MARKET REVIEW. Japanese stocks outperformed global peers over the quarter, but offset by Yen weakness, meaning our

Transcription

1

2 MARKET REVIEW Global equity markets continued to trudge upwards over the last quarter as economic data continued to firm up. In forex markets, the Euro gained as traders positioned for a more hawkish stance taken by central banks in the US and Europe. Fixed income markets also rose across the board. In contrast, oil prices experienced a peak to trough decline of 20% over the quarter, reflecting an oversupplied market despite initiatives taken by the OPEC cartel to limit oil production. Persistently low levels of the VIX commonly known as the fear gauge suggest that investors risk appetite remain high. That said, there were short bouts of market volatility driven by political risk; from Donald Trump s unpredictable policies, to escalating tensions around North Korea and Qatar. The MSCI World Index climbed to an all-time high in June. US equities lagged global peers, justifying our underweight. Valuations continue to hover at levels of the 2008 financial crisis. Encouraged by strong earnings, technology stocks continued to trend up. For instance, graphics chip giant Nvidia saw strong performance on the back of a robust global semiconductor market. But the sector has since seen a pull-back from its highs over the past few weeks. Healthcare and biotech stocks continued with their strong showing from the previous quarter, when we noted that concerns from policy action have abated. Consistent with this view, the US FDA (Food and Drug Administration) has continued to approve a slew of drugs for sale. One of biotech s star contributors, Regeneron Pharmaceuticals, received regulatory approval to market the Dupixent drug for treating dermatitis. FDA approvals are typically positive catalysts for a firm s product range and earnings. The US financial sector deserves a mention, as all but one of the largest banks passed an important stress test in their ability to withstand unexpected economic shocks. In general, financial institutions tend to benefit from an increasing rate environment. This has not played out so far as the yield curve has been flattening. Japanese stocks outperformed global peers over the quarter, but offset by Yen weakness, meaning our currency-hedged exposures did well. Softbank again contributed to market gains as it continued its string of global acquisitions by buying US robotics firm Boston Dynamics and Japanese bipedal robotics company Schaft. Emerging markets led global markets in USD terms, driven by Asia. Top country gainers include China, Korea, and Taiwan; while information technology, real estate and consumers were the leading sectors. Technology was the key theme over the quarter. In China, Alibaba and Tencent Holdings benefitted from their rapidly growing e-commerce and mobile services, and foray into global markets. Alibaba recently increased its stake in the popular Southeast Asia e- commerce company, Lazada, to more than 80 percent. Companies in Korea (Samsung and LG) and Taiwan (Foxconn Technology and Taiwan Semiconductor Manufacturing) saw outsized gains. A common driver is the strong demand for servers and data centres which are essential for businesses involved in cloud computing, data mining or artificial intelligence. Within emerging markets, Russia, Brazil and South Africa detracted; driven by the current softness in commodities. Political risk has also been a concern; such as deteriorating US-Russia relations, and the possible impeachment of Brazil s president. European equities were largely flat over the second quarter despite a more positive economic environment. There was encouraging data from the manufacturing sector as measured by the Purchasing Manager s Index. The French elections did not go the way of Brexit which brought relief to pro-eu supporters, and benefitted equities the French market contributed to almost half of European equity gains. These factors, along with the ECB reducing QE, contributed to gains in the euro. The financial and industrial sectors contributed meaningfully to European market return. Lufthansa and Easyjet both gained about 30%, leading airline stocks, and outperforming their US peer group. Lufthansa s stock has been on a solid uptrend since reaching an agreement with their pilots on wages and pensions last quarter. On the flip side, the energy sector lagged as a

3 result of falling oil prices. Oil behemoths Total, BP, and Royal Dutch Shell, all faced similar downward pressure on their stocks. In the fixed income space, ten-year US treasury yields settled down to 2.3% at the end of the quarter. There was a flattening of the yield curve, which is useful for understanding the market s expectations of the economy going forward. In this case, there has been increasing concerns about the US s longer-term growth prospects. Markets have signalled moderation in the pace of rate hikes, with the next one potentially deferred to March High-yield bonds continued to see gains driven by spread tightening. The high yield segment also did well relative to other riskier bonds such as Asia and Emerging markets, benefitting our positioning. High yield investors benefit as economic conditions improve, lowering default risk. All sectors gained except energy, reflecting its current malaise. Spreads tightened considerably in financials and across its sub-industries. Healthcare also contributed as Valeant bonds rallied. and spread tightening. Bonds issued by the Vietnam and Pakistan governments performed in the top of their comparable group, with gains of about 4%. Emerging market debt was up with spread compression across most markets. Notable exceptions were commodity-related Oman, Brazil, and Russia. Despite weak dynamics, Russia managed to place three billion USD of state-backed long term debt with oversubscription ratio of 2 times, reflecting strong risk appetite. Energy continued to weigh on commodities markets. Oil markets entered correction territory as investors lost confidence in the ability by producers to limit production and support prices. One reason for this pessimism is the rapidly increasing supply from US shale oil producers, who increased output to the highest levels since May US producers are not part of the OPEC deal to limit production. The rally in base metals came to a halt, consolidating over the quarter with mixed signals on Chinese real estate demand and supply-side reforms. Asian bond market gains had even contribution from the three sources of returns: carry, shift of the yield curve

