FSM Managed Portfolios Quarterly Investment Strategy - 1Q 2021
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FSM Managed Portfolios
Quarterly Investment Strategy
1Q 2021
1FSM Portfolios
Market Valuation
Earnings Earnings Earnings
P/E Yr P/E Yr P/E Yr
Markets Fair P/E Growth Growth Growth
2020 2021 2022
2020 2021 20212
US (S&P 500) 27.0 22.1 19.1 17.0 -15.10% 22.18% 16.03%
Europe (Stoxx 600) 23.6 17.3 14.9 15.0 -34.57% 35.66% 16.54%
Japan (Nikkei 225)* 25.7 21.1 18.3 18.0 -10.26% 21.44% 15.28%
Emerging Markets (MXEF) 20.0 15.1 13.0 13.5 -15.54% 31.75% 15.85%
Asia ex-Japan (MXASJ) 20.2 16.2 13.9 14.5 -6.86% 24.91% 16.54%
Singapore (STI) 19.3 13.9 11.9 15.0 -39.64% 39.47% 16.39%
Hong Kong (HSI) 14.5 12.3 10.7 12.0 -25.53% 18.32% 14.51%
Taiwan (TWSE) 20.4 17.3 15.7 15.0 11.15% 18.11% 9.57%
South Korea (KOSPI) 20.6 14.0 11.7 11.5 0.24% 47.10% 19.96%
China (HSML100) 12.1 10.6 9.4 13.0 -20.43% 13.99% 12.97%
China A (CSI 300) 15.6 13.3 11.8 13.0 -5.53% 17.85% 13.72%
Malaysia (KLCI) 18.3 15.5 13.7 16.0 -0.35% 6.81% 4.06%
Thailand (SET) 17.1 16.0 15.4 14.0 -43.82% 49.42% 15.80%
India (SENSEX)* 27.5 18.5 16.1 18.0 -11.48% 33.88% 20.66%
Indonesia (JCI) 29.0 21.6 17.9 16.0 8.68% 109.88% 36.92%
Russia (RTSI$) 25.3 17.3 12.2 7.0 -51.47% 57.04% 17.46%
Brazil (IBOV) 13.2 8.1 6.8 11.5 -65.19% 251.78% 13.31%
NASDAQ (NASDAQ 100) 47.6 13.5 11.9 - 7.75% 15.07% 15.06%
Fixed Income Categories YTM (%) Credit Spreads (Bps)
Asian Bond 2.99 262.92
Asian Corporate Bond 3.37 300.92
Emerging Market Bond 3.50 313.96
Emerging Market Corporate Bond 3.62 326.05
USD High Yield Bond 4.18 382.37
Global High Yield Bond 4.47 411.18
EUR High Yield Bond 3.40 304.22
Asian High Yield (BBB) Bond 4.53 416.92
Source: Bloomberg and iFAST compilations. All returns are in their respective local currency terms and the MSCI index return is in US dollars. 2
Data as at 31 December 2020.
*Japan and India PE forecasts are based on the fiscal year ended March 2019, 2020 and 2021 respectively and all returns are in their respective
local currency terms.FSM Portfolios
Portfolio Performance Review
(Data as at 31 December 2020)
To view the market performance in 4Q, regarding developing markets, S&P 500 and Nikkei 225 soared by
11.7% and 18.4% respectively, and Europe Stoxx 600 also gained 10.5％. As for emerging markets, the
MSCI China Index representing China and CSI 300 representing China A-shares gained 11.2% and 13.6%
respectively over the quarter. Overall, emerging markets outperformed developed markets. The MSCI
Emerging Market Index representing emerging markets increased 19.3%, while the MSCI All Countries
World Index, the representative of developed markets, earned 14.4% over the same period.
Global pandemic showed signs of moderation. Markets are expected to embrace strong economic recovery
and further increase their confidence in risk assets, allowing major markets to continue their growth
following last quarter. Among the major global markets, the emerging markets were the best performers.
Thailand and Singapore markets rebounded from last quarter’s low and recorded double growth in this
quarter. Brazilian and Indian markets had the best performance in our research coverage. South Korean
and Taiwanese markets also had strong performance, but the growth of China A and China H slowed down.
