That said, markets have seemingly largely ignored the potential impacts of the epidemic, as countries are resuming normal activities with less restrictions and lockdowns. With economic indicators implying a recovery from the fallouts of the epidemic, the MSCI Emerging Markets Index surged and gained 8.42% in July.

With the extended quantitative easing having no end in sight, we expect excess liquidity to further flow from USD assets to non-USD assets, which provides an upward driving force for emerging markets, in particular emerging Asian markets. Among them, we would focus on the Vietnam market. The frontier market recorded a hefty drop at the end of July, as markets were concerned over the spike in covid cases, after over hundred days without locally transmitted cases. However, we see the drop more like a market overreaction than anything.

With a timely reaction to the situation, we are relatively confident that Vietnam will not see the situation go out of control. In addition, despite the global economic slowdown, the economic indicators in the country recovered to pre-epidemic levels, we find Vietnam’s fundamentals rather solid. This is further bolstered by the Sino-US geopolitical tensions, which benefits the country as the production lines shuffle. IMF sees the country’s economy growing 2.7% this year and returning to 7% next, the sharp fall in Vietnam equities is likely an opportunity for a great upside potential.

One of the longest EU leaders’ summit concluded in late July, and the divergent leaders compromised in the end, clearing the EUR 750 billion Recovery Fund for the European Parliament’s approval with revised terms: 390 billion in grants and 360 billion in loans. This was the first liability pooling under the EU, which is a big step forward to a more connected Europe. However, the fundamental conflicts between the states throughout the summit could prove to be an issue in the future.

As for Brexit, both sides remain miles apart on key issues, possibly implying there will be no trade deals before the upcoming deadline at the end of September. Although EU’s chief Brexit negotiator Michael Barnier mentioned that the EU intended to keep a mutually beneficial relationship with the UK even after the divorce, European corporations already took a no-deal Brexit as given and are planning accordingly. With the massive uncertainty both politically and economically, European markets remain a less attractive investment in the short to mid-term.

With foreign direct investment reducing in China, and trade and exports also constituting a smaller part of the Chinese GDP, the rise of de-globalisation could cause lasting damage to the Chinese economy. According to the latest communication from the Chinese politburo, apart from the ‘six stabilities’ and ‘six guarantees’ emphasized since the outbreak of the epidemic, the Chinese leadership is considering prioritising self-reliance and domestic growth, under the big banner of ‘Double Circulation’ led by the domestic economic cycle. Simply put, the politburo determined that it would be better for China to develop its domestic market in a deeper manner for the long term.

As various economic indicators in China continued to improve, it would be an opportunity to jump on the growth train. Considering the government’s emphasis on the domestic market, prioritizing technological research and reducing reliance on foreign imports, relevant sectors in China should continue to see much growth with governmental help. Therefore, we have a stronger conviction to stay bullish on the new economy sector, eyeing on better upside potential in the mid to long-term.

Vaccine optimism and stimulus expectations were the 2 main driving forces behind the surging markets. The positive progress in various vaccine developments drove anticipation that the global economy could return to normal at a sooner date than originally expected; additional fiscal stimulus is also expected to give a boost to the somewhat struggling economy. To add on that, US President Donald Trump mentioned that the White House is considering a possible payroll tax suspension, further boosting market optimism.

The gradual recovery of economic indicators, with all major PMIs rising to 50 or above, suggests a potential bottom in the economic downturn. In particular, we have noticed that the earnings forecast for both the tech and healthcare sectors began to rebound after the earlier downward revision. Although there might be slight corrections in the short term with the valuations still on the higher end, with surprisingly good quarterly results and a lifted outlook, we continue to stay bullish on these sectors in the long term.

The Bloomberg Barclays Global Aggregate Bond Index were up 3.19%, US Investment Grades gained 3.25%, while Emerging Markets US dollar Bonds and US High-yield bonds also rose 3.12% and 4.69% respectively.

Despite the second wave covid crisis regaining traction across multiple countries, concerns over the epidemic continue to fade out of the spotlight as various economic indicators improve, and markets look forward to the much-anticipated v-shaped recovery as vaccine hopes go high. Corporate confidence improved, and credit markets seemingly forgot about the ongoing fiscal support from the governments that keeps various corporations afloat, which might be a concerning risk factor if one were to invest blindly.

