Although 2020 proved to be one of the most challenging years in modern history, equity and bond markets did well. Looking into the new year, we see continued opportunities in financial markets as the macro outlook appears supportive of risk-assets. While risks and volatility will remain, the outlook has improved with the US election out of the way, and given positive developments on the vaccine front. The market is braced for possibly more fiscal and monetary stimulus. which should boost risk appetite.

Yet, there is still much uncertainty as to how the new world order will look like, considering the changes the virus has wrought on the global landscape. Increasingly though, the focus of global economic growth is expected to be centred on China, the only major economy that is expected to show a positive growth despite the year that has been.

Furthermore, China has taken steps to enhance its economic standing after a bruising trade war with the United States. At its last Politburo meeting, China stated that it will accelerate the establishment of a dual-circulation development pattern, with domestic demand as the main driver, even as it continues to purse trade alliances. This development strategy is not new – the idea of rebalancing the economy from an export and investment-driven one to a more domestic focused one has been an ongoing government objective to raise domestic consumption but it is especially significant in recent years after the US-China trade tensions. With this focus on domestic consumption and a growing middle class, the following names are expected to benefit.

Xiaomi Corp is heavily vested in the smartphone arena, but also produces mobile apps and a huge variety of products for a global market. Xiaomi’s recent 3Q 2020 results came in above expectations and its management remains optimistic on the growth trend of smartphones, which accounts for about 66% of the firm’s revenue, especially in areas such as Europe, Latin America and India. Also, given that Huawei, one of its major rivals, is facing worsening chip access due to US-China tensions, Xiaomi is well positioned to take advantage of China’s 5G boom and Huawei’s woes to increase its market share further.

Ping An Insurance is China’s second largest life and property & casualty insurer, with an integrated financial services platform. One major positive development during the pandemic was the acceleration of digitalisation initiatives within the industry. Among listed insurers, Ping An has been a pioneer in this respect and even adopted artificial intelligence interviews for agency recruitment, which enabled the group to access a larger pool of candidates while maintaining similar efficiency levels. Another success was its online ecosystem (ie, Ping An Good Doctor), which saw an estimated 27% growth in tele-consultations during the pandemic.

Bond

Huarong Finance Co Ltd 3.375% 24 Feb 2030 (USD)

Huarong Finance is wholly owned by China Huarong International Holdings Ltd (Huarong International), which in turn is wholly owned by China Huarong Asset Management Co Ltd (China Huarong). Established in 1999, China Huarong is one of four major asset management companies (AMC) that is licensed by China’s State Council to manage distressed assets nationally. These AMCs are seen as strategically important in managing the banking sector’s non-performing loans, thereby maintaining stability in the banking system.

Slightly more than 60% of China Huarong is directly held by China’s Ministry of Finance. Other state-owned shareholders include National Council for Social Security Fund, China Life Insurance (Group) Company and Central Huijin Investment.

Distressed asset management remains a core business, where income from distressed asset management contributed about 62% of revenue during 1H2020.

Key downside risks for the bond include the group being unable to improve profitability from the FY2019 results; unable to reduce previously aggressive risk appetite and a high governance risk. The uncertainty over keepwell legal structures is also another potential factor.

China Huarong has granted a keepwell deed, and a deed of equity interest purchase, investment and liquidity support to ensure its subsidiary — Huarong International — has sufficient assets and liquidity to meet its financial obligations. While the weakness in keepwell structures continue to be clarified in the Chinese courts from previous cases, the strong reputation of China Huarong as a strategically important state-owned enterprise does mitigate the risk somewhat. The potential government support to China Huarong is an important credit factor in our view.

Mixed-Asset Funds

Amundi-OCBC Momentum Fund

The fund is a multi-asset fund invested into both bonds and equities. Its bond allocation comprises a basket of globally diversified bonds with an average investment grade of at least ‘BBB-‘ which potentially lowers the volatility of the overall portfolio. However, do note that the fixed income allocation allows up to a maximum of 25% into non-investment grade bonds. The equity component is invested into a basket of global equity ETFs and this component provides the portfolio with the potential for capital appreciation. In addition, the fund potentially distributes quarterly pay outs of up to 3% per annum. It also has an auto termination feature where the fund will automatically terminate when the total return for each share class reaches 30% of the initial offer price.

