Cachet's Insight 27/04/2020

Market Outlook

As of 23 April, JACI Total return index delivered -0.04% for the week. More recovery in issuance, in particular IG, as primary activity picks up further. Both India and China announced additional measures to boost liquidity this week. Eurozone IHS Markit flash composite PMI plunged to 13.5 in April, the lowest in records and far below expectations. US April flash PMIs also fell to lows of 36.9 and 27 for manufacturing and services respectively. Asia PMIs posted huge declines, while South Korea records its worst contraction since the GFC, shrinking 1.4% in Q1 2020.

Investor sentiment was poorer last week on the oil price collapse. While there are some signs of easing in the COVID-19 outbreak, the situation continues to worsen in a number of countries, and number of cases reported worldwide now exceed 2.7million. Many economies remain in lockdown. 10Y UST yields tightened 3bps this week to 0.60% as of 23 April 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. Investors may 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.

WTI futures (for May delivery) turned negative for the first time in history last week amidst concerns of a supply glut and as Covid-19 continues to hit demand. However, oil prices stabilized towards the end of the week, with Brent and WTI futures for later deliveries rising. Investors should closely monitor the 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.

Hong Kong stock market is still volatile, and the funds are speculatively rotated. The Centa-City Leading Index (CCL) reported last week at 175.68, up 0.47%, hitting an eight-week high. People's lives and income gradually return to normal as the epidemic situation in Hong Kong improves, investors can pay short term attention to local property developers included CK Asset Holdings (1113.HK), SHK Properties (0016.HK), and Swire Properties (1972.HK), etc.

Hot Topic

April 20, 2020 will go down in oil-market history as the day when the U.S. benchmark price for crude dropped below zero for the first time -- and then kept falling. In a massive and unprecedented swing, the future contracts for May delivery of West Texas Intermediate tumbled to minus $37.63 a barrel. The jaw-dropping development was in no small measure down to an extreme glitch in the way oil futures operate. But it also revealed a fundamental truth about the oil market in the age of coronavirus and the aftermath of a price war: The world’s most important commodity is quickly losing all value as chronic oversupply overwhelms the world’s crude tanks, pipelines and supertankers.

For some producers, it may be cheaper in the long run than closing down production or finding a place to store the supply bubbling out of the ground. Many worry that shutting their wells might damage them permanently, rendering them uneconomical in the future. Then there are the traders who buy oil futures contracts as a way of betting on price movements who have no intention of taking delivery of barrels. They can get caught by sharp price drops and face the choice of finding storage or selling at a loss. And the escalating glut of oil has made storage space scarce, and increasingly expensive.

The lowest prices came in trades in futures -- contracts in which a buyer locks in a purchase at a stated price at a stated time. Futures are a tool for users of oil to hedge against price swings, but also a means of speculation. The contracts run for a set period, and traders who don’t want to unwind their position or take delivery generally roll over their monthly contracts shortly before expiration to a month further in the future. Contracts for May delivery were due to expire on April 21, putting maximum pressure the day before on traders whose contracts were coming due. For them, selling at a steeply negative price was better than taking delivery of actual oil because nobody needs it and there are fewer and fewer places to put it.

Expert’s View

Carl Icahn is not buying stocks right now. He is hoarding cash, shorting commercial real estate and preparing for the coronavirus to wreak more havoc. This is a time to be “extremely careful,” Icahn said in an interview Friday on Bloomberg Television. From his home on Miami’s Biscayne Bay, the billionaire investor has surveyed the damage to stock prices -- and to his portfolio -- and reached out to medical experts for information and opinions on the Covid-19 pandemic. To Icahn, who at 84 has traded through all the stock-market crashes since the Great Depression, the future is just too unpredictable for the S&P 500 to be trading at 17 times 2021 earnings estimates. “You cannot really justify that multiple,” Icahn said. “Short-term, you may have some big downdrafts.”

The market disagrees. Since the Federal Reserve on March 23 unveiled a series of unprecedented measures to support the U.S. economy, followed by even more in subsequent weeks, stocks have roared back 30% from their intraday low.