4 OUTLOOK AND ASSET ALLOCATION STRATEGY GLOBAL ASSETS Global Assets -- - = + ++ Equity Fixed Income Note: --: Underweight -: Slight Underweight =: Neutral +: Slight Overweight ++: Overweight Equity: Neutral Global equity markets have latched onto synchronized EPS growth. With valuations rich in major markets, incremental returns should be driven by earnings rather than further P/E upgrades. To complement a hawkish position in fixed income, we currently run a growth oriented exposure in equities. Cross-market correlations have reduced, allowing for more effective regional selection. Favour regions that benefit from economic growth and where expectations are less priced-in. Fixed Income: Neutral As global economies continue to recover, a meaningful development is the ECB taking steps to catch up with the Fed on exiting QE. Such concerted efforts are starting to embolden bond bears; look forward to more episodes of taper tantrum. Markets are skittish; bonds holders are playing their version of picking up pennies in front of a steam roller. To mitigate this, we run reduced duration exposures in the portfolio. A barbell strategy provides exposure to safe haven government bonds while getting favorable risk/reward in the current environment from high yield and emerging markets. Focus on investments where return from coupon and spread tightening offset the effects of rising yields.

5 EQUITY Global Assets -- - = + ++ U.S. Europe Japan Asia Pacific ex Japan Emerging Markets Note: --: Underweight -: Slight Underweight =: Neutral +: Slight Overweight ++: Overweight United States: Underweight Earnings momentum is picking up in both large and small cap stocks. Small caps benefit more amid modest GDP growth with rising rates, which is the environment we are in now. What could derail this is sub-par GDP of less than 2%, typical of recessions or market crisis, which the current economy is not facing. Market valuations are on the high end. Within this, valuation for small caps relative to large caps are below the long-term average. OW small cap growth. US reflation could turn out to be long drawn process as infrastructure spend needs to follow the fiscal policies. Hence we prefer growth for its exposure to secular growth driven by technology. Europe: Neutral Corporate earnings continue to trend up. However, consensus estimates are assuming over 50% growth and decline in cash flows. Valuations are near post-recovery highs, which need to be supported by continued growth. The upward momentum which benefited our overweight stance has tailed off recently, and more notably across numerous markets. Equity-currency correlation has been volatile; positive when driven by political risk (typically in down markets) otherwise negative in normalized environments. Markets starting to price in higher yields from early 2017, together with unknown political risk and normalizing markets, indicate better risk-reward from hedging. Neutral as markets are at an inflection point, reducing visibility compared to earlier in the year. Japan: Neutral The BOJ s permissive monetary policy looks to continue to be stimulative for equity markets. Japanese markets stand out in that near term growth estimates are more aligned with the long term, compared to other regions that are projecting higher growth rates. Inflation remains doggedly low, mirroring trends for the last 30 years. Nevertheless, some change is happening in corporate Japan. Yamato Transport, well known for their corporate logo, decided to raise its delivery prices for the first time in 27 years. Should this represent an inflection point for inflation trends, conventional precepts to Japanese markets will need to be revisited. Valuation ratios are near the longer term average. Market sentiment is still tied to currency; equities tumbled in April as the yen rose on regional tensions. Maintain currency-hedged exposures but remain vigilant for changes to correlation between currency and equities. Asia Pacific ex Japan: Slight Overweight Asian exports have experienced a cyclical upturn, led by technology. With higher rates of technology adoption and data usage, semiconductor production has experienced a cyclical upturn. With Asian firms dominating in global market, Asia s role as factory of the world seems to be evolving as it looks to be the world s tech foundry. The RMB weakening trend has essentially tailed off with policy makers seeking a balance between currency stability and export competitiveness. With Hong Kong also reiterating its USD peg, it looks like currency stability is the preferred strategy to address concerns on RMB-asset depreciation. Valuation is just above the long-term average, with room to rise. Chinese market (H-shares) valuations have been rising from decade-lows. Asia has established positive momentum relative to other regions. Emerging Markets: Slight Overweight Brazil and Russia s recovery from recession are gaining traction as both economies are showing positive growth trajectory. EPS continues to improve after years of decline from Absolute and relative valuations are near the long-term average and supported by EPS growth. Net inflows to EM funds from the beginning of the year have contributed to the gains this year. Inflows have moderated recently and we are monitoring if flows will deteriorate, leading to a change in positioning.

