“Vaccine news a cause for market on hopes of a global recovery. Chinese manufacturing activity expanded for the ninth straight month in November”

“Asian equities extend gains on recovery hopes, following stellar November.”

Asian equities markets began the new month with a bang on Tuesday, 1st Dec, buoyed by the prospect of a COVID-19 vaccine fueling a global economic recovery, buoyant Chinese factory activity and expectations of continuing fiscal and monetary support. Due to the vaccine news, hopes for a global recovery has fuelled a huge wave of liquidity coming to equities. MSCI’s broadest index of Asia-Pacific shares outside Japan added 1.08% after closing the month 9% higher, the best November since 2001.

China’s blue-chip CSI300 index jumped 1.56% higher on Tuesday, after a business survey on Tuesday showed activity in China’s factory sector accelerated at the fastest pace in a decade in November.

China said on Monday that manufacturing activity expanded for the ninth straight month in November as the world’s second-largest economy continues to recover from a slump caused by the coronavirus pandemic.

The official manufacturing Purchasing Managers’ Index (PMI) for November came in at 52.1, according to the National Bureau of Statistics. That’s the highest reading in more than three years, as well as better than the 51.5 forecast by analysts in a Reuters poll and October’s official reading of 51.4.PMI readings above 50 indicate expansion, while those below that signal contraction. PMI readings are sequential and show month-on-month expansion or contraction.

China, where cases of Covid-19 were first detected, is among the few economies expected to continue growing this year — but at a much slow pace. The International Monetary Fund has forecast the Chinese economy to expand by 1.9% in 2020, slowing from the 6.1% last year.

Adding to recent vaccine optimism, U.S. pharmaceutical company Moderna said on Monday, 30th Nov, that it had applied for U.S.emergency authorisation for its COVID-19 vaccine and would also seek European approval for the treatment. Meanwhile, developments regarding a potential vaccine were being closely watched by financial markets as investors try to gauge how quickly and when the global economy will fully recover.Hence, we recommend investors to enter laggard sectors as economies worldwide benefit from a global recovery. Examples of such sectors are autos, airlines, oil & gas, and infrastructure & building materials.

In conclusion, investors are recommended to employ a more back-to-basics stock selection approach and continue to adhere to company fundamentals and strict risk management principles (stop-loss mechanisms and/or appropriate portfolio hedging) to mitigate risks from market swings and uncertainties. Amid the continued volatility, we recommend investors to aim for stable returns instead of short-term tactical trading during this period.

Fixed Income Overview:

There has been continued positive momentum and increasing signs of recovery in macro environment, as more countries announce and prepare for the reopening of their economies. US 10-Year Treasuries yields dropped to 0.85% as at1 Dec 2020 from 0.90% as at 17 Nov 2020 and we expect it to remain between 0.5%-1.25% for the 1H of 2021.

The credit default swap (CDS) Index for the Asia ex-Japan Investment Grade entities rebounded to 61 as at 01 Dec 2020 from 60 as at 16 Nov 2020. The CDS Index has increased by 1 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread rebounded to 156 as at 01 Dec 2020 from 155 as at 17 Nov 2020. Credit spreads are expected to be range bound for the coming months.We caution investors holding marginal investment graded bonds (BBB-, Baa3) to be wary of rating agency downgrades. Also, emerging market bonds from countries such as India, Turkey, Mexico, and Brazil may continue to face further credit rating downgrades. For clients holding such bonds, we recommend reducing exposure and increasing diversification to other countries’ issuers. Several onshore bonds defaulted recently including Yongcheng Coal, Huachen Automotive Group & Tsinghua Unigroup. For investors with an investment grade bond portfolio mandate, we recommend bonds with BBB+ ratings or higher, and portfolio duration of 3.5 – 4 years.

We again recommend investors to stick to short dated high quality (BB Rated) High Yield bonds excluding bonds issued by Chinese issuers with a duration of less than 2 years which would offer the best value. Investors should also have sufficient holding power to hold these bonds to maturity. Geographically, we are overweight Emerging Markets’ bonds excluding China and neutral on Developed Markets’ and China bonds.

Further, we recommend investors to match their exposure of high-beta bonds such as: CoCo Bonds, Perpetuals, and high yield bonds to their respective risk appetites. Loan-to-value ratios for bond holdings may fluctuate drastically due to rating agency downgrades and therefore investors are advised to lower their leverage and have more buffer to mitigate the potential price volatility. It is also recommended for investors to hold a diversified fixed income portfolio due to various uncertainties across sectors. Overall, we recommend a balanced and more diversified portfolio of high quality (BB rated) high yield bonds and short duration IG Bonds.

Equities Overview:

We continue to remain cautiously bullish on Equities. Our emphasis this fortnight is on increasing further exposure to laggard sectors that are beneficiaries of further progress on the vaccine front and the eventual materialization of the long awaited economic stimulus from the US. With a Biden win as previously mentioned, we have witnessed signals of Biden’s intention to have constructive discourse with China which confirms our previous assessment that there will be less pressure on the Chinese technology sector going forward. Against this backdrop, we recommend investors to be selective and continue to be overweight US and Chinese tech companies. As reiterated previously, we have been and remain bullish and overweight in the consumer discretionary sector, in particular, that in China for obvious reasons since the Chinese economy is coping well amid the pandemic (vs the rest of the other major economies).

Over and above, despite US infection rates breaking new highs, stock market investors remained bullish and seem to be looking forward beyond the pandemic, ignoring such numbers. With further positive progress on the vaccine front, we recommend investors to increase the pace of adding further exposure to the laggard sectors, in particular, autos, airlines, oil & gas, infrastructure and building materials.

Apart from further positive progress on the vaccine front, the anticipation of a near-term materialisation of an economic stimulus from the US continues to bode well for Equities. In addition, the usual reduction in liquidity arising from investors taking a break for the Christmas holiday season will likely be less pronounced this year than it was in previous years as a result of the pandemic. Hence, we remain constructive on Equities for the remainder of this year and beyond.

As reiterated previously, the emphasis on stock selection is crucial now more than ever. We recommend investors to stick to fundamentals. In short, employ a more back-to-basics stock selection approach and continue to adhere to company fundamentals and strict risk management principles (stop-loss mechanisms and/or appropriate portfolio hedging) to mitigate risks from market swings and uncertainties. Amid the continued volatility, we recommend investors to aim for stable returns instead of short-term tactical trading during this period.