Icahn rose to fame and notoriety in the 1980s as a corporate raider. He is since restyled himself as a shareholder activist, a role in which he is battled fellow billionaires such as Michael Dell and Bill Ackman. Icahn also supported Donald Trump and in 2017 served as a special adviser to the president.

Many of Icahn’s larger stock holdings are in industrials such as oil refiner CVR Energy Inc. and Tenneco Inc., the auto parts maker. They have been battered by the pandemic. “We keep it pretty well hedged, but even the hedges couldn’t stop us from losing some money,” he said.

Icahn spotted a once-in-a-lifetime opportunity amid the market gyrations. On April 20, when it seemed the whole world was selling oil and crude futures fell to an unheard-of minus $40 a barrel, he was buying. Icahn bought cheap oil in Monday’s plummet to historic lows.

Because CVR constantly needs oil to supply its two refineries, Icahn realized he could use it to profit from the frenzy. He said he instructed the Sugar Land, Texas-based company to make space in its storage tanks and put in orders for 1 million to 2 million barrels at negative prices he does not expect ever to see again.

Icahn’s biggest position is a multibillion bet he initiated in mid-2019 against the CMBX 6, an index of commercial real estate mortgage-backed securities.

Hot Stocks

Deutsche Bank AG said its first-quarter results were above market expectations. In a surprise statement, the bank said it expects to report group profit before tax of 206 million euros ($223 million), and net income of 66 million euros. Revenues are expected to be 6.4 billion euros, compared with Bloomberg-compiled estimates for 5.7 billion euros.

Deutsche Bank’s early report -- full details remain scheduled for April 29 -- suggests that the Frankfurt-based lender joined its Wall Street peers in benefiting from a strong trading performance as market volatility boosted demand for its services. By contrast, Paris-based Société Générale SA revealed last week it lost hundreds of millions of euros on stock trades during the pandemic-induced market meltdown.

Deutsche Bank expects non-interest expenses to be 5.6 billion euros, while provisions for credit losses were probably about 500 million euros.

The bank said its common equity tier 1 ratio was 12.8% at the end of the quarter, down from 13.6% at the end of December. About 40 basis points of the decline in the ratio was based on the coronavirus pandemic.

Investment Ideas

As the COVID-19 pandemic continues its spread globally, governments have imposed stricter social distancing measures globally to prevent the spread of the virus. Corporates and employees are moving to web-conferencing to replace physical meetings. Consumers have resorted to alternatives to maintain their quality of life amidst lockdown measures. Until the situation improves, it looks like the “Work From Home” regime experienced by many of us around the world will be the new norm at least for the next few months. Above product is playing the work from home theme.

As demand for digital solutions surges, US Tech Names have been performing well during the pandemic. For Investors who are looking to participate for a short tenor and a degree of downside protection, we selected the above names which are large cap US listed, using a 50% downside buffer to collect a comfortable coupon.

Strikes are at levels never before reached or for in the case of zoom, pre-covid levels

Payoff Mechanism

  • Investors receive an unconditional fixed coupon periodically until the note is either auto-called or redeemed at maturity.

  • 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).

  • Short tenure in line with client’s investment profile , and this is more as an opportunistic short term play with a low autocall potentially KO after one month.

Product: Fixed Coupon Note (FCN)

Asset Allocation

Asia Bond Market

Singapore-based companies dominated Asia dollar bond issuance in a week that saw total offerings decline to $4.7b from $7.1b last week. Aircraft-leasing company BOC Aviation, Singapore Technologies Engineering and PSA Treasury -- all from the city state -- contributed about half of the note sales last week. Korean lenders Kexim and Kookmin Bank priced a combined $1.2b of securities, with the proceeds to be used in part to support small and medium businesses affected by the pandemic, while Qingdao, Pingdu and Xiaomi from China filled the remaining $1.1b. Hong Kong-based AMT International will also begin talking to investors for a possible USD or SGD bond. Bonds from at least 64 Chinese companies totaling $37.8b face repayment pressure, according to company and ratings firm statements compiled by Bloomberg. Spreads on top-rated Asian dollar bonds are headed for a less than 1bp rise last week, which will be the first widening in three weeks, according to a Bloomberg index; a similar index of high-yield notes has risen 43bps this week through last Thursday, the steepest increase since the week ended March 20. The Markit iTraxx Asia ex-Japan index of CDS was also on track to widen, snapping two straight weeks of declines.

