Cachet's Insight 01/06/2020

Market Outlook

As of 28 May, JACI Total return index delivered +0.08% last week. Primary market remains active last week and was led by IG issues.

China approved the plan to impose new national security laws on Hong Kong last week. The US announced earlier it could no longer certify Hong Kong's autonomy from China and is said to be considering a range of sanctions on China for its crackdown on Hong Kong.

Investor sentiment was mixed last week as more economies reopen globally but US-China tensions continued to worsen, and economic data stays weak. While there are some signs of easing in the COVID-19 outbreak, second waves are emerging in several cities and cases reported worldwide now exceed 5.7 million. 10Y UST yields widened 2 bps to 0.69% as of 28 May close. Keeping a close watch on developments of the coronavirus spread and oil price collapse, and their impact on market liquidity and issuer fundamentals. Investors should look out for attractive opportunities upon recent spread widening and may selectively add risk

More fiscal and monetary support was announced this week from countries such as Japan, India, Singapore and Korea. Japan approved a second stimulus package worth USD 1.1 trillion to fight the impact from the pandemic, with the main focus to protect businesses and employment. Bank of Korea lowered its policy base rate by 25 bp to a record low of 0.5%. Investors should closely monitor geopolitical events especially Saudi-Russia oil price war, US-China trade progress and Middle east tensions as global geopolitics remain volatile. Investors may participate selectively as new issuance begins to pick up in the IG space.

On economic data, China's industrial profits fell 27.4% yoy in April, though the decline was slower compared to the 36.7% fall in the first 3 months. Germany has officially entered recession with 1Q GDP growth at -2.2%, and Singapore also lowered its 2020 GDP projections to contract between 4-7%. Investors should reduce China exposure on heightened US-China tensions.

S&P 500 futures kicked off June by tumbling as much as 1.1%, raising concern that May’s ebullience will give way to pessimism this month. The U.S. violence is shuttering businesses that are already suffering from the lockdowns. U.S.-China tensions pose a particular risk for Hong Kong shares and possibly American companies in the territory. Investors may also be suffering from a case of sticker shock after the S&P 500 climbed 13% in April and 4.5% in May –- amid a huge global recession.

Hong Kong Exchanges (0388.HK) approved the secondary listing applications by the U.S.-listed Chinese tech companies, according to people familiar with the matter, asking not to be identified discussing private matters. NetEase(NTES.US) plans to list in Hong Kong on June 11, while China’s No. 2 online retailer JD(JD.US) aims to debut on June 18, Bloomberg News has reported. JD’s stock sale could raise at least $2 billion to help the e-commerce firm shore up its position in an increasingly competitive home market. Representatives for Hong Kong Exchange(0388.HK), JD(JD.US) and NetEase(NTES) declined to comment.

Hot Topic

China's manufacturing purchasing managers' index (PMI) for May stood at 50.6, lower than analysts' expectation of 51, but reflects the economic recovery amid continuous efforts to prevent a second wave of imported COVID-19 infections.

According to data from the National Bureau of Statistics (NBS), the country's manufacturing PMI slid 0.2 percentage points month-on-month in May but has been in the expansion territory for three straight months since the COVID-19 outbreak.

Zhao Qinghe, a senior statistician with the NBS, noted that 81.2 percent of the companies polled have resumed more than 80 percent of manufacturing and their operations continue to see improvement.

According to the survey, the manufacturing indexes of 14 industries including food, petroleum processing and auto manufacturing remain in the expansion territory, while textiles, the apparel industry and wood processing have seen a contraction.

Tian Yun, a vice director of the Beijing Economic Operation Association, told the Global Times on Sunday that flappy overseas demand amid the global pandemic partially dragged down China's export sector even though economic activities in Europe have start to recover.

The manufacturing sector's new export order index remained at low level of 35.3 percent in May, slightly up 1.8 percentage points from April, according to the NBS.

China's non-manufacturing PMI expanded to 53.6 in May, up 0.4 percentage points from the previous month, said the NBS.

The country's consumption sector continues to recover, along with the implementation of measures to spur residents' consumption. However, the index covering culture, sports and entertainment remained low at 44.5 percent in May.

The performance of the manufacturing and non-manufacturing sectors indicated that the country's economy may turn to positive growth in June, Tian predicted, noting that China's GDP growth may still slightly shrink year-on-year in the second quarter.

"Chinese economic growth will continue to drive the global economy, as the economy has stayed unchanged and will remain sound in the long run," he said.

Hot Stocks

Pizza takeout and delivery has experienced a windfall from lockdowns and its publicly traded chains are set to outperform the U.S. restaurant industry this year. Back in April, Consensus Metrix predicted that quick-service and fast-casual restaurants led by Domino’s (DPZ.US), Papa John’s (PZZA.US) and Wingstop (WING.US) would lead the industry’s recovery starting in the fourth quarter. It may be starting to happen already.

