Cachet's Insight 24/02/2020

Market Outlook

JACI Total return index delivered +0.34% for the week. Primary market remains active this week with deals flowing from both IG and HY space and strong investor demand.

Amidst the virus outbreak, Bank of Indonesia lowered its benchmark lending rates by 25bps to 4.75% in its first reduction since October. Economic growth forecast was also cut to 5-5.4% this year. Singapore also pledged S$6.4billion in dedicated support to cushion growth this year.

Markets have become increasingly concerned as cases outside China rose quickly over the week, and the impact on businesses spread globally with major supply chains still disrupted. Bloomberg Economics estimate China to be running only at 40-50% capacity last week. 10Y UST yields tightened 9bps to 1.52%. Investors should keep a close watch on developments of the coronavirus spread and impact on markets. Portfolio duration lengthened slightly as virus outbreak continues to impact the global economy.

China announces further measures to support the economy, by lowering benchmark borrowing costs for new corporate and household loans to increase liquidity. The market expects more monetary easing in 2Q20 and a fiscal stimulus to boost GDP this year.

Investors should closely monitor the geopolitical events especially US-China trade progress and Middle east tensions as global geopolitics remain volatile. Investors who cut longer dated and /or weaker China holdings earlier and should maintain current exposure to China for now while monitoring market liquidity and issuer fundamentals as the situation develops.

Chart of the week

China’s stock benchmark recouped all its losses from a record $720 billion sell-off earlier this month, a sign that investor confidence is improving after policy makers acted to ease the economic fallout from the coronavirus outbreak. The CSI 300 Index added 2.3% Monday, surpassing its close from Jan. 23, the last trading day before a Lunar New Year break that saw a surge in virus infections. The benchmark plunged 7.9% on Feb. 3 as markets reopened to a health crisis that paralyzed most of the world’s second-largest economy.

Hot Topic

Famous economist Tao Dong were quite negative on the current economic circumstances, following are some salient points which the investors should pay attention to.

Economics of this disease much bigger than Sars.
  • Power consumption down, mobile phone sales is down, departmental store, cinema sales is down 95%

  • Shanghai MTR is only 1/5 of capacity

  • Alibaba shows business sales are going down

  • Companies on average can only last for 3 months in current situation

  • Run rate of current GDP is in double digit negative

  • Supply chains disrupted

Production disruption may last longer – leading to global recession
Chinese government will launch fiscal measures to support the economy, but may not be widespread effective
  • Subsidies to smaller companies

  • Interest rate going to be lowered

  • Subsidies to particular consumer items such as automobiles

  • RMB heading down

  • Large amount of debt repayment due, default ratio will see some improvement because government needs to get things stabilized. Kick the debt can down the road.

Hot Stock

Warren Buffett kicked his stock-buyback program into high gear, spending $2.2 billion on Berkshire Hathaway repurchases in the last three months of 2019, the most ever in a single quarter — and he's looking to buy even more.

Buffett's Berkshire Hathaway (BRKB) which loosened its repurchase policy almost two years ago after being stymied on the deal making front, has since taken a cautious approach to buybacks, acquiring only $6.3 billion of stock. In the fourth quarter, Buffett bought Berkshire stock every month, and has no plans to slow down, if the price is right.

"Shareholders having at least $20 million in value of A or B shares and an inclination to sell shares to Berkshire may wish to have their broker contact Berkshire's Mark Millard," Buffett said in his annual letter to Berkshire Hathaway shareholders Saturday.

Even as Warren Buffett ramped up his repurchases, Berkshire's massive pile of cash hovered close to a record, totaling $128 billion at the end of 2019. Buffett, Berkshire's chairman and chief executive officer, has sought to redeploy those funds into higher-returning deals or stock purchases, but has been stymied by what he's said are "sky-high" prices for good businesses.

Buffett signaled that stocks are likely to outperform bonds over the long term if current conditions continue.

"If something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments," Buffett wrote.

Buffett spent a portion of his annual letter reassuring shareholders about the future of the company once it's no longer run by the billionaire investor and his business partner, Charlie Munger, who turned 96 this year.

"Berkshire shareholders need not worry: Your company is 100% prepared for our departure," Buffett said.

At Berkshire's annual meeting in May, shareholders will be able to submit questions to be answered by lieutenants Ajit Jain or Greg Abel, Berkshire vice chairmen who are considered top contenders to someday replace Buffett. They answered a few investors questions at last year's meeting.

Operating Berkshire earnings fell to $4.42 billion in the fourth quarter, down 23% from a year earlier, driven by underwriting losses at its namesake reinsurance group, which was hurt by typhoons in Japan, wildfires in California and Australia, and widening losses at its business writing retroactive reinsurance contracts.

Berkshire's Class A shares last year under-performed the S&P 500 Index by the widest margin since 2009. The stock has gained just 1.1% this year.

Also in Berkshire's 2019 annual report, released alongside Buffett's letter Saturday:

Kraft Heinz (KHC), which counts Berkshire as its largest shareholder, had a tumultuous 2019, with write-downs, management shakeups and downgrades to junk. Buffett's company carries its Kraft Heinz investment on its balance sheet at $13.8 billion, a figure unchanged since 2018's fourth quarter, even as the market price of the stake dropped to $10.5 billion at the end of last year.

Berkshire's BNSF railroad posted a 3.8% gain in profit in the fourth quarter, just shy of record earnings in the previous three months, as a decline in expenses helped counter falling revenue across shipments of products such as coal, consumer items and agricultural goods. BNSF posted a regulatory filing Friday night, on the eve of the release of Buffett's annual letter, giving investors a sneak peek of results.

