UOB bank
15 April 2020
1. Market developments and outlook:
Risk assets have rallied so far in the first few weeks of April as the rate of increase in new COVID-19 cases seemed to slow, hopes built for easing of global containment measures, the Federal Reserve (Fed) expanded support for credit markets, and oil price rallied on hopes for a global supply cut. The Fed expanded the universe of eligible bonds that the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) can purchase. In addition to investment grade credits, both facilities were expanded to allow the Fed to purchase BB- or better credits that were recently downgraded (“Fallen Angels”). The Fed also extended the collateral eligible for Term Asset-Backed Securities Loan Facility (TALF), notably triple-A-rated commercial mortgage-backed securities (CMBs) and static collateralized loan obligations (CLOs).
There is a great deal of consensus amongst economists (including our macro strategists) that a big recession is looming. As a contrast, markets have been optimistic recently and have rallied quite a bit since its low levels in late March. Our base case is that central bank and fiscal activity will soften, but not remove, the economic blow and we may likely see another leg down in markets. During this period, we intend to remain conservatively positioned to help protect client capital, and our defensive posture seen below in section 2 should be beneficial in mitigating the worst of any further weakness. Conversely, if we do gain better visibility into the impact of the crisis, see some stability in global infections, and markets stabilise, our investment process should also be able to adapt quickly. When it arrives, we expect the recovery in financial markets to be swift and steep due to the extent of monetary and fiscal support currently being provided by governments and central banks, even if the real economy takes a little longer to recover. It is worth highlighting the highly dynamic nature of UIFT. Similar to the rapid reduction in risk as the crisis grew, we can equally re-risk as the crisis shows signs of receding.
2. Performance attribution and positioning:
| As of 15 April 2020 | Portfolio Positioning | Contribution to Returns (gross in USD) | ||
| Portfolio Exposure | Market Exposure | Contribution to Duration (Years) |
Month-to-Date | Year-to-Date |
| Global Research Income | 9.0% | 0.0 | 0.4% | -1.2% |
| Global Income Low Volatility | 27.2% | 0.0 | 1.3% | -8.4% |
| Equity Hedging | -18.8% | 0.0 | -0.1% | 2.0% |
| Equity Total | 17.5% | 0.0 | 0.7% | -7.6% |
| Systematic Fixed Income | 36.4% | 4.0 | 2.2% | 0.3% |
| Government bonds | -7.0% | -0.9 | -0.1% | -0.6% |
| Systematic US Corporates | 7.6% | 0.6 | 0.4% | -0.4% |
| Cash Equivalents | 0.0% | 0.0 | 0.0% | 0.0% |
| Credit Hedging | -2.5% | 0.0 | 0.0% | -0.2% |
| Fixed Income Total | 34.5% | 3.7 | 2.4% | -0.8% |
| European Financials | 7.0% | 0.2 | 0.4% | -0.3% |
| Global Property | 5.0% | 0.0 | 0.2% | -0.9% |
| Alternatives Total | 11.9% | 0.2 | 0.6% | -1.2% |
| Total | 63.9% | 3.9 | 3.7% | -9.6% |
3. Recent portfolio positioning and key changes:
In terms of portfolio positioning, there have been no material changes over the past 2 weeks.
Our equity exposures (including Global Property) have moved up slightly from their lows of 17% as of late March to ~22% as of 15 April. This is mostly driven by the systematic volatility targeting processes which have modestly increased exposures as volatility is subsiding.
On fixed income, we have previously reduced duration and are closer to our target duration levels (~3.9 years as of 15 April). We are conscious that bond yields tend to bottom out ahead of equities in such times of market stress, and taking into account the bond rally year-to-date, we had previously trimmed our duration exposures.
Finally, we continue to see the most opportunities in credit markets – particularly investment grade/crossover credit which is favoured by the Fed in their corporate debt purchases and should weather any recession better than lower quality fixed income – and have been tilting the portfolio in favour of credit over global equities and duration.
All information in this publication is based upon certain assumptions and analysis of information available as at the date of the publication and reflects prevailing conditions and UOB Asset Management Ltd (“UOBAM”)’s views as of such date, all of which are subject to change at any time without notice. Although care has been taken to ensure the accuracy of information contained in this publication, UOBAM makes no representation or warranty of any kind, express, implied or statutory, and shall not be responsible or liable for the accuracy or completeness of the information.
Potential investors should read the prospectus of the fund(s) (the “Fund(s)”) which is available and may be obtained from UOBAM or any of its appointed distributors, before deciding whether to subscribe for or purchase units in the Fund(s). Returns on the units are not guaranteed. The value of the units and the income from them, if any, may fall as well as rise. Please note that the graphs, charts, formulae or other devices set out or referred to in this document cannot, in and of itself, be used to determine and will not assist any person in deciding which investment product to buy or sell, or when to buy or sell an investment product. An investment in the Fund(s) is subject to investment risks and foreign exchange risks, including the possible loss of the principal amount invested. Investors should consider carefully the risks of investing in the Fund(s) and may wish to seek advice from a financial adviser before making a commitment to invest in the Fund(s). Should you choose not to seek advice from a financial adviser, you should consider carefully whether the Fund(s) is suitable for you. Investors should note that the past performance of any investment product, manager, company, entity or UOBAM mentioned in this publication, and any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance of any investment product, manager, company, entity or UOBAM or the economy, stock market, bond market or economic trends of the markets. Nothing in this publication shall constitute a continuing representation or give rise to any implication that there has not been or that there will not be any change affecting the Funds. All subscription for the units in the Fund(s) must be made on the application forms accompanying the prospectus of that fund.
The above information is strictly for general information only and is not an offer, solicitation advice or recommendation to buy or sell any investment product or invest in any company. This publication should not be construed as accounting, legal, regulatory, tax, financial or other advice. Investments in unit trusts are not obligations of, deposits in, or guaranteed or insured by United Overseas Bank Limited, UOBAM, or any of their subsidiary, associate or affiliate or their distributors. The Fund(s) may use or invest in financial derivative instruments and you should be aware of the risks associated with investments in financial derivative instruments which are described in the Fund(s)’ prospectus. In the event of any discrepancy between the English and Mandarin versions of this publication, the English version shall prevail.