Xinhu (Oversea) 2017 Investment Co., Ltd.

  • Parent Guarantor: Xinhu Zhongbao Co., Ltd. (600208.SH)

  • SBLC Provider: China Zheshang Bank Hangzhou Branch

  • Format: Reg S only, Category 1, Registered form

  • Status: Fixed rate senior credit enhanced bonds

  • Expected Issue Rating: Unrated

  • Size: US$ 87 Million

  • Tenor: 2 years and 11 months

  • Reoffer Price / Yield: 99.732% / 4.40%

  • Coupon Rate: 4.30% S/A 30/360

  • First Coupon Payment Date: October 27, 2020 (Short Last Coupon)

  • Settlement Date: April 27, 2020 (T+3)

  • Maturity Date: March 27, 2023

  • Use of Proceeds: Refinance the Group’s existing medium to long term offshore indebtedness which will become due within one year.

  • Change of Control Put: 100%

  • Details: SGX-ST Listing; US$200k/US$1k denominations; English Law

  • Clearing: Euroclear and Clearstream

  • SGC: Guotai Junan International (B&D)

  • JBRs and JLMs: Guotai Junan International, CNCB Capital, Guoyuan Capital


  • 1147.HK Edensoft Holdings Limited (2020/04/23 - 2020/04/29)

  • 1936.HK Ritamix Global Limited (2020/04/24 - 2020/05/04)

Newly Listed

  • 1953.HK Rimbaco Group Global (2020/04/28)

Result Announcement


  • Quarter: 0914.HK Anhui Conch Cement Co Ltd

  • Interim: 6169.HK Renrui Human Resources Technology Holdings Ltd

  • Quarter: 603195.CH Gongniu Group Co Ltd

  • Quarter: NXPI.US NXP Semiconductors NV

  • Quarter: LRN.US K12 Inc


  • Quarter: 0005.HK HSBC Holdings PLC

  • Quarter: 600305.CH Jiangsu Hengshun Vinegar Industry Co Ltd

  • Quarter: 600519.CH Kweichow Moutai Co Ltd

  • Quarter: SBUX.US Starbucks Corp

  • Quarter: TAL.US TAL Education Group


  • Quarter: 3968.HK China Merchants Bank Co Ltd

  • Quarter: 601155.CH Seazen Holdings Co Ltd

  • Quarter: BA.US Boeing Co/The

  • Quarter: CME.US CME Group Inc

  • Quarter: MA.US Mastercard Inc


  • Quarter: 603229.CH Zhejiang Ausun Pharmaceutical Co Ltd

  • Quarter: 603127.CH Joinn Laboratories China Co Ltd

  • Quarter: MO.US Altria Group Inc

  • Quarter: MCD.US McDonald's Corp

  • Quarter: Twitter.US Twitter Inc

Analyst Recommendation

  • Daiwa Securities gave its price target on China Merchants Bank Co Ltd (3968.HK) to HK$42.00 a share and gave the buy rating.

  • Nomura gave its price target on Anhui Conch Cement Co Ltd (0914.HK) to HK$61.20 a share and gave the buy rating.

  • Deutsche Bank gave its price target on Altria Group Inc (MO.US) to US$51.00 a share and gave the buy rating.

  • First Sheunghai gave its price target on TAL Education Group (TAL.US) to US$60.00 a share and gave the buy rating.

  • UOB Kay Hian gave its price target on Kweichow Moutai Co Ltd (600519.CH) to RMB$1399.00 a share and gave the buy rating.

  • Citic Securities gave its price target on Jiangsu Hengshun Vinegar Industry Co Ltd (600305.CH) to RMB$23.00 a share and gave the buy rating.

Global Indices

  • SSE Composite Index was down 1.06% last week.

  • Hang Seng Index was down 2.25% last week.

  • Dow Jones Industrial Average index was down 1.93% last week.

  • NASDAQ Composite Index was down 0.18% last week.

  • S&P 500 Index was down 1.32% last week.

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