“The Dow Jones Industrial Average rose to a new record on Monday despite weakness in bank stocks caught by the impact of Friday’s margin call.”

Market Overview:

“Dow closes up nearly 100 points at new record, shrugging off fallout from margin-call rout.”

As investors appeared willing to dismiss volatility sparked by a large investment fund’s massive $30 billion margin calls last week that resulted in the unwind of billions of dollars in holdings. The margin event also triggered concern that global banks that dealt with the firm could face sharp losses. The Dow erased a 160-point loss and closed up 98 points at a fresh record of 33,171.

Dow Jones Industrial Average Index 1-month chart (Source: Bloomberg)

The S&P 500 fell 0.09% to 3,971 after falling as much as 0.8% earlier. The Nasdaq Composite slipped 0.6% to 13,059.

S&P 500 Index 1-month Chart (Source: Bloomberg)

Nasdaq Composite 1-month chart (Source: Bloomberg)

Traders are bracing for heightened volatility during this holiday-shortened week with quarter-end rebalancing among pension funds and other big investors. The recent swift advance in bond yields could set up money managers for big adjustments in their portfolios.

The Dow and the S&P 500 have risen 7.2% and 4.2%, respectively, so far in March. The tech-heavy Nasdaq, however, has dipped 1% this month as some investors dived in high-flying technology names amid rising yields.

Investors are awaiting updates from President Joe Biden about his infrastructure plan which could cost north of $3 trillion. The president is expected to unveil his plan when he travels to Pittsburgh on Wednesday and detail how it would be paid for. White House press secretary Jen Psaki said Sunday Biden plans to roll out two packages in the coming months, the first covering infrastructure and the second covering health and family care.

We recommend investors to accumulate on existing or initiate new positions on significant pullbacks in certain tech sub-sectors. Additionally, investors are recommended to increase exposure in cyclicals.

In conclusion, investors are recommended to adopt a more diversified portfolio and continue implementing strict risk management principles (stop-loss mechanisms and/or appropriate portfolio hedging) to mitigate risks from market swings and uncertainties.

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. 10-yr Treasury rebounded sharply to 1.73% as at 30 Mar 2021 from 1.59% as at 16 Mar 2021it is expected to be around 1.25% to 2.0% for the year of 2021.Moreover, to contribute to the recovery, we anticipate FED Funds rate to be kept 0% – 0.25% with no rate hike by the end of 2023.

The credit default swap (CDS)index for Asia ex-Japan Investment Grade entities rebounded to 66 as at 30 Mar 2021 from 61 as at 16 Mar 2021. The CDS Index has increased by 5 bps, reflecting a less positive outlook on credits moving forward. Asia IG credit spread dropped to 128 as at 30 Mar 2021 from 133 as at 16 Mar 2021. Credit spreads are expected to be range bound for the coming months. Asia HY credit spread dropped to 648 as at 30 Mar 2021 from 659 as at 16 Mar 2021. 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/offshore bonds defaulted recently including bonds issued by Yongcheng Coal, Huachen Automotive Group, Tsinghua Unigroup & China Fortune Land Development. 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.

CDS Asia ex-Japan Index 1-year Chart (Source: Bloomberg)

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 3 years which would offer the best value. Investors should also have sufficient holding power to hold these bonds to maturity. Also, we recommend investors to maintain short durations for IG bond portfolios from around 3.5 – 4 years. 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 more diversified fixed income portfolio or to reduce leverage of portfolios due to various uncertainties across sectors.

We anticipate there to be more investment grade / high quality high yield bond issues in Q2 of 2021 as issuers would like to take this opportunity to issue bonds at lower absolute yields before Treasury yields further surge. Hence, we recommend investors to monitor this space, in particular, low beta bonds. For reference, the purchase yields for 3-5 year low beta IG bonds are at 1% – 2%, and 3-5 year low beta HY bonds are at 3% – 5%. For investors with a higher risk tolerance, high beta bonds can be considered, vice versa, investors can consider low beta bonds. Overall, we recommend a balanced and more diversified portfolio of high quality (BB rated) high yield bonds and short duration IG Bonds.

Equities Overview:

The recent concerns over rise in 10 years treasury yields, have caused unease across global equity markets. We foresee higher inflation risks, as a result of the global economic recovery and the huge amount of US economic stimulus remain a serious concern amid a lack of major near-term macro catalysts (US$1.9trn of economic stimulus has materialised). Further spikes in treasury yields may exacerbate the weakness in the Equities market due to low likelihood of FED’s taking any near-term action as they have indicated in the past. Moving forward, we hope to see stabilization in the treasury yield growth. However, we expect the FED to let inflation run. Having said that the FED has sufficient tools (e.g. Red Hikes to contain inflationary risk should inflation exceed beyond their comfort zone).

Our strategy for this fortnight remains the same as we continue to remain cautiously bullish on Equities. However, we recommend investors to accumulate on existing or initiate new positions on significant pullbacks. We advise investors to stay invested in tech sub-sectors such as SaaS, e-Commerce, Cybersecurity, Cloud, and SG related themes amongst others across China and the US.

We recommend investors stay invested in blue chips in order to mitigate market volatility. In the near term, in the coming weeks if not days, investors should be wary of further sell off from potential margin calls from other large hedge funds like the one we have seen in recent days.

Broadly, we advise investors to closely monitor several key factors that could affect the direction of the market: i) margin calls from large global funds, ii) inflation expectations and outlook, iii) US-Sino relations globally could throw a wrench in the recovery of the global economy.

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.