US stock market hits new high. Asian equities under pressure due to regulations and COVID-19

The S&P 500 clinched its fifth positive month in a row, rising more than 2% in June. The broad index also notched its best first half since 2019. Investors have shrugged off high inflation readings and have kept buying stocks on the hopes an economic comeback from the pandemic would continue and the Federal Reserve would mostly maintain its easy policies.

Some investors and strategists have cited the spread of the Delta variant of Covid-19 as a risk for markets in the second half of the year. However, analysts believe that the variant shouldn’t hurt equity markets, citing low fatality rates in countries with widespread vaccinations. With resurgent doubts about the strength of the post-pandemic boom, traders are shifting back into the tech behemoths whose dominance of high-growth industries leaves them poised to keep sales and profits rising even if the economy slows. That’s fueled a run of outperformance since the beginning of June and marks a shift from early this year, when the so-called reflation trade was all the rage as investors plowed into the stocks of companies whose fortunes are closely tethered to cyclical swings in the economy. As a result, the market value of the five biggest technology companies -- Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. and Facebook Inc. -- has surged more than $1 trillion since the beginning of June.

Asian equities under pressure

Asian shares stumbled  and were set for continued lackluster performance as confidence took a beating over the global spread of the Delta virus variant and worries it could stall a worldwide economic recovery. Fears central banks will choke economic recovery by tightening policy in their efforts to rein in inflation, a rapidly spreading Delta variant of the coronavirus around the world and still low rates of vaccination have darkened the outlook.

China equities also took a beating after a strong run as one of the least affected country from the COVID-19 pandemic. Chinese regulators have introduced new rules in areas from anti-monopoly for internet companies to data security, targeting large tech firms. And punishment has come swiftly. Ant Group’s record-breaking initial public offering was pulled by regulators in November, while Alibaba was slapped with a $2.8 billion fine as a result of an anti-monopoly probe. Ride-hailing giant Didi meanwhile, became the subject of a cybersecurity review days after its massive U.S. IPO. And China’s top cyberspace regulator ordered app stores this month to suspend Didi from being downloaded.

However, signs of Chinese technology companies pro-actively putting in place regulatory changes may see the Chinese tech company sell-off stabilize while a more abundant supply of COVID-19 vaccine saw Asian countries ramping up on their vaccination process, which may curtail the spread of the Delta variant.

Portfolio Strategy

The portfolio rallied strongly in June thanks to the strong rally of technological stock even though the Asian equities have been dragging on the returns of the overall portfolio. Asian equities are expected to rally in the next few months as COVID-19 will run its course over the coming weeks as observed in the Indian market. The US continue to report positive development in their economic recovery and that is expected to support the stock market in the near term as long as inflation numbers start to moderate, allowing US Federal Reserve to continue their loose monetary policy.  

In order to hedge against the rising risk of rising interest rates as well as a potentially strengthening of the USD due to tightening monetary policies, we will be switching out from our Asian short duration bond (United SGD Fund) to a US based short duration high yield bond (Allianz US short duration high income bond). This allows us to ride the rising interest rate and rising USD trend better. As for the CPF-IS portfolio which does not have an equivalent fund, we will be using an Asian high yield bond (Manulife Asia Pacific Investment Grade Bond A SGD) instead. Meanwhile, we will be taking profit from the portfolio via a general rebalancing of the portfolio back to 70% equity 30% bond as some of the portfolios has shifted close to 75%-80% equity due to a combination of a strong stock market rally and RSP into equities by some of the client.

After this round of adjustment, the portfolio will still be maintaining a 70% equity 30% bond allocation as we continue to participate in the recovery of the global economy due to the COVID-19 pandemic while being more targeted in industry and country types in order to enhance the returns, while buffering from any market shocks as a result of the surprises that COVID-19 can throw at us.