BlackRock ESG Multi Asset Fund

The fund follows an asset allocation policy that seeks to maximise total return in a manner consistent with the principles of environmental, social and governance “ESG”-focussed investing. Within this framework, the fund aims to reduce risk through the exclusion of 9 controversial sectors and UN Global Compact violators, build portfolio resilience by investing only in firms with an ESG rating of BBB and above as well as focus on thematic investment opportunities that drive positive societal change. The fund also aims to pay a potential distribution of 3% – 3.5% per annum on a monthly basis.

Bond Funds

BlackRock China Bond Fund

This fund provides clients with an opportunity to participate in the growth of China’s economy through the fixed income space where it can dynamically allocate across both the China onshore and offshore bond markets. Given the current yield levels for Chinese bonds, the fund potentially offers an attractive level of potential income of approximately 6% per annum (non-guaranteed) while maintaining a relatively low level of volatility (5 year realised volatility of approximately 2.6% as of end September 2020). The fund also offers diversification benefits to clients given its low level of correlation to typical asset classes.

Fidelity Enhanced Reserve Fund

The fund is focused on providing an attractive level of risk adjusted total return from a portfolio of debt securities, mostly from issuers whose principal businesses are in the Asia Pacific region. The types of instruments the fund can invest in include money market funds, investment grade, high yield bonds and collective investment schemes. The key attributes of the fund are stability (with a target volatility of around 1% per annum), an attractive income stream with pay outs on a monthly basis and enhanced liquidity with a relatively faster settlement period.

PIMCO GIS Asia High Yield Bond Fund

The fund is an actively managed fund that invests primarily in Asian high yield bonds. It seeks to maximise total return through investments in Dollar-denominated Asian high yield credit while delivering relatively high income. It is diversified broadly across industries, issuers and countries in Asia on the basis of PIMCO’s top-down and bottom-up processes. Its value proposition lies in its exposure to the rapidly growing Asian dollar high yield market and the attractive risk-adjusted returns compared to other asset classes.

JPMorgan Income Fund

The fund invests in a broad range of debt securities and uses an unconstrained approach to find the best investment ideas across multiple fixed income sectors. Its investment process focuses on analysing fundamental, quantitative and technical factors with the aim of generating consistent monthly income distribution for investors. Geographically, the fund is currently heavily weighted towards North America with developed Europe being the second largest exposure.

Equity Funds

JPMorgan A-Share Opportunities Fund

This fund aims to provide long term capital growth by investing primarily in companies from China. The fund adopts a “Best Ideas” approach to invest in a portfolio of China equities that the investment team believes provides high growth and quality potential. It leverages off the increased opening up of Chinese financial markets where inclusion in the MSCI index potentially leads to positive multi-year fund flows into the market. With a dedicated Greater China team of investment professionals, JPMorgan believes that this extensive local research footprint will enable them to identify high-conviction ideas in new growth sectors in China, such as consumption, technology and healthcare.

Currencies

We expect antipodeans to benefit most from US Dollar (USD) weakness. Global risk cues and firmer commodity prices, together with re-rating of expectations from the Reserve Bank of New Zealand, should augur well for the Australian and New Zealand currencies.

The Euro should also continue to surpass resistance levels against the US Dollar in a largely USD-driven move. Note, however, that the macro picture in Europe is still largely anaemic and it may be difficult to justify a significantly firmer Euro.

The USD-Japanese yen cross may however stay largely range-bound, as USD weakness is offset by risk sentiment.

In Asia, we continue to back Renminbi (RMB) strength. The resilient RMB should continue to help other Asian currencies to strengthen too. In addition, a better growth outlook has also allowed portfolio inflows to return to Emerging Asia, providing further support for the local currencies. These positives are set against increasingly edgy central banks, who are concerned about its negative impact on exports. This should slow down the appreciation of Asian currencies, without necessarily denting its overall trajectory.

For the Singapore Dollar (SGD), we expect it to be held within a narrow range on a basket basis. This, however, implies that there will be downward pressure on the USD/SGD amid persistent USD weakness.