Even though credit markets have generally improved, Fitch ratings have warned of a 5% default rate in high yield bonds over the year, underpinning the heightened innate risks in the credit market; With market optimism running high, investors might also want to seek hedging against the heated market. In both cases, selection is still very important. Avoid issuers from sectors expected to suffer lasting damage from the covid fallout, and stay away from emphasising on the past financial records, only pick issuers with solid financials unaffected by the pandemic.

US

The number of covid cases exceeded 20.9 million globally, of which the United States accounts for more than a quarter of total cases. Despite the serious epidemic situation, the US economic data seems to indicate a strengthening local recovery momentum. The latest number of new jobless claims has fallen below the 1 million mark for the first time since the start of the outbreak. The US stock market remains in an upward trend, the Dow and the S&P 500 index rose 1.86% and 0.72% respectively over the past five trading days ending Thursday, while the NASDAQ fell 0.59%. Russia announced registry of its first COVID-19 vaccine. While the market remains hopeful that the vaccine could help control the epidemic, there are also worries that the vaccine's usage may restrict the current dovish policies of global central banks. Regarding Sino-US trade relations, it was reported that senior officials of both countries will evaluate the implementation of the first phase trade deal around 15^th August.  As for spot gold, while it did briefly hit a record high, gold prices subsequently plummeted on August 11, setting a record for the largest single day decline over the past seven years. At the time of writing, spot gold sits at $1948 per ounce. Next week, the United States will release the minutes of the Fed July interest rate meeting.

Europe

The latest focus in Europe remains on the Brexit talks, markets are still speculating whether the UK and EU can reach an agreement before the September deadline. Positive news and data continue to pour in, supporting European equities, the UK, French, and German indexes rose between 2.63% and 3.22% over the past 5 trading days ending Thursday, outperforming global markets. After the UK Prime Minister Boris Johnson and Irish Prime Minister Micheál Martin met on Friday, both expressed optimism about a zero-tariff trade agreement between the UK and EU. Next week, the Eurozone will announce the initial value of the August manufacturing PMI and the finalised July CPI.

China

Over the past week, the margin trading balance growth has slowed down, resulting in weaker performances in both the Shanghai and Shenzhen stock markets. The CSI 300 Index fell slightly by 0.07% over the week, while the Hong Kong equities had a better week, the Hang Seng Index gained 2.66% over the same period. In terms of economic data, China's industrial production maintained a positive growth of 4.8% YoY in July; retail sales were weaker, falling 1.1% YoY over the same period, but the decline was less severe than the previous month; the YTD figure in July fixed investment ex rural areas also saw improvement over previous months.  China will announce the LPR (Loan Prime Rate) next week, market expects both the 1-year and 5-year rates to remain unchanged.

Understanding the Characteristics of Different Bonds

Government vs Corporate

The first characteristic is the classification of government or corporate bonds. As the name implies, government bonds are bonds issued by the government, commonly referred as sovereigns, the best known sovereigns include the US Treasuries and German Bunds. For bonds issued by developed countries such as the US or Germany alike, international rating agencies will usually give them a higher rating, as the default risk of these government bonds are likely close to zero, with a high level of liquidity. However, because of the lower risk factor, its yield to maturity is also low.

As for corporate bonds, they are issued by companies and are commonly used as working capital in the company’s operations. Apart from the individual risks of the companies themselves, investors of corporate bonds must also bear the risks of the relevant countries the companies are doing business in, so the risks tend to be relatively higher. With the heightened risk factors, most corporate bonds have higher yield to maturity, this is called the "risk premium” of the bond.

As an investor, corporate bond tend to carry a relatively higher risk, as we are exposed to both the country and company risks. However, under normal circumstances we could expect receiving a higher yield from the investment for taking the additional risk.

High Grade vs High Yield

Most global bonds would request ratings from renowned international rating agencies, such as S&P, Moody’s and Fitch. If a bond has a rating higher than BB+, it is considered an investment grade bond, which suggests a relatively higher credit quality. Due to the issuing company’s good cash flow management and better solvency, the risk of holding its bonds is lower, which also results in a lower interest rate return.

