Cachet's Insight 30/03/2020

Market Outlook

As of 26 March, JACI Total return index delivered +1.31% last week. Primary issuance remains limited last week. US new jobless claims skyrockets to a record 3.3m in last week alone amidst a widespread economic shutdown caused by COVID19.


March PMI data dropped to historical lows across several regions, including Eurozone, the US, and UK, with services sector hit more severely than manufacturing. Limit IPO market activity in the time being.


Some signs of market stabilization and liquidity returned last week on massive global fiscal and monetary measures to cushion the economic hit from COVID19. However, the COVID-19 situation continues to worsen in many countries. On improved investor sentiment, 10Y UST yields tightened by 29bps last week to 0.85% as of 26 March close. Investor should keep a close watch on developments of the coronavirus spread and oil price collapse, and their impact on market liquidity and issuer fundamentals, then maintain defensive posture, focus on liquidity through UST and cash.


The Fed announced last Monday its plans to purchase unlimited amount of bonds to keep costs low, and also set up programs to support credit markets. A USD2 trillion fiscal stimulus package was also passed on Thursday. Investor should keep monitor the geopolitical events especially Saudi-Russia oil price war, US-China trade progress and Middle east tensions as global geopolitics remain volatile, keep look out for attractive opportunities upon recent spread widening and may selectively add risk.


Hot Topic


The Federal Reserve last Monday announced it would purchase an unlimited amount of Treasurys and mortgage-backed securities in order to support the financial market. The Fed said it would buy assets "in the amounts needed" to support smooth market functioning and effective transmission of monetary policy. The Fed had previous set a $700 billion limit for asset purchases. In addition, the Fed announced several new lending programs worth $300 billion to support companies hurt by the shutdown of the U.S economy. In a statement, the Fed said aggressive efforts must be taken to limit the losses of jobs and income.


Chart of the week

The Dow Jones Industrial Average rose 14% Tuesday from Monday’s low, hitting its high for the session a minute before the closing bell -- quite the recovery.


But that gyration pales in comparison to the swings that happened back in the days after Black Monday, Oct. 19, 1987, and during the 2008 financial crisis.


Here are the 10 biggest two-day swings, measured from one session’s low to the next trading day’s high, going back to 1987.


Investment Ideas

Over the past few weeks, we have seen equity markets dip amidst the battle against the Coronavirus.


Major equity indices lost up to 30% from their highs in Jan and have seen a slight rebound over the last couple of days – SPX up 17%, SX5E up 15% and HSI up 8% since Tuesday.

This is driven in part due to optimism from fiscal stimulus by Governments globally (refer to table below after the ideas).

Apart from the equity markets, another market that has taken quite a hit is the oil market. Crude oil has lost 57% of its value since Feb 2020. Our Zurich research view is that the war on Crude oil market share is not sustainable as many producers are producing below cash costs at current levels and Russia and Saudi Arabia is hitting supply limits at current prices. This will inevitably lead to reduction is supply and support for oil prices (refer to charts below after the ideas).


1. FCN on Indices

Will this a sustained rebound in the equity markets or just a brief respite from the correction, your guess is as good as mine.


Due to the uncertainty in the markets and direction of equity indices, we present an FCN with a low strike for investors to achieve yield while having a downside buffer.

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


Payoff Mechanism:

  • Investors receive a fixed coupon periodically until the note is redeemed.

  • Investors receive 100% of the nominal if the Worst Performing Underlying closes at or above the auto-call level on one of the periodic observation dates.

  • At maturity, if the note is not already redeemed, Investors receive 100% of the nominal if the Worst Performing Underlying closes at or above the strike price.

  • Otherwise, if the worst of underlying closes below the strike, Investors receive the delivery of the worst of underlying (at strike) or the equivalent redemption amount in cash.


S&P 500 Index (SPX)


Euro Stoxx 50 (SX5E)


Hang Seng Index (HSI)


2. Twinwin on Oil producers

The oil market is experiencing heightened volatility and we wouldn’t bet on a straight-out recovery.


Below we present a Twin-win on oil with a deep KI barrier to provide downside protection and allowing investors to participate in both upside or downside performance.


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


If the note is early redeemed at each monthly observation, client will receive 8% p.a. coupon.

If not autocalled, at maturity,


  • Underlying has never closed below AKI level; investor will receive the absolute performance. E.g. if underlying is down 30% from current levels, investor will receive +30% returns.

  • Underlying has closed below AKI level at least once:

  • If the Underlying closes above Strike at Maturity, investor will receive the performance of the Underlying

  • Otherwise, investor will receive physical delivery of underlying at strike.


Exxon Mobil Corp (XOM UN)


Royal Dutch Shell PLC (RDSA NA)



Asset Allocation

Asia Bond Market

Lack of activity in Asia’s primary dollar bond market continued Monday as spreads on the notes blew out further amid a surge in the global death toll from the coronavirus. The worst sell-off in credit markets worldwide since at least the global financial crisis continued despite a flurry of central bank steps, as the U.S. failed to agree on a coronavirus economic rescue package.