Investment Idea

Daily range accrual

Asia Bond Market

Bloomberg-compiled data shows over $4 billion of dollar bonds with maturities of less than a year have entered the market so far this year, with a record number of deals compared to the same period in previous years, more Chinese borrowers sell short-dated notes. Issuers ranged from a high-quality Japanese financial firm to an unrated Chinese local government financing vehicle. Moody’s said Monday it withdrew its ratings for Huachen Energy after bondholders demanded immediate repayment of the principal and interest on a note which the co. defaulted on last year. According to Fitch, some 12 Chinese companies face moderate to high refinancing risks as a result of the novel coronavirus. Asia’s primary dollar bond market kept up its momentum and saw a flurry of new deals on Wednesday including two green note offerings, and at least six diverse borrowers from India, Singapore to China marketing deals. According to Bloomberg, HNA’s $200m 6.25% bond due 2021 climbed 6 cents to 78 cents on the dollar, the most since December 2017. Bloomberg news reported the government of Hainan, the southern island province where HNA is based, is in talks to seize control of the group after the contagion hurt its ability to meet financial obligations. Most of Peking University Founder Group’s dollar bonds extended losses. Its 7.45% dollar note due 2022 dropped by 1.7 cents to 29 cents. A court in Beijing has accepted creditor Bank of Beijing’s application to start the restructuring process for Peking University Founder Group, according to an exchange filing.

Semiconductor Manufacturing International Corp

  • $600m 5Y bond at +133 vs IPT at +170bp area

  • Expected issue ratings: Moody’s: Baa3

  • Issuing format: Regulation S only, Cat 1, Registered Form

  • JGCs/JLMs/JBRs: J.P. Morgan, ICBC International, Barclays (B&D) and UBS

LVGEM (China) Real Estate Investment

  • Calls From Feb. 21 for USD Note, Exchange Offer

  • Joint Dealer Managers: Nomura, BOSC International, AMTD, DBS Bank and Haitong International

  • JGCs/JLMs/JBRs:Nomura, BOSC International, AMTD, DBS Bank Ltd., CCB International, Haitong International, BOCOM International, China Investment Securities International, Zhongtai International, HeungKong Financial, ABC International, CMBC Capital and UBS

Zhenro Properties

  • USD 363-Day Bond, IPT 6.125% Area


  • FORMAT: Regulation S Registered Form, Category 1

  • JGCs / JBRs / JLMs:HSBC (B&D), CCB International, CLSA, Deutsche Bank, Goldman Sachs (Asia) L.L.C., Haitong International, Standard Chartered Bank, Zhenro Securities

China Aoyuan Group

  • $188m 363-day note at 4.8%, IPT was 5.125% area

  • Expected issue rating: unrated

  • Format: Regulation S only Category 1, Registered form

  • Sole bookrunner and sole lead manager: Goldman Sachs (Asia) L.L.C.

Global Indices

  • SSE Composite Index was up 4.21% last week.

  • Hang Seng Index was down 1.82% last week.

  • Dow Jones Industrial Average index was down 1.38% last week.

  • NASDAQ Composite Index was down 1.59% last week.

  • S&P 500 Index was down 1.25% last week.

Asset Allocation

Newly Listed

  • FLRZ.US F5 Finishes Inc (2020/2/27)

  • PASG.US Passage Bio Inc (2020/2/27)

Analyst Recommendation

  • Credit Suisse gave its price target on ASM Pacific Technology Ltd (0522.HK) to HK$118.00 a share and gave the outperform rating.

  • Macquarie gave its price target on Galaxy Entertainment Group Ltd (0027.HK) to HK$67.00 a share and gave the outperform rating.

  • Huatai Research gave its price target on Group Ltd (TCOM.US) to US$39.00 a share and gave the buy rating.

  • Citic Securities gave its price target on Inc (JD.US) to US$53.10 a share and gave the buy rating.

  • HSBC gave its price target on Baidu Inc (BIDU.US) to US$161.00 a share, gave the buy rating.

Result Announcement


  • Annual: 0002.HK CLP Holdings Ltd

  • Quarter: UL.US Unilever PLC

  • Quarter: UN.US Unilever NV

  • Quarter: HPQ.US HP Inc

  • Quarter: INTU.US Intuit Inc


  • Annual: 0522.HK ASM Pacific Technology Ltd

  • Quarter: MANU.US Manchester United Plc

  • Quarter: AIH.US Aesthetic Medical International Holdings Group Ltd

  • Quarter: TRI.US Thomson Reuters Corp

  • Quarter: HD.US Home Depot Inc/The


  • Annual: 0388.HK Hong Kong Exchanges & Clearing Ltd

  • Quarter: BILIBILI.US Bilibili Inc

  • Quarter: NTES.US NetEase Inc

  • Quarter: TCOM.US Group Ltd

  • Quarter: MNST.US Monster Beverage Corp


  • Annual: 0027.HK Galaxy Entertainment Group Ltd

  • Quarter: IQ.US iQIYI Inc

  • Quarter: BYND.US Beyond Meat

  • Quarter: JD.US Inc

  • Quarter: BIDU.US Baidu Inc


  • Annual: 0017.HK New World Development Co Ltd

  • Quarter: BRK.A.US Berkshire Hathaway Inc

  • Quarter: W.US Wayfair Inc

  • Quarter: PNM.US PNM Resources Inc

  • Quarter: ROCK.US Gibraltar Industries Inc

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