MSCI Asia ex-Japan Index representing Asian markets grew by 18.3%, slightly lower than the overall
emerging markets.
As at 31 December 2020, our Aggressive, Moderately Aggressive and Balanced portfolios have gained
74.5%, 64.3% and 51.8% respectively since inception.
In terms of bonds, the higher risk bond category especially the high yield bond outperformed again in 4Q,
and Asian credit bonds became the worst-performing category.
As at 31 December 2020, our Moderately Conservative and Conservative portfolios have climbed 37.3%
and 26.0% respectively since inception.
[Unless otherwise specified, all returns are calculated in local currencies]
Cumulative Return Since 31 August
Portfolio Index Performance
2015*
Aggressive 74.53% 57.12%
Moderately Aggressive 64.27% 50.17%
Balanced 51.84% 43.22%
Moderately Conservative 37.30% 36.27%
Conservative 25.98% 29.32%
Source: Bloomberg and iFAST compilations. FSM Managed Portfolios were launched on 31 August 2015. Data as at 31 December 2020. All
performance figures include dividends and exclude sales charges. The performance figures are calculated based on the prices of the underlying
securities on a NAV-to-NAV basis with dividends reinvested. The latest available NAVs are carried forward if respective funds are on holiday.
Performance figures less than one calendar year in the first year of its launch are calculated since launch until the end of the particular calendar year.
Benchmark performance is calculated based on the price of the indices as at their respective valuation date in HKD terms. Past performance is not
indicative of future return. The portfolio's performance is for illustrative purposes only and does not represent the actual or future performance of clients'
portfolios.
Represents outperformance
3FSM Portfolios
Investment Outlook
Asset Allocation
Market Portfolio Allocation
Equity
US Underweight
Europe Underweight
Japan Overweight
Asia ex-Japan Overweight
Emerging Europe, Middle East and Africa Overweight
Latin America Underweight
China H-share Overweight
Bond
Short Duration Bond Overweight
Asian Investment Grade Bond Underweight
Asian High Yield Bond Overweight
Emerging Market Bond Overweight
Global High Yield Bond Underweight
Global Bond Neutral
Overweighing Equities vis-à-vis Bonds
Most markets managed to continue their growth in 4Q. In terms of currency, 20 equity markets covered in
our research recorded gains. All the emerging equity markets presented outstanding performance, and
Brazilian market was the best one within our research coverage. Thailand and Singapore markets, the
bottom two in ASEAN markets last quarter, rebounded from their lows and recorded double growth in this
quarter. South Korean and Taiwanese markets also had strong performance, but China A and China H
slowed down. Emerging markets outperformed developed markets, thanks to the rising Latin markets.
To counteract the impact of COVID-19, major central banks have adopted interest rate cuts or
unconventional and loose monetary policies to support the economy and financial system. Governments
also increased fiscal stimulus measures to support the economy. The large-scaled stimulating measures
have successfully boost market sentiment. Capitals kept flowing into markets, and the cyclical Asian
emerging markets are welcomed. Sovereign debt of developed countries improved, and hedging
instruments such as treasury bonds managed to record growth during the quarter. Looking ahead, the
global economy will keep recovering from the pandemic, and corporate earnings will improve, plus risk
assets such as equities and high yield bonds still have room to grow.
4FSM Portfolios
Equities
Developed Markets
In 4Q, the US stock market continued its upward trend of the previous quarter. The S&P 500 Index
representing US stocks rose 11.7% during the quarter. The presidential election is finally settled, and
vaccines are ready for rollout, plus the government took a new round of bailout, altogether driving US
market up. However, the infected cases kept rising in the US, and the economic figures released in the
quarter were mixed. In December, the Markit Manufacturing PMI rose to 60.7, standing above 50 for seven
consecutive months and creating a new high in the latest two years and a half. Meanwhile, the Services
PMI grew to 57.2, better than market’s expectation, showing that local economic activities are accelerating.
The non-farm payrolls fell by 140,000, the first decline in recent eight months, but lower than market
expectation. The unemployment rate remained at 6.7%. As the Fed injected more liquidities and maintained
a low-interest environment, the valuation of US market remains expensive. As such, we continue to
underweight this market.