The Federal Reserve announced a plan last Monday that provides support for high-grade corporate credit -- high-yield debt is getting left behind, however. Spreads on Asian dollar bonds were 10-25bps wider, according to traders, though they pointed to choppy markets and fewer trades. Uncertainty over the global economic and medical outlook is still too great to justify buying risk assets right now and the sell-off could worsen, according to Credit Suisse AG and JPMorgan Asset Management. Chinese commodities firms are under mounting stress as they seek to repay rising amounts of debt amid a global corporate bond sell-off. Rush for safe havens poses refinancing risks for emerging markets, according to Institute of International Finance. China Evergrande Group has wired funds to repay its $1.6b 7.0% dollar-bond due Monday, according to people familiar with the matter. Unprecedented moves by the Federal Reserve to avert a crippling credit crunch have started to warm a frozen market, but not yet enough for issuers to return to the dollar market, at least in Asia. Asia investment-grade dollar bond spreads were about 10-30bps tighter. A surge in dollar borrowing costs has prompted many Chinese property developers to return to a cheaper domestic market for funding, triggering a sharp increase in onshore bond sales.


A recovery in credit markets rolled on after unprecedented moves by the Federal Reserve earlier this week to avert a crippling cash crunch. Prices for China high-yield bonds rose. As a dollar crunch sweeps the globe, cracks are starting to show up in Asia’s emerging markets, despite the hefty foreign reserve cushions built up over the years. The dollar-bond primary market in Asia saw no fresh deals last Thursday even as credit-default swaps across Asia and spreads were set to decline for a third consecutive day. That followed the first back-to-back gains in global equities since mid-February. Analysts say Asia deal flow will likely resume soon starting next week from state-owned companies and the most blue-chip issuers, if market sentiment remains sanguine. Guandong is now home to the highest amount of stressed corporate dollar debt in China.


IPO

  • 1942.HK MOG Holdings Limited (2020/03/28 - 04/06)

  • 3390.HK Tycoon Group Holdings Limited (2020/03/30 - 04/03)

  • 6063.HK LOTUS HORIZON HOLDINGS LIMITED (2020/03/30 - 04/02)


Global Indices

  • SSE Composite Index was up 0.97% last week.

  • Hang Seng Index was up 2.98% last week.

  • Dow Jones Industrial Average index was up 17.30% last week.

  • NASDAQ Composite Index was up 12.64% last week.

  • S&P 500 Index was up 14.98% last week.


Analyst Recommendation

  • Morningstar gave its price target on China Evergrande Group (3333.HK) to HK$20.00 a share and gave the buy rating.

  • Bank of China International gave its price target on Shimao Property Holdings Ltd (0813.HK) to HK$30.76 a share and gave the strong buy rating.

  • Nomura gave its price target on Meituan Dianping (3690.HK) to HK$120.00 a share and gave the buy rating.

  • Goldman Sachs gave its price target on Lamb Weston Holding INC (LM.US) to US$63.00 a share and gave the buy rating.

  • Yuanta Securities International gave its price target on Proya Cosmetics Co Ltd (603605.CH) to RMB$123.50 a share and gave the buy rating.


Result Announcement

2020/03/30

  • Annual: 0813.HK Shimao Property Holdings Ltd

  • Annual: 1521.HK Frontage Holdings Corp

  • Annual: 1093.HK CSPC Pharmaceutical Group Ltd

  • Annual: 3690.HK Meituan Dianping

  • Annual: 2400.HK XD Inc

2020/03/31

  • Annual: 3333.HK China Evergrande Group

  • Annual: 1810.HK Xiaomi Corp

  • Annual: 2869.HK Greentown Service Group Co Ltd

  • Annual: 600309.CH Wanhua Chemical Group Co Ltd

  • Annual: 600301.CH Nanning Chemical Industry Co Ltd

2020/04/01

  • Annual: 600657.CH Cinda Real Estate Co Ltd

  • Annual: 600011.CH Huaneng Power International Inc

  • Annual: 600356.CH Mudanjiang Hengfeng Paper Co Ltd

  • Annual: 600332.CH Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd

  • Quarter: LW.US Lamb Weston Holding INC

2020/04/02

  • Annual: 603605.CH Proya Cosmetics Co Ltd

  • Annual: 603713.CH Milkyway Chemical Supply Chain Service Co Ltd

  • Annual: 603606.CH Ningbo Orient Wires & Cables Co Ltd

  • Quarter: FC.US Franklin Covey Co

  • Quarter: KMX.US CarMax Inc

2020/04/03

  • Annual: 603839.CH Anzheng Fashion Group Co Ltd

  • Annual: 603229.CH Zhejiang Ausun Pharmaceutical Co Ltd

  • Annual: 603636.CH Linewell Software Co Ltd

  • Annual: 600085.CH Beijing Tongrentang Co Ltd

  • Quarter: STZ.US Constellation Brands Inc

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