6 FIXED INCOME Fixed Income -- - = + ++ Sovereign Investment Grade High Yield High Yield: Slight Overweight The high yield market s downside sensitivity to oil has diminished based on recent price resilience. This can be attributed to improved cost structures and share of higherquality issuers. Spreads are consolidating after tightening over the past two years. Flows to high yield funds continue to rise. Short duration high yield offers more room for spread tightening and mitigates the impact from widening of spreads. Asia Emerging Market Debt Note: --: Underweight -: Slight Underweight =: Neutral +: Slight Overweight ++: Overweight Sovereign: Slight Underweight Europe seems ready to ease off QE with diminished political risk and growth strengthening. With the Fed and ECB taking on a more hawkish tone, bonds yields are more sensitive on the upside as evidenced by the selloff across bond markets in June on comments from the ECB president. European bonds have been trading in a volatile range for the past year. Despite European sovereign yields rising from late 2016, further tightening does not seem priced in. High employment and fiscal stimulus should keep the Fed hiking. Markets also seem to be underestimating the Fed s willingness to hike, reflecting some mispricing from current monetary policy trajectory. Investment Grade: Slight Underweight Corporate net leverage is at average levels, though interest coverage is declining from a peak. Corporate bond valuations have become rich as investment grade-constrained investors buy them in the quest for yield relative to government bonds. Foreign demand for US credits has slowed in recent months. UW investment grade bonds as the risk/reward for corporate bonds is skewed to the downside as incremental yield over sovereign bonds is insufficient to compensate the downside risk in a tail event. Asia: Neutral Asian credits offer higher yield pickup and have more room for spread tightening compared to DM corporate bonds. Both segments are expected to have similar downside in global credit event or rise in yields. A risk is capital flight from Asian credit markets but this has been mitigated with increased structural demand from Asian investors to help underpin Asian credit markets. Spreads have been consolidating with lack of direction, which contains further enthusiasm for the segment. Emerging Market Debt: Slight Overweight EM recovery is bolstered with Brazil industrial production surprising on the upside. With benign inflation, the Brazilian central bank should not be making changes to interest rates. Spreads have been consolidating with lack of direction but offer more room to tighten compared to other bond markets. Global recovery and low market volatility have been supportive for inflows. Recent flows have turned negative but are contained, while issuance has been healthy. Emerging market bonds have also been showing resilience during the recent bond sell-off.

7 RETURNS AS AT 30 JUNE 2017 Regional Equity QTD YTD Global 3.6% 10.3% US 2.6% 8.2% Europe -0.5% 5.0% Japan 5.9% 4.8% Asia Pacific ex-japan 5.3% 18.3% Emerging Markets 5.5% 17.2% Fixed Income QTD YTD Global Investment Grade 2.6% 4.4% High Yield 2.2% 4.7% Asia 1.1% 3.4% Emerging Market Debt 1.8% 5.1% Commodity QTD YTD Gold -0.6% 7.7% WTI Crude -9.0% -14.3% Source: Bloomberg All returns in index currency terms Country QTD YTD Australia -2.4% 1.0% Brazil -3.2% 4.4% China A 6.1% 10.8% China H 0.9% 10.3% Hong Kong 6.9% 17.1% India 4.4% 16.1% Indonesia 4.7% 10.1% Korea 10.7% 18.0% Malaysia 1.4% 7.4% Russia -5.8% -15.8% Singapore 1.6% 12.0% Taiwan 5.9% 12.3% Thailand 0.0% 2.1% Sector QTD YTD Gold equity -3.0% 5.3% Energy equity -7.0% -13.8% Technology 4.6% 17.1% Healthcare equity 6.6% 14.9% Financial equity 3.8% 6.0% Currencies QTD YTD USD/SGD -1.5% -4.9% EUR/SGD 5.7% 3.3% JPY/SGD -2.4% -1.0%

8 Important Notice & Disclaimers This publication shall not be copied, or relied upon by any person for whatever purpose. The information herein is given on a general basis without obligation and is strictly for information only. This publication is not an offer, solicitation, recommendation or advice to buy or sell any investment product, including any collective investment schemes or shares of companies mentioned within. Although every reasonable care has been taken to ensure the accuracy and objectivity of the information contained in this publication, finexis advisory Pte Ltd and its employees cannot be held liable for any errors, inaccuracies and/or omissions, howsoever caused, or for any decision or action taken based on views expressed or information in this publication. The information contained in this publication, including any data, projections and underlying assumptions are based upon certain econometric assumptions, forecasts and analysis of information available as at the date of this document and reflects prevailing conditions and our views as of the date of the document, all of which are accordingly subject to change at any time without notice. finexis advisory Pte Ltd does not warrant the accuracy, adequacy, timeliness or completeness of the information herein for any particular purpose, and expressly disclaims liability for any errors, inaccuracies or omissions. Any opinions, projections and other forward-looking statements regarding future events or performance of, including but not limited to, countries, markets or companies are not necessarily indicative of, and may differ from actual events or results. Nothing in this publication constitutes accounting, legal, regulatory, tax or other advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person. You may wish to seek advice from a professional or an independent financial adviser about the issues discussed herein or before investing in any investment or insurance product. Should you choose not to seek such advice, you should consider whether the investment or insurance product in question is suitable for you.