloned - Cloned - Cloned - Cloned
11 February, 2023
Weekly Insight 10/02

Weekly Insight 10/02

   ​usa ​US

US equities faltered after hitting the highest level in the previous week, the 3 major equity indices lost 1.04-3.37% over the past 5 days ending Thursday. Concerns over the economy after the strong jobs data affected risk taking sentiment, the US 2 Year yields have risen to 4.5%, the highest level in more than 2 months, the inverted 10Y-2Y yield spread also widened to the highest level since the 80s. Fed President Jerome Powell agreed that the disinflationary process has begun, but suggested that more rate hikes could be needed than markets expect, and rates would be held restrictive for longer; Powell’s stance is further echoed by other Fed members throughout the week. At the time of writing however, Bloomberg interest rate futures data showed that markets are pricing in Fed Fund Rates to peak at 5-5.25% in Q2, and still expects rate cuts to take place within the year.

On the other hand, the earnings season continued with 343 of S&P 500 constituents reporting at the time of writing, only around 70% have posted earnings beat, and overall earnings growth was -2.68%, with over 35% of companies reporting lower earnings YoY. As for economic data, labour market data showed a slight change in direction, where initial and continuing jobless claims came in higher than market expected, and were both higher than the prior reading. Next week, the US will continue its release of economic data, including CPI and PPI data for January, NFIB small business optimism index, as well as sectorial data for January including housing starts, retails sales advance, and industrial production data. The usual labour market data on initial and continuing jobless claims will also be released.

 

euro ​Europe

European equities outperformed the global markets this week, the UK, French, and German equity indices were 0.09-1.16% higher over the past 5 days ending Thursday. ECB members continued to speak out during the week, with most of them calling for more rate hikes to keep monetary policy restrictive. At the time of writing however, interest rate futures have remained largely unchanged, pricing a higher probability of a 50 bps hike in the March meeting, and a 25 bps one in the May meeting. For the economy, Eurozone retail sales in December fell 2.8% YoY, which was lower than both the expected 2.7% fall and November’s 2.5% contraction. German industrial production in December also fell 3.1% MoM, significantly lower than the expected 0.7% contraction, while the German CPI in January was 8.7% higher YoY, lower than the market estimates of 8.9%, likely helped by the governmental subsidies. UK released their prelim Q4 GDP, which was flat in the last quarter, narrowly avoiding a technical recession. Next week, the ECB will publish the first Economic Bulletin for the year, the Eurozone will release the preliminary Q4 GDP figures, while the UK will publish the CPI and retail sales figures for January.

 

china​China

China and Hong Kong markets had a softer week as markets take a breather after the steep rally back in January. Over the week, the CSI 300 index was 0.85% lower, while the Hang Seng Index also lost 2.17%. Overnight funding costs in China were eased as the PBOC injected 1 trillion Yuan from 8th till 10th. On the geopolitics front, the balloon incident could possibly cause further strain to Sino-US relations, US Secretary of State Antony Blinken has cancelled his planned China trip, and the US House voted to condemn China over the incident. As for the economy, Chinese CPI was 2.1% YoY in January, which was still lower than the market expected 2.2%; the PPI on the other hand contracted 0.8% YoY in January, which was also lower than the market expected contraction of 0.5%. Both figures raise the expectations on the PBOC to further loosen monetary policy in the year. Next week, China will be releasing new Yuan loans, money supply M2, and aggregate financing data for January, as well as the 1 year Medium-Term Lending Facility (MLF) Rate.

0210ENG

 

0210ENG2

Research Insights - Cloned - Cloned - Cloned - Cloned - Cloned
4 February, 2023
Weekly Insight 03/02

Weekly Insight 03/02

   ​usa ​US

US equities continued the strong performance over the week, with the 3 major indices gaining 0.31-5.98% over the past 5 days ending Thursday. Corporate earnings reports remains mixed, but Meta led the way after beating revenue estimates and offering an optimistic outlook, driving gains in the tech indices. The US Fed raised interest rates by 25 bps during the week as markets expected. Fed President Jerome Powell said while ‘the disinflationary process has started’, more work is still needed in the fight against inflation, with the labour market being a point of concern. He further suggested that there might be more rate hikes down the road, and mentioned that rate cuts are not expected to take place within the year. Markets however are unmoved by his comments, at the time of writing, interest rate futures markets are pricing in Fed funds rate to fall to the 4-4.25% by the end of the year.


As for economic data, they have been mixed. The Conference Board Consumer Confidence Index was 107.1 in January, missing market expectations. JOLTs job openings in December of over 11 million beat market expectations, while ADP employment change of 106K in January missed expectations of 178K. Both initial and continuing jobless claims came in lower than expected, hinting at continued tightness in the labour market. Economic data releases in the US will be relatively light next week, there will be mortgage application figures alongside University of Michigan Sentiment Index for February, as well as the usual labour market data of initial and jobless claims figures.