Domino’s Pizza and Papa John’s are the two best-performing stocks this year on the S&P Super composite Restaurants Index after Wingstop (WING.US). This week, Domino’s said U.S. comparable store sales surged 21% over the past four weeks, though it is unsure how long the trend will continue. North American preliminary comp sales for Papa John’s (PZZA.US) rose almost 34% from April 27 through May 24, and the company said, “as states and communities slowly reopen, we continue to show strong performance.”

Both chains added thousands of jobs, and their strengthened delivery and carryout networks can help grab share from weaker independents. Northcoast upgraded both Domino’s (DPZ.US) and Papa John’s (PZZA.US) because they will benefit from “last man standing” status as competing pizzerias and restaurants close and more people order in. Both are gaining momentum against the larger restaurant index.

Pizza sales will inevitably slow as lockdowns ease and restaurants reopen. But the trend may not completely abate as social distancing limits restaurant capacity and consumers remain hesitant to go to crowded places. Deliveries and contactless transactions make it an easy dining option. Plus, with consumer spending down a record amount in April, pizza is arguably an affordable luxury. Deliveries could provide a gauge of virus sentiment.

Domino’s (DPZ.US)

Papa John’s (PZZA.US)

Investment Ideas


  • Given the historically low interest rate environment, cash deposits provide low interest rates across currency

  • One way to enhance the yield on your deposits would be investing a in dual currency investment (DCI) with yields upward of 7% p.a.

  • In the worst case, you would be purchasing paper gold at a discount to current levels

  • Target price: We are constructive on gold and forecasts XAUUSD to be at 1800 over the next 12 Months

  • Uncertainties surrounding the reopening of economies opening back up should continue to prop up gold and the precious-metals space, making bullion an effective diversifier for a multi-asset portfolio,

  • Lower for longer rate outlook should be supportive to gold prices as they rates have been showing a strong negative correlation to gold prices recently

Investment Rationale

  • A DCI is suitable for investors who take the view that the predetermined conversion rate for the Currency Pair is favourable and who can accept the conversion of the Investment Amount, Interest Amount or both into the Alternate Currency.

How Does It Work?

  • In a DCI, the investor places an Investment Amount (investment currency) for a specified tenure and at the same time sells an option with a pre-determined Strike Level and tenure.

  • The investor will receive a pre-agreed enhanced yield which is based on an agreed Interest Rate at the time of the commencement of the investment.

  • The observation of the spot level of the Currency Pair will take place on a pre-determined expiry Date.

Repayment Amount

  • On expiry date, if Spot Rate is above Strike Level, investor will receive back both Investment Amount plus Interest Amount in the Investment Currency on Investment End Date, or

  • expiry date, if Spot Rate is at or below Strike Level, investor will receive both Investment Amount plus Interest Amount in the Alternate Currency (converted at the Strike Level) on Investment End Date.

What is the maximum loss?

  • When the DCI is exercised, the investment notional with the interest will be converted into alternate currency at the pre-determined strike and incur an unrealized loss. This loss will be realized IF the investor chooses to convert the investment notional plus interest from alternate currency back into investment currency at market.


  • Currency Pair: XAU/USD

  • Investment Currency: USD

  • Alternate Currency: XAU

  • Zone Cut: AM/MANG

  • Spot ref: 1714.29

*Please noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.


Asset Allocation

Asia Bond Market

Asian dollar-bond sales soared to about $12 billion from $3.5 billion last week, bolstered by a $6 billion offering from tech giant Tencent Holdings, and the Asia dollar-bond sale tally for May stands at $24.5 billion so far, a record compared with previous years, according to Bloomberg-compiled data. Spreads on Asia dollar bonds were about 2-5bp wider in secondary trading on Friday morning, according to a trader, as investors were concerned that U.S.-China tensions could escalate further. Two borrowers: Sichuan Languang Development and Xiangtan Urban & Rural Construction -- were marketing dollar bonds to investors last Friday. In the China high-yield market, Fantasia sold a $300 million bond last week.