Whereas for bonds rated BB+ or below, they are classified as high yield bonds. Compared to investment grade bonds, high-yield bonds have higher yields and with better return on capital. However, bear in mind that high yield bonds are also known as junk bonds, suggesting a higher default rate; the bond price volatility will also be larger, potentially experiencing a stock-like drawdown.

For investors, keep in mind that high-yield bonds may not always be the ideal high return stable investment. If the overall economy or corporate earnings improve, high-yield bonds can usually generate better returns; on the contrary, when the market is more volatile and the economic outlook is weaker, investment grade bonds can better stabilise the portfolio. In addition, also note that investment grade bonds tend to have longer duration and are more likely subject to interest rate risk.

Fixed-rate vs Floating-rate

Fixed rate bonds are bonds that pay fixed coupons regularly, and a majority of the bonds in the market fall into this category. When investors invest in these bonds, as long as there are no special event like defaults happening, we can expect to receive regular fixed coupons along with the principal at maturity. The fixed coupon makes calculation relatively convenient, which allows investors to plan accordingly with the expected cash flows.

Floating rate bonds have a variable coupon amount, where the coupon rate is usually the sum of the interbank rate plus a fixed premium. Therefore if interest rate rises, the coupon will follow suit. Although the coupon amount is not as easily computable as fixed-rate bonds, the interest rate risk of floating rate bonds is much lower, as the change in market interest rates are likely reflected in the coupon rate, resulting in a more stable bond price.

If investors expect interest rates to further fall, choosing fixed-rate bonds will be more advantageous; on the contrary, if interest rates are expected to rise, floating-rate bonds can reduce the impact of rate hikes. However, fixed rate bonds usually allow investors to better control their cash flow.

All in all, different bond characteristics will expose investors to different risks. While higher risks usually accompany with higher potential returns, depending on the client’s profile and interests, there is no single ‘best’ choice that one can choose from. Always understand the risk profiles of investors and the product itself before making investment decisions to ensure that the best outcome is achieved.

US

The latest earnings season in the US is coming to an end. Among the 440 S&P 500 companies that have reported, around 84% of them beat market expectations. Over the past trading 5 days ending Thursday, the Dow and the S&P 500 were in the green for 5 consecutive trading days, gaining 4.08% and 3.17% respectively over the period; the Nasdaq even rose for 7 consecutive trading days and hit a new record high. Although the US Republicans and Democrats are still divided over certain key issues in the new stimulus bill, the overall negotiations still made progress. Together with US ISM manufacturing index improving and beating market expectations, the stock markets rallied. US Fed Vice Chairman Richard Clarida said that the Congress stimulus bills will help the US economy rebound in the second half of the year. It is worth mentioning that the US dollar index stayed weak, hitting a low of 92.52 on Thursday, the lowest level since May 2018; the price of gold continued to rise. At the time of writing, the spot gold price crossed $2,070 per ounce, continuing to set new record highs. The United States will release data on CPI and retail sales next week.

Europe

European equities followed the global markets and went up. The UK, French, and German equity indexes rose between 1.73% and 2.19% over the past 5 trading days ending Thursday. The latest quarterly earnings season in Europe is also coming to an end. Among the 342 STOXX 600 companies that have reported, about 63% beat market estimates, which is slightly lower than the 84% of the S&P 500. In particular, companies such as BMW recorded quarterly losses, while Commerzbank and Allianz also recorded steep falls in net profits. The Bank of England will hold the interest rate meeting next week, the market is looking for be any hints on possible interest rate cuts.

China

China and Hong Kong stock markets lagged behind Western markets. The CSI 300 Index only rose 0.27% over the week, while the Hang Seng Index fell 0.26%. US President Donald Trump signed an executive order prohibiting US companies and individuals from doing business with TikTok's parent company and WeChat. The news triggered market concerns over related sectors, relevant shares also saw sharp drops. China's export data in July improved, rising by 7.2% YoY in dollar terms, while market expected a decline of 0.6%. Next week, China will announce July data on fixed investment, industrial production, retail, and CPI.