 

euro ​Europe

Similar to global markets, European equities gained on the back of improving outlook, the UK, French, and German indices gained 0.76-2.49% over the past 5 days ending Thursday. On Thursday, the ECB hiked rates for 50 bps to 2.5% as expected. Despite the recent cooler inflation data, as the Eurozone CPI fell further to 8.5% in January, the Bank said it would continue ‘raising interest rates significantly at a steady pace’, and intends to hike for another 50 bps in the March meeting. ECB President Christine Lagarde noted the resilience of the European economy, as preliminary Eurozone GDP grew 0.1% in 2022 Q4, avoiding recession. The BOE also hiked rates for 50 bps to 4% this week as widely expected. The Bank cited higher wage pressures as a concern, but believes that we are now past peak inflation. The Bank also projects that the UK economy has managed to grow in 2022 Q4, avoiding a technical recession, but the economy is still expected to remain stagnant with GDP growth projected to stay below 1% in the coming few years. Next week, Eurozone will release the December retail sales figures, Germany will release their December industrial production figures and the January CPI data, and the UK will also release their preliminary Q4 GDP.

 

china​China

Contrary to the global market, both China and Hong Kong equities recorded losses this week, the CSI 300 index was down 0.95%, while the Hang Seng index lost 4.53%. The Chief Executive of Hong Kong John Lee announced that the Hong Kong-China border will fully reopen on Monday, removing quotas and testing requirements for cross-border movements. In an attempt to revive the economy, unvaccinated travelers can now enter the city, and authorities will be giving out over 500,000 airline tickets to attract visitors. Chinese economic data showed more recovery, all PMIs apart from the Caixin Manufacturing PMI, returned to the expansion zone above 50, and beat market expectations, although the Caixin Manufacturing PMI missed expectations and remained in the contraction zone at 49.2. It was reported that the US Secretary of State Antony Blinken would visit China on Sunday. Next week, China will release a slew of economic data for January, including new Yuan loans, money supply M2, and aggregate financing data, alongside CPI and PPI data.

 

0203ENG

0203ENG2

Research Insights - Cloned - Cloned - Cloned - Cloned
28 January, 2023
Weekly Insight 27/01

Weekly Insight 27/01

   ​usa ​US

US markets remained strong, on the back of positive economic data and several uplifting earnings reports. Over the past 5 days ending Thursday, the 3 major equity indices gained 2.74-6.08%. Corporate earnings season continued, Microsoft offered weak guidance citing slowdown in growth, Intel missed estimates and suggested that demand is weaker, Tesla on the other hand was optimistic on the outlook and the stock jumped over 10%. Further layoffs were announced across the tech sector, including Google, Meta Amazon, and Microsoft. The debt ceiling debacle continued, it was reported that Republicans are considering to extend the debt ceiling to September, but both sides remain uncompromising, cash is expected tom run out around June, and default risks remain on the table.

The US released the latest GDP figures for Q4, which grew 2.9%, beating market estimates. The slowdown of the economy raised expectations for a soft landing of the US economy. Markit manufacturing and services PMIs in January both beat market estimtes, but remained below 50. Labour market data remains mixed, initial jobless claims unexpectedly fell, and was lower than market estimates, continuing claims on the other hand increased, which was higher than estimates. Next week, the US will be releasing a lot of economic data, including Conference Board Consumer Confidence Index for January, ISM manufacturing and services index for January. There will also be a lot of January labour market data, including ADP employment change, non-farm payrolls, unemployment rate, as well as the usual initial and continuing jobless claims. The US Fed will also hold their first monetary meeting in 2023 next week. At the time of writing, markets are pricing in a modest 25 bps hike in the meeting.

 

euro ​Europe

European equities rebounded over the week, the UK, French, and German indices gained 0.18-2.07% over the past 5 days ending Thursday. Ahead of the monetary meeting next week, European Central Bank President Christine Lagarde reinstated that the Bank will continue the fight against inflation, to prevent the high inflation from being entrenched. The latest European economic data leans positive, Eurozone consumer confidence was -20.9 in January, which slightly missed market expectations. January PMIs on the other hand beat estimates, services PMI in particular returned to the expansion zone for the first time since August. The German IFO business climate index in January met expectations, further improving from the December figure. Next week, Europe will be releasing the latest Q4 GDP figures, as well as CPI data for January, both the ECB and the Bank of England will also hold their first monetary meetings in 2023. At the time of writing, Bloomberg interest rate futures show that markets are pricing in a 50 bps hike from the ECB, while there is also a high chance for the BOE to hike 50 bps as well.

