Cachet's Insight 12/05/2020

As of 7 May, JACI Total return index delivered -0.03% last week. IG continues to lead primary market activity, both from sovereigns and corporates. Oil prices rose amid output cuts from the world's biggest producers and signs of demand returning. Saudi Arabia increased crude pricing for most grades to Asia.

Investor sentiment was subdued last week amid mixed earnings and weak economic data. Several European countries are gradually reopening their economies. While there are some signs of easing in the COVID-19 outbreak, cases reported worldwide now exceed 3.8million and many economies remain in lockdown. 10Y UST yields was unchanged at 0.64% as of 7 May close. Investors should keep a close watch on developments of the coronavirus spread and oil price collapse, and their impact on market liquidity and issuer fundamentals. On a look out for attractive opportunities upon recent spread widening and may selectively add risk, with preference for more liquid positions within the IG segment and shorter dated names.

Another 3.17 million Americans filed for unemployment benefits last week, bringing the total to more than 33 million since the lockdown began in mid-March. Separately, Eurozone quarterly GDP dropped to the worst ever at -3.8% qoq in 1Q2020. Close monitoring of geopolitical events esp. 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

The US and China may discuss progress in implementing the Phase-one trade deal next week after President Trump threatened to terminate it. Investors may reduce China exposure on US-China trade war concerns.

Rumors about the China concepts stocks listed in US is going to move to Hong Kong as a second listing market, Jingdong (JD.US), NetEase (NTES.US) are reported to apply for second listing secretly, at the same time, there are reports that Baidu (BIDU.US) and Ctrip (TCOM.US) speed up the listing process in Hong Kong, will submit the application form to the HKEX soon. As the China concepts stockpolitical situation between China and the US is becoming increasingly tense, those China concepts stocks listed in US need to find a way out as soon as possible. A new cold war is evolved gradually among China and the US, the potential political risks of the market are increasing.

Hot Topic

Despite the historic scale of the recession that is now unfolding, the scale and size of policy support is likely to prevent this downturn from morphing into something more structural with systemic failures in the financial system. But the markets are likely to have paid too much for the prospect of a return to normal. Investors are usually very sensitive to inflection points and rates of change. If, as we expect, lockdowns are partially eased over the next month, the sequential growth will likely look strong (which is what the equity market is reflecting). But, the pace of growth is still likely to be weak. As many economists have explained, on a sequential quarter-on-quarter annualised basis their US forecast shows -34% in Q2, +19% in Q3 and +12% in Q4, which looks rather V-shaped. But, on a year-on-year basis, their forecast for US growth shows -11% in Q2, -8% in Q3, and -5% in Q4, which clearly qualifies as U-shaped.

Overall, therefore, their expectation is one in which the economy recovers only gradually from the virus outbreak but, nevertheless, shows sequential growth rates in H2 that are unprecedented in post-war history.

There are 2 likely scenarios from here:

  • The first scenario is that the slow progression of the return post lockdown, and the higher level of unemployment, mean that investors become disappointed relative to current expectations and markets fall back towards, although likely not through, previous lows.

  • The second scenario is that, having paid up for the recovery, equities get stuck in a trading range, perhaps ‘Fat & Flat’ with quite a lot of volatility but little aggregate return for a while.

Of the two, I would assign a slightly higher probability to a further pullback – the genuine bull market has not started.

The next cycle, whether it becomes a strong bull market or not, is less likely to be driven by valuation expansion as interest rates are at their lower bound. But some key drivers are likely to shape the difference between relative leaders and laggards:

  • High debt levels, and low nominal growth.

  • Low levels of inflation (at least in the near term).

  • Continued digital revolution.

  • More diversification of supply chains.

  • Downward pressure on margins.

  • Greater consolidation.

  • Greater focus on the 'social contract' and ESG.

There are likely to be three investment conclusions:

  • Growth will remain scarce: growth companies will continue to C.

  • Income will remain scarce: sustainable dividend payers will prosper.