S&P expects Chinese keepwell bond market to continue to shrink in next several years, noting supply could fall if Peking University Founder Group’s debt carrying the credit protection mechanism is rejected by its bankruptcy administrator. Share of issuance with keepwell provisions in total Chinese offshore dollar bond sales fell to less than 7% last year from 14% in 2017, after Chinese authorities relaxed rules on companies’ use of offshore bond proceeds, according to a report by the rating firm The case of Peking University Founder Group “highlights both the structural-subordination and regulatory risks” for offshore bonds with keepwell deeds, EIPU (equity interest purchase undertaking) and similar provisions: S&P If Founder Group’s administrator decides against claims on co.’s keepwell bonds, higher risk premium may be demanded to price in structural subordination in addition to expected default risk Higher funding costs could reduce supply of keepwell bonds Such a development may lead more transparent bond structures, such as direct issuances or guaranteed bonds, to become the standard S&P doesn’t rate the co. or its offshore subsidiaries

Tencent Holdings Limited (0700.HK)

  • Issuer rating: A1 / A + / A + (Moody's / S & P / Fitch), outlook is stable

  • Expected issue rating: A1 / A + / A + (Moody's / S & P / Fitch)

  • Status: USD Priority Unsecured Notes

  • Format: Rule 144A / Reg S (issued under the existing global medium-term note plan)

  • Scale: USD benchmark

  • Settlement date: June 3, 2020 (T + 5)

  • Term: Fixed interest over 5 years (January 2026) | 10-year fixed interest | 30-year fixed interest | 40-year fixed interest

  • Preliminary price guidance: CT5 + 175 basis points area | CT10 + basis point areas | OLB + 220 basis point areas | OLB + 240 basis point areas

  • Use of proceeds: refinancing and general corporate use

  • Terms: Listing on the Hong Kong Stock Exchange; USD 200,000 / USD 1,000 denomination; English law

  • Joint Global Coordinating Bank: Bank of America Securities (B & D), HSBC, Morgan Stanley, Goldman Sachs (Asia)

  • Joint bookkeeping bank / joint lead bank: Bank of China (Hong Kong), Mizuho Securities, Barclays, Credit Suisse, Deutsche Bank, Industrial and Commercial Asia, JP Morgan, SPDB

Fantasia Holdings Group Limited (1777.HK)

  • Subsidiary Guarantors: Certain non-Chinese subsidiaries of the issuer

  • Guaranty: Pledge of shares of certain subsidiary guarantors

  • Format: Reg S only, registration form, category 1

  • Variety: Fixed-rate priority notes

  • Issuer rating: B2, stable outlook / B, stable outlook / B +, stable outlook (Moody ’s / S & P / Fitch)

  • Expected release rating: B3 (Moody's)

  • Contracts: high-yield custom contracts

  • Scale: USD benchmark

  • Duration: 3 years and 2 years non-redeemable

  • Preliminary price guidance: 12.5% area

  • Settlement date: June 1, 2020 (T + 3)

  • Use of proceeds: to refinance certain existing offshore debt

  • Listing: SGX listing

  • Terms: 200,000 USD / 1,000 USD face value; New York law

  • Joint Global Coordinating Bank / Joint Leading Bank / Joint Bookkeeping Bank: UBS (B & D), Barclays, BNP Paribas, Deutsche Bank, Morgan Stanley

Newly Listed

  • 9923.HK Yeahka Limited (2020/06/01)

  • 2381.HK SMC Electric Limited (2020/06/02)

  • 1645.HK Haina Intelligent Equipment International Holdings Limited (2020/06/03)

Result Announcement


  • Annual: 0823.HK Link REIT

  • Quarter: ATHM.US Autohome Inc

  • Quarter: ENS.US EnerSys


  • Quarter: BZUN.US Baozun Inc

  • Quarter: DCI.US Donaldson Co Inc

  • Quarter: ZOOM.US Zoom Video Communications Inc


  • Quarter: CPB.US Campbell Soup Co

  • Quarter: GOOS.US Canada Goose Holdings Inc

  • Quarter: KC.US Kingsoft Cloud Holdings Ltd


  • Quarter: GHG.US GreenTree Hospitality Group Ltd

  • Quarter: COO.US Cooper Cos Inc/The

  • Quarter: AVGO.US Broadcom Inc


  • Annual: 1271.HK Grand Ming Group Holdings Ltd

  • Quarter: TIF.US Tiffany & Co

  • Quarter: XIN.US Xinyuan Real Estate Co Ltd

Analyst Recommendation

  • DBS gave its price target on Link REIT (0823.HK) to HK$76.00 a share and gave the buy rating.

  • China Renaissance gave its price target on Baozun Inc (BZUN.US) to US$38.00 a share and gave the buy rating.

  • HSBC gave its price target on Canada Goose Holdings Inc (GOOS.US) to US$30.00 a share and gave the buy rating.

Global Indices

  • SSE Composite Index was up 1.37% last week.

  • Hang Seng Index was up 0.14% last week.

  • Dow Jones Industrial Average index was up 3.75% last week.

  • NASDAQ Composite Index was up 1.77 % last week.

  • S&P 500 Index was up 3.01% last week.

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