 

china​China

The Chinese equity market is closed for the week in observance of the New Year, while the Hong Kong equity market had a great start to the year of rabbit, gaining 2.92 % over the past 2 days ending Friday. With the pivot in COVID policy, China is starting its return to normalcy. Travel and tourist over during the New Year holidays surged, visitors to Macau grew by more than 300%, online travel agency trip.com reported that travel and ticket demand this year has surpassed comparable figures in 2019. The Ministry of Transport estimated that 2.1 billion trips will be taken this year, which will be double of that of 2022. Box office sales also surpassed 2022 figures as of Friday morning, reaching 6.2 billion yuan, hinting at some recovery in Chinese consumption. Next week, China will be releasing more economic data, including NBS official manufacturing and non-manufacturing PMIs for January, Caxin manufacturing and services PMIs for January, and industrial profits data for December.

 

0127ENG

0127ENG2

Research Insights - Cloned - Cloned - Cloned - Cloned
21 January, 2023
Weekly Insight 20/01

Weekly Insight 20/01

usa ​US

The US markets slipped as concerns over the economy reignited, over the past 5 days ending Thursday, the 3 major equity indices were down 0.73-2.73%. Fed officials continued to convey the message that inflation remains the top priority of the Fed, Fed Vice Chair Lael Brainard stated that inflation remains high despite the recent easing, such that rates would stay restrictive to ensure inflation returns to the longer term target of 2%. New York Fed President John Williams said the Fed has more work to do to bring down inflation, while Boston Fed President Susan Collins suggests that rate should go above 5% and stay at the level for some time. At the time of writing, the 2Y treasury yields were hovering around 4.15%, while 10Y treasuries are trading around the 3.4% level.

On economic data, PPI data came in lower than market expected, with the headline PPI falling 0.5% MoM in December. Industrial production and core retail sales figures also recorded MoM contractions, possibly suggesting a slowdown in the economy. However, the labour market remained tight, with initial and continuing claims coming in lower than market expected. In other news, the US debt limit fiasco continued, the debt limit was reached on Thursday, and the Treasury Department resorted to alternative sources of funds to avoid running out of cash. Next week, the US will be releasing more economic data, including the Markit manufacturing and services PMIs for January, durable goods orders for December, personal income in December, PCE data for Q4, as well as the revised GDP figures for 2022 Q4. The usual labour market data of initial and continuing jobless claims will also be released.

 

euro ​Europe

European equities fell on Thursday, bringing the UK, French, and German indices to a 0.34-0.92% loss over the past 5 days ending Thursday. The ECB released the minutes for the December meeting, which showed that many officials preferred a 75 bps hike. Members also projected that inflation has become more persistent, and expect core inflation to edge higher in 2023. ECB President Christine Lagarde said inflation is too high, and the ECB will continue to ensure inflation returns to 2%. The message is also echoed by Bank of France President Francois Villeroy de Galhau and Dutch Central Bank President Klaas Knot, who expect more than a single 50 bps hike this year. On the economy, German ZEW economic sentiment surged to 16.9 in January, which is a lot better than the expected -15.0 and December’s -23.3. UK CPI in December was 10.5%, in line with market expectations. Next week, both the Eurozone and the UK will release the January PMI figures, the Eurozone will release the consumer confidence index for January, and Germany will release the IFO business climate index for January.

 

china​China

The Chinese equity market continued to perform, the CSI 300 index posted a 2.63% over the week ahead of the long New Year holidays, the Hang Seng index also gained 1.41% over the period. Fixed asset investment, industrial production, and retail sales all came in better than market expected, China released their Q4 GDP, which was 2.9% YoY, much better than the expected 1.8%. The big turnaround in the policy lifted market expectations, with most provinces targeting an economic growth of at least 5% this year. On the other hand, the National Statistics Bureau reported that the population recorded the first drop since 1961, which could spell uncertainty for the future of the property market. US Treasury Secretary Janet Yellen met China Vice Premier Liu He in Zurich, pledging to avoid further worsening in Sino-US relations, it was also reported that Yellen will visit China at a later date. Next week, the China market enters a weeklong New Year holiday, no new economic data will be released, and markets will likely pay attention to travel and consumption related data after the holidays.

 

0120ENG

0120ENG2

Research Insights - Cloned
20 January, 2023
Japan – Possible Shift in Monetary Policy

The Japanese Yen surged 5.30% against the Dollar over the month, as markets expected a change in monetary policy direction from the Bank of Japan. Over the month of December, the Nikkei 225 lost 6.70% (0.74% in US$ terms), while the TOPIX was down 4.73% (up 1.36% in US$ terms).


The Bank of Japan announced a surprise change to its yield curve control policy during the month, widening the band for 10 Year yields to 50 bps from the 0% target. Markets anticipate this as a sign for the BOJ to shift its monetary policy in 2023, after BOJ President Haruhiko Kuroda steps down in April. At the time of writing, Bloomberg interest rate futures suggests that markets expect BOJ rates to hit 0.25% by the end of the year, which would mark the end of the negative interest rate doctrine that has started back in 2016.