  • Debt levels will be higher: strong balance sheet companies will prosper

Hot Sector: E-commerce

Credit Suisse released an in-depth report on online retail penetration, showing that online retail penetration has grown to 25.8% in 2019. The rise of e-commerce live streaming, factory reverse customization and fresh e-commerce have promoted 3 important segments together to promote new demand, speeds ​​up the penetration of online retail. Credit Suisse expects online retail penetration to reach 37% in 2023, e-commerce live broadcast, reverse customization, and fresh e-commerce CAGR will reach 43%, 21%, and 23.5% growth rate by 2023. The proportion of online sales of these 3 sectors has reached 20%. Credit Suisse raised the sector’s profit forecast for year 21-22 by 1-13%.

JD (JD.US): Credit Suisse ’s forecast is significantly higher than the market forecast and expects its marginal income to continue to benefit from the reverse customization acceleration and the upcoming listing in Hong Kong and the separate listing of logistics, becoming a positive catalyst for stock price. JD’s current valuation still has a discount compared to global peers, especially Amazon (Amazon.US), recommend buying with target price US$61.50.

Alibaba (BABA.US): Credit Suisse believes the current valuation is lower than its peers, recommends investors to gradually buy at a bargain. Credit Suisse expects that Alibaba’s cloud business will continue to accelerate and reach breakeven in the second half of the year. Credit Suisse gave a price target to US$285.00.

Pinduoduo (PDD.US): Credit Suisse believes that the volatility is lower than last year, and PDD reaches the target of 1.5 trillion yuan in total turnover, therefore the stock price will continue to rise with target price US$59.80.

Hot Stock

Tencent's online businesses may not be significantly affected by COVID-19 outbreak, with consensus expecting an 18% sales rise in 1Q, slightly lower than 4Q's 25%. However, 1Q mobile game sales may contract sequentially, based on SensorTower data, likely due to weak performance from aging titles such as Honour of Kings, despite market expectations of a strong boost from players confined to their homes. The company's social-ad business could continue to grow strongly, despite challenging industry conditions, on high demand and new inventory released in mid-February, but its fintech and business services segment could deliver slower growth as offline payments declined during the pandemic and some cloud computing projects were delayed.

Tencent is expected to report 1Q results on May 13 after the Hong Kong market closes

Investment Ideas

Although past performance is not a guarantee or indication of future results, research shows that gold tended to perform well during periods when US federal funds target rate is kept below 100bps. In addition, our analysis also shows that gold performed well during the Federal Reserve’s first and second rounds of QE after the global financial crisis in 2008.

  • The FOMC announced on 15 March 2020, that it is cutting interest rates to near zero and would purchase US$700bn in bonds and securities to stabilise financial markets and support the economy

  • With our forecast of US$1,700 for 12- month gold price, we believe that the recent pullback provides a good buying opportunity. Therefore, while the need for liquidity could continue to drive near-term volatility in gold price, we are initiating a BUY call on gold with a 6-12month view

Key Risks

  • Further scramble for liquidity on the back of further drawdowns could continue to put pressure on gold priceespecially in the short-term.

  • An unexpectedly strong recovery in outlook for the global economy, which allows for higher rates, could adversely impact the performance of gold.

  • A sharp reduction in uncertainty arising from the impact of COVID-19 could also reduce the appeal of gold as a hedge.

Gold price (US$, LHS), versus Fed Fund Rate (RHS) and Total Assets (RHS)

Some ideas to express view on Gold:

Product: Digital Coupon

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

Maturity Redemption

  • If underlying closes above strike at maturity, investor receives flat coupon

  • If not, physical delivery of underlying at strike

Product: Booster

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

Maturity Redemption

  • If underlying closes above strike at maturity, investor receives leverage performance up to cap [PR * min(Final/Strike – 1, Call Strike Cap)]

  • Otherwise, physical delivery of underlying at strike

Asset Allocation

Asia Bond Market

A jumbo bond offering from Sinopec (0386.HK), with $1b 5Y +180, $1.5b 10Y +205, $500m 30Y 3.35%, boosted weekly issuance in the Asia dollar bond market to the most in three weeks at $6.45b. That compares with $4.76b last week. While mandates for potential deals next week have been scarce, Indonesian state-owned mining company PT Indonesia Asahan Aluminium is in the pipeline. Several Indonesian state-backed firms are considering offshore bond sales, according to a government minister. However, 6 Indonesian and Malaysian palm oil producers have been hit with negative ratings actions by Fitch Ratings, which cut its outlook for crude palm oil prices. Lenovo, CK Hutchison and Indonesia-state backed Hutama Karya were other notable issuers this week. Lenovo $350m Tap of 5.875% 2025 Bonds at 5.640%, Hutama’s $600m offering received more than $3.4b of orders. Sun Hung Kai Properties received over $3.5b of orders for $500m 10Y bonds.

