31/12/19 (2019 Year in review)
As we approach the end of the year, we share with readers a review the calls and performance made since the start of the year for our annual end of year review, along side our new partnership with various financial websites.
We think the main trading themes in 2019 are split between the US-China Trade War and US Federal Reserve Policy, and we will review our EOY 2018 view and current 2020 stance accordingly.
US-China Trade War
Having always held the view that the US-China Trade War is a political tool used to stop China from becoming the World No.1 Powerhouse by 2025, we remain firm that there will be no immediate resolution to the US-China Trade War, while looking at the phrase 1 trade deal as one of another usual trade war truce which have occurred various times in the past 1.5 years. We reckon that the improved sentiment over the phrase 1 trade truce would not be sufficient to give any major boost to both the US and China economic data, which have remained weak in H2 2019.
With the upcoming US 2020 Presidential Elections, we do not expect further improvement to the Trade War situation, given that the US would not want to lift tariffs in an effort to continue suppressing China as we have made on our point above.
We expect further weakening of the Chinese economic data, while continued efforts to boost the economy via IPR cuts can be expected from the PBOC followed by increasing the pace of already planned 2020 fiscal expansions via the Central Government. We are expecting a total of 45bps cut in the IPR for 2020.
US Federal Reserve policies
We think the US Federal Reserve policies have been the main driver to how global markets have performed in 2019.
Our EOY 2018 prediction of two 25bps rate cuts by the Federal Reserve which have been deemed outrageous by market participants then when most were expecting three 2019 rate hikes was now deemed conservative as the Fed went all into a total of 75bps cut this year, followed by a resumption of balance sheet expansion via overnight repos at a pace which is double that of QE3 from 2012-2014.
We had underestimated the resolve of the Federal Reserve in 2019 to ensure no major corrections to global equities, which resulted in a YTD rise of 30% for the S&P500, which went against our view of continued weakness in equity markets for 2019. We remain short the S&P500 going into 2020 expecting higher volatility in the markets, while hedging indices upside risk via being short the dollar through precious metals and commodities.
We saw the opportunity to hedge the short indices portfolio in May 2019 after noticing performance differential between the 2Y US Treasury and Precious Metals when we took on long positions in both Gold and Silver, which managed to bag in gains of 20% and 24% respectively.
We remain constructive on being long both Gold and Silver in the current macro environment, with end of year 2020 targets of $1800 and $25, as we noted the increasing positive correlation between US Yields and stronger precious metals prices which led us to think that both Gold and Silver is well setup to rally in both a risk on or risk off environment in 2020 due to the possibility of higher US inflation as showed by BIS data for increasing inflation trend since August 2019 for CPI All-Items 12 months percentage change.
This above 2020 pick up in US inflation view supports our long Brent Oil position established in September 2019 in the wake of the Saudi Aramco attacks, having went long front month Brent Oil contract at $63 per barrel, and currently have the trade up 10% or $7 per barrel taking into account two months of front month – next backwardation lending. We remain constructive on being long Brent crude oil as part of an inflation hedge and also taking on a view that Saudi would not be able to control oil markets prices to the downside given the draw down in ready inventory and reduced capabilities to expand oil refining due to the attacks in September.
We view that the continued overnight repo operations by the Fed will likely result in overwhelming liquidity in the markets which could have an impact to overall headline inflation figure, and thus put on a call for one 25bps rate hike in 2020, away from the general consensus of one 25bps cut according to fed funds futures.
We continued to take on a short US Dollar view even on the prospects of one rate hike in 2020, as we deem the rate hike is likely possible due to heighten inflation number by Mid 2020 which will likely cause the US dollar to weaken against G7 currencies by at least 7%.
Equities 2020 outlook
We expect higher levels of volatility as compared to 2019 and for major indices to move at least 30% from current benchmark prices.
a. We are constructive on the following themes and sectors, these are not ranked in order. The ideas provided here are deliberately not nuanced as we want this to serve as a platform for deeper research.
In due course, we will have initiations based on our expectations of future share performance.
SOE H-shares trading at a substantial discount to A-shares
Mean reversion for Companies impacted by demonstrations in Hong Kong
Asia ex Japan non-discretionary consumer spending
Asia ex Japan large conglomerates trading at substantial discount, specifically with under-performing segments that are poised to turnaround
Companies with opportunity for delisting, especially via leveraged buyouts or to consolidate control
Singapore construction sector
Singapore hotel and tourism sector
b. We are bearish on the following:
Highly geared, high risk industries with high percentage of refinancing due
Highly geared, negative operating cash flow with high percentage of refinancing due and inability to carry out equity fund raising without substantial discounts to valuations and VWAP.
Cyclical industries past its peak growth, past its peak revenue price points, and further at risk as a consequence of policy changes.
Companies that have gone through significant valuation re-rating, leading to compression of yields
Companies at significant risk of major policy changes typical of a late stage economic cycle or due to the economy in which its major operations are located.
We are cognisant of the fact that lofty valuations can become loftier and intend to look for opportunities where valuations are theoretically unable to support even blue sky growth forecasts
c. In addition to our short initiations, We have 7 specific long initiations of which 5 have already been published either on our site or on our partner's.
Stay tune to read the unpublished ones on our partner's site.
1. Overseas Education Limited
2. Genting Singapore
3. Keppel Corporation
4. Perennial Real Estate Holdings Limited
5. Thai Beverage
6. Yoma Strategic (unpublished)
7. Dairy Farm International (unpublished)
Do note that the share price may have already moved significantly and may not provide a balanced risk/return reward at this juncture. The time frame and target price are typically stated for each initiation we make. Where positions are not disclosed, the underlying assumption to be made is that we either already have a position or plan to initiate a position.
Any content should not be relied upon as advice or construed as providing recommendations of any kind.