A shift in monetary policy for the year is further supported by the untamed inflation, with the Tokyo Core CPI hitting 4% in December, a new high since the 80s. The higher inflation also hit consumer sentiment, with household spending falling MoM for the first time in 3 months. While the fiscal package would come into effect in the months ahead, its effectiveness is uncertain; the global economic slowdown could cancel out the gains from reopening, monetary policy normalisation would likely put heavier pressure on investment markets. We remain conservative over the Japanese equity market before more there is a larger drawdown.

Research Insights - Cloned
20 January, 2023
Fixed income – IG Bonds over Equities

In the last month of the volatile year, fixed income markets had mixed performance across the board, monetary tightening concerns exerted pressure on bond prices. Over the month of December, the Bloomberg Global Aggregate and Emerging Markets US Dollar Bonds gained 0.54% and 0.85%, while US Investment Grades and US High Yields lost 0.44% and 0.62% respectively.


2022 has been a difficult and volatile year for fixed income, as the major themes of inflation and monetary tightening dominated markets throughout the year. As the year comes to an end, inflation figures across major economies has seemingly peaked, but it is still expected to stay elevated, and rates cuts are not expected to take place before inflation figures return to normal levels, until there is adequate demand destruction, short term upside is likely limited. 


As global monetary policy would remain tight, the recession risks remain in place. Our outlook on the fixed income market remains largely unchanged from the previous month: underweight credit spread, while slightly overweighting in duration. Credit quality would likely be important under this macro backdrop, high yields are poised to suffer further as the economic conditions further worsen. On the contrary, investment grades could benefit from risk aversion. Furthermore, the US rates are around 50-75 bps away from the indicated terminal rates, long end yields have likely peaked, further downside due to interest rate risks are limited. Henceforth, overweighting in investment grade, both short and long term bonds, will be our preferred strategy in the near term.

 

Research Insights - Cloned
20 January, 2023
EM – Short Term Dollar Weakness Could Cushion Downside Risks

Into the last month of the year, emerging markets edged lower in line with global markets. Over the month of December, the FTSE ASEAN 40 lost 0.30% over the month, ending the year with a 2.36% gain, while the MSCI emerging markets index lost 1.64% in December, ending 2022 with a 22.37% loss, in line with the losses in the China market.


Given the global economic slowdown and chances of recession, there are multiple sources of headwinds for EM economies, including high inflation, weak currency, tight monetary and financing conditions, as well as weaker external demand. Furthermore, the weak balance sheets and the risks of inflation rules out strong fiscal stimuli, higher financing costs weakens investment sentiment, drawing capital away from EM economies, further impacting longer term economic growth. According to World Bank, EM economic growth is expected to decelerate to 2.7% in 2023, far lower than the long term average.


For ex-China EM economies, Latin America led by Brazil will likely experience higher volatility ahead as uncertainty mounts following Lula’s win, both politically and financially. Asian markets on the other hand would suffer due to the fall in external demand, but with China’s recovery and the reopening across the region, the renewed demand could possibly offset some impact on the economy. Emerging Europe would likely underperform, as there is still no signs of resolution on the Ukrainian conflict. All in all, while market is skewed to the downside, given that short term softness in the US Dollar is expected, this could possibly limit the risk in EM equities, one could consider a small allocation to Asian EM if opportunity arises.

0120EM1


 

Research Insights - Cloned
20 January, 2023
Europe – More Uncertainties Ahead

European markets closed off the year with a modest loss in December, largely due to concerns over the weak economy in the region as well as the monetary policy outlook. The Euro also gained 2.87% against the Dollar on the back of a more hawkish ECB. Over the month of December, the STOXX 600 Index lost 3.44% (up 0.26% in US$ terms).


The latest economic data in Europe showed slight improvement. PMIs surpassed expectations and improved MoM, although they remained in contraction; confidence indices rebounded; CPI data also suggested that inflation in the region has peaked, but the figures are still far from the ECB’s long term target level. The ECB hiked rates by a meagre 50 bps in the December meeting, but ECB President Chirstine Lagarde suggested that 50 bps hikes will be the new normal, and more hikes are on the way to get inflation under control, the ECB will also start to trim its inflated balance sheet. At the time of writing, markets are pricing in another 150 bps in rate hikes within the year. 


The confirmation of monetary policy tightening will put further pressure onto the valuation levels in the market, as well as the economy itself. Upside in the equity market will be relatively limited, and the material risks of recession could drive corporate earnings lower. However, these factors have yet to be properly priced into the market, we see more downside risks in European equities. Thus, moving on into the New Year, before the risks are priced in sufficiently, we continue to advocate underweighting European equities.

0120EU1


 

Subscribe to