Two debt-laden Chinese conglomerates took center stage last week after one firm’s credit-protection pledge drew scrutiny and a ban on retail buying by another sent a yuan bond plummeting.

Peking University Founder Group Corp. is putting to test an ambiguous credit protection mechanism popular among the nation’s offshore bond issuers, after uncertainties emerged over the destiny of some debt carrying its pledge. The equivalent of about 12b yuan worth of offshore bonds with so-called keep well provisions from Founder Group, which is under court-led debt restructuring, are pending recognition from the company’s administrator, according to a notice to bondholders.

A local bond linked to HNA Group Co. sank by a record on Wednesday after retail investors were barred from buying some debt issued by the company and affiliated entities Hainan Airlines Holding’s 1.44b yuan bond due 2021 has long been favoured by retail investors, and the news means the potential loss of that significant support, according to Shen Chen, a partner at Shanghai Maoliang Investment Management LLP.

Newly Listed

  • 1147.HK Edensoft Holdings Limited (2020/05/13)

  • 1936.HK Ritamix Global Limited (2020/05/13)

  • 9983.HK Central China New Life Limited (2020/05/15)

  • 9996.HK Peijia Medical Limited (2020/05/15)

Result Announcement


  • Quarter: AMN.US AMN Healthcare Services Inc

  • Quarter: TME.US Tencent Music Entertainment Group

  • Quarter: IFF.US International Flavors & Fragrances Inc

  • Quarter: HALO.US Halo Labs Inc

  • Quarter: SUN.US Sunoco LP


  • Quarter: HMI.US Huami Corp

  • Quarter: TM.US Toyota Motor Corp

  • Quarter: HMC.US Honda Motor Co Ltd

  • Quarter: VOD.US Vodafone Group PLC

  • Quarter: DUK.US Duke Energy Corp


  • Quarter: 0700.HK Tencent Holdings Ltd

  • Quarter: 0981.HK Semiconductor Manufacturing International Corp

  • Quarter: SNE.US Sony Corp

  • Quarter: CSCO.US Cisco Systems Inc

  • Quarter: TAK.US Takeda Pharmaceutical Co Ltd


  • Quarter: 1347.HK Hua Hong Semiconductor Ltd

  • Quarter: GDS.US GDS Holdings Ltd

  • Quarter: XNET.US Xunlei Ltd

  • Quarter: FUTU.US Futu Holdings Ltd

  • Quarter: NCLH.US Norwegian Cruise Line Holdings Ltd


  • Quarter: 2018.HK AAC Technologies Holdings Inc

  • Annual: 1999.HK Man Wah Holdings Ltd

  • Quarter: 8082.HK Sun Entertainment Group Ltd

  • Quarter: VFC.US VF Corp

  • Quarter: JD.US Inc

Analyst Recommendation

  • Goldman Sachs gave its price target on Tencent Holdings Ltd (0700.HK) to HK$494.00 a share and gave the buy rating.

  • Citic Securities gave its price target on Semiconductor Manufacturing International Corp (0981.HK) to HK$21.58 a share and gave the buy rating.

  • BOCOM International gave its price target on AAC Technologies Holdings Inc (2018.HK) to HK$55.00 a share and gave the buy rating.

  • Goldman Sachs gave its price target on GDS Holdings Ltd (GDS.US) to US$70.30 a share and gave the buy rating.

  • HUATAI Research gave its price target on Inc (JD.US) to US$50.50 a share and gave the buy rating.

  • BOCI gave its price target on Tencent Music Entertainment Group (TME.US) to US$13.00 a share and gave the buy rating.

Global Indices

  • SSE Composite Index was up 1.23% last week.

  • Hang Seng Index was down 1.68% last week.

  • Dow Jones Industrial Average index was up 2.56% last week.

  • NASDAQ Composite Index was up 6.00% last week.

  • S&P 500 Index was up 3.50% last week.

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