With a gradual vaccine rollout and reopening of the economy, 2021 certainly represents a year of hope after the pandemic in 2020.The financial market has surely built in this optimism with S&P 500 recording double digit returns last year and bond yields rising from the bottom.
At The Chinese Finance Association (TCFA) investment outlook seminar on Feb 6th, four senior investment professionals looked beyond the pandemic and shared their opinions on the opportunities and challenges to invest in the current market.
Economic outlook and Interest rate
"The market seems to engage in a reflation trade since late last year", said Henry Mo, chief economist at AIG and the former President of TCFA, and "more and more economists talk about 6-pack economic growth this year."
However, according to Michael Ning, Managing Director at MacKay Shields and portfolio manager of Mackay Flexible Income Fund and High Yield ETF (HYLD), "the rise in 10yr treasury yield is a result purely from the increase in 10yr breakeven, and the real yield didn't change at all from July's low." Economy growth is not directly impacting yield levels, and "market is pricing in scenario to reflect fed's intention."
"We live in a structurally low inflation time", said Steve Xia, Senior Managing Director at Guardian and Professor at Brandeis University. "There is an oversupply problem globally", citing the low utilization rates in both the US and China. "At the same time, the demand is weak as the lower income group is already spending every dollar that they have for the past 30yrs." In his view, 10yr treasury yield may reach 1.5% - 2%, "but it will go down from there."
Credit Market
Beyond treasury market, people also wonder where to look for returns.
"Corporate issuance remains robust" said Henry Mo, as this may lead to concerns for rising corporate debts. "On the other hand, some companies start to use cash on balance sheets to bring down leverage."
In Michael's opinion, "credit risk is under control and can be managed. Private sector uses cheap funding condition to build up cash", and it was not used for share buyback yet. "I'd be concerned if they do it again sometime in the future" he added.
While credit spreads dipped below their pre-pandemic levels amid the ongoing coronavirus-induced uncertainty, Steve agreed that credit bonds still present a compelling investment option. "I like leverage loans better."
"The challenge for this year is really about where to find the upside," said Michael, using GME's 2022 callable bond as an example, "the bond didn't participate in the stock rally at all. There is no more upside except carry."
Stock/GME Investment implication
Reddit group WallStreetBets and GameStop stock have been making headlines recently. Investors on this open forum rallied together and dramatically drove up the stock's prices. Multiple trading platforms restricted users from buying those stocks, calling it a "risk-management decision" undertaken in the face of "extraordinary circumstances".
Guanghua Gao, Co-founder and Director of QED Alpha Capital Inc., provided another insightful perspective for this market turmoil. "High frequency market makers (HFMM) can take advantage of this and make money from retail customers" as order fill methodology adopted by the HFMM could create temporary market impact, and leave the retail investors more panic due to adverse selection. Such a dramatic move would hurt individual investors, while HFMM could make money when the stock prices came back. "I'm not saying they definitely did it during this GME rally, but these are in HFMM's tool box and they won't hesitate to use it when it's available." said Guanghua Gao.
However, the speakers unanimously agree that the GME situation won't trigger a systematic risk, and it is still a good time to invest in the stock market now, despite the valuation is already pretty high.
"If we look at the spread between stock earning yield and 10yr real rate, stocks appear to be fairly valued," said Michael. "Of course, we're talking about the -1% low real rate environment."
Steve agreed, highlighting the risk for stock market if 10yr yield go above 2%. "But in my opinion, we won't get there."
Guanghua suggested to allocate to stock index funds like QQQ and SPY. "Whenever the stock market goes down 10%, you should add more positions."
Asset allocation
Cash is always the dry powder especially at this time of the cycle. It gives investors an opportunity to get in with great flexibility. In recent months, Bitcoin price has continued to march higher, drawing attentions from many investors. But what is driving this growth and will it continue?
Panelists' view vary from concerned to cautiously optimistic. "In short and intermediate term, I do see very good opportunity. And it won't disappear in the US any time soon," said Guanghua.
On the other hand, Steve says much still hinges on the sovereign governments' policy response. "If I don't trust fiat currency, I'd buy gold rather than Bitcoin." "Everyone should own some gold. Unlike Bitcoin, gold truly have limited supply," Steve added.
"I am cutting exposure to long end of the curve" said Michael, "If the goal is for income, bank loan is one of my recommendations for investors."
In terms of specific geographies, Guanghua mentioned that China—initially at the forefront of the outbreak and recovered first—would be a good investment, especially in cross-broader e-commerce companies.
Comparing China's stock with equivalent US companies, "you'd see that they have the same earning and half the valuation," said Steve. There is an opportunity that the discount will be smaller in the coming year, thus making China's stock more attractive.