“The US announced the possibility of fast-tracking an experimental COVID-19 vaccine – driving markets to a potential V-shape recovery. US-China tension eases with trade deal diplomacy, driving up Asian markets.”

“Trump administration considers fast-tracking experimental COVID-19 vaccine by AstraZeneca, driving S&P and NASDAQ close to new highs.”

The Trump administration is considering fast-tracking an experimental COVID-19 vaccine being developed by AstraZeneca Plc and Oxford University in hopes it could be deployed in the United States before the US elections in November.This could quicken the rate of which the economy recovers into the new normal of a post-COVID-19 world with pre-COVID-19 elements.

The four-day Republican national convention got under way on Monday, with the party making the case for Trump’s re-election.On Capitol Hill, Democrats and Republicans remained at loggerheads over funding levels and unemployment benefits.Market participants will pay close attention to U.S. Federal Reserve Chairman Jerome Powell’s remarks on monetary policy at this week’s Kansas City Fed Jackson Hole symposium, which is being held this year in a virtual format.The Dow Jones Industrial Average rose 378.13 points to 28,308.46, the S&P 500 gained 34.12 points, or 1.00%, to 3,431.28 and the Nasdaq Composite added 67.92 points, or 0.6%, to 11,379.72.Of the 11 major sectors in the S&P 500, all but healthcare ended the session in the black.

Ahead of its 4-to-1 share split on Friday, Apple Inc provided the biggest boost to the S&P 500 and the Nasdaq, its share price closing above $500 days after becoming the first public U.S. company to top $2 trillion in market value. The stock gained 1.2%.Boeing Co gave the Dow its biggest lift, rising 6.4%. This signals the sector rotation towards the laggard sectors such as autos, consumer discretionary, and travels which include airlines.

Further news on US-China tensions depict trade being a haven for the two international giants, leaving a way out of the trade war. Whilst conducting trade talks, tensions eased as both nations continue to use diplomacy during trade talks. In contrast to the retaliatory actions these nations have taken against each other.China’s commerce ministry confirmed that the two countries had a “constructive dialogue” and agreed to continue pushing forward the implementation of the Phase 1 trade deal made six months prior. This caused Asian stocks to take an uplifting turn as seen where the HSI recently bounced back up 126 points.

Overall, we recommend investors 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.

Fixed Income Overview:

There has been continued positive momentum and increasing signs of recovery in the fixed income environment, as more countries announce and prepare for the reopening of their economies. US 10-Year Treasuries yields rebounded to 0.66% as of 25 August from 0.58% as at 11 August and we expect it to remain between 0.25%-1% for the rest of 2020. At the same time, Federal Reserve announced that FED fund rates would maintain at current level (0% – 0.25%) till the end of 2022. The credit default swap (CDS) Index for the Asia ex-Japan Investment Grade entities has dropped from 73 as at 31 Jul to 65 as at 20 Aug. Credit spread has dropped by 8 bps, reflecting a more stable and positive outlook moving forward.

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 downgrades. For clients holding such bonds, we recommend reducing exposure and increasing diversification to other countries’ issuers. 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 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 and neutral on Developed Markets’ 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:

Our investment strategy for this fortnight will be recommending investors to enter the laggard sectors or to accelerate the build-up of exposure laggard sectors if one has not done so. As we head into year end, and if a vaccine is confirmed, we anticipate significant upside in selected laggard sectors such as autos, consumer discretionary, travel(incl. airlines).

One key observation over the past week or so is that investor focus has clearly redirected to the laggard sectors where investors are sector rotating into several laggard sectors while the technology sector sees continued profit taking after a strong out performance since the March lows. That said, we continue to recommend investors to maintain an overweight in the strongest of blue chip technology market leaders and trim the peripherals or secondary positions in the technology sector (incl. small-mid caps) while accelerating the pace of increasing exposure in the aforementioned laggard sectors as containment measures begin to gradually loosen globally. With respect to the laggard sectors, we are more inclined towards Chinese companies that have greater exposure to the domestic Chinese economy as we believe that the Chinese economy will recover faster from the COVID-19 situation than the US and other major economies. Nevertheless, we wish to note that we are also in favour of selected laggards listed in the US.

In addition, we anticipate that the current impasse in relation to the additional economic stimulus package in the US will likely be resolved and the additional stimulus package will eventually be passed in the near term as the US economy is clearly in need for additional stimulus. Against this positive stimulus backdrop alongside increased hopes of the confirmation of a vaccine in Q4, we anticipate that the corresponding potential upside in these laggard sectors, if materialise, will likely be significant.

As reiterated previously, the emphasis on stock selection is crucial now more than ever for the remainder of 2020. We recommend investors to stick to fundamentals rather than get swayed by headline news. 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.