In terms of Europe, market confidence improved because of the good news in the COVID vaccine. At the
end of 2020, capitals flew from growth stocks to value stocks, benefiting European market which largely
relies on value stocks. Stoxx 600 gained 10.5% in this quarter. European economy also improved over the
same period. In December, the Manufacturing PMI in Eurozone rose to 55.5, expanding for six consecutive
months. The Industrial Production Index in October narrowed the decline to 3.8% from previous 6.3%,
which was better than market’s expectation. Despite uncertainties of the pandemic, European central banks
will continue to increase PEPP, extend TLTRO to twelve months and keep interest rates unchanged in
order to stimulate the economy. These measures will help moderate the pandemic's impact on the economy.
On the whole, considering the aggressive and continuous policy support in Europe, plus the reasonable
stock market valuations, we are not pessimistic towards European stock markets.
Strategy:
As the market expects economic recovery and inflation to be around the corner, the US 10-year Treasury
bond interest rate will rise in 2021. The Fed also indicated that they have learned a lesson from recent
years, and they would tolerate higher inflation. Fed is expected to take action to interfere if the interest
rates surge to a level beyond economic tolerance. The bond-buying scale can be adjusted flexibly without
shrinking sheets too early. We believes that the volatility range will enlarge, and the overvalued sectors
and stocks will be the first to fall due to the rising interest rate. Supported by unlimited QE and low-
interest-rate environment worldwide, major global markets have accumulated certain growth since
March's low. Coupled with the fact that P/E estimates are largely revised down, 14 out of 18 markets
covered in our research are overvalued or higher than historical mean even though calculation is based
on estimated P/E in 2021. Several markets have been overbought, showing that major global markets are
not as worth-investing as a year ago.
Currently, US market is expensive and its valuation has even reflected the earnings growth for the next two
years. The valuation may be further suppressed because of the rising interest rates along with the
expectation that inflation will return. According to previous experience, in the early stages of economic
recovery and inflation, cyclical stocks, small-cap stocks and financial stocks all performed well. However,
we believe that some traditional industries suffered structural hit, and thus the recovery path may be slow.
In contrast, the pandemic has changed people's lifestyle and accelerated the digitalization of economic
activities. The introduction of vaccines will not change the speedy development of the digital economy.
Among them, e-commerce, SaaS and semiconductors are anticipated to continue a rapid growth.
5FSM Portfolios
Emerging Markets
Thanks to the rising Latin equity markets, the emerging equity markets continued last quarter’s growth, and
the MSCI Emerging Markets Index recorded a 19.3% growth in 4Q. All the emerging equity markets
presented outstanding performance, and Brazilian market was the best one within our research coverage.
Thailand and Singapore markets, the bottom two among ASEAN markets in the previous quarter,
rebounded and recorded double growth in this quarter. South Korean and Taiwanese markets also had
strong performance, but China A and China H slowed down. MSCI Asia ex-Japan Index representing Asian
markets grew by 18.3%, slightly lower than the overall emerging markets.
In terms of China, figures released during the quarter were generally beyond the market's expectation,
showing that its domestic economic activities were recovering across the board. Externally, even though
the pandemic resurgence was seen worldwide, economic activities of its major trade partners have revived
one after another. China's exports saw a large increase in 4Q. The latest data in November showed a
14.9% YoY growth, hitting a year high. As to equity market, the upside slowed down at the end of 2020,
due to the tightening China-US relations after US presidential election, and the short-term adjustments in
leading tech stocks resulted from government’s regulatory measures.
Strategy:
As China is recovering ahead of the globe with stable momentum, its domestic demand will drive a rebound
in regional exports. Meanwhile, commodity prices will go up along with improving domestic demand and
weakening US dollars. We are also optimistic about South Korean market. Global economy will rebound
from last year’s bottom, and mobile phones, automobiles and other electronic products are booming, and
the demand for memory in data centre servers hit by the pandemic will also rebound strongly. Although the
demand for memory market was weak, and the prices dropped from 2018 to 2020, looking ahead, we will
see a rebound in demand and prices, which will drive South Korean market to go high.
Due to the escalating China-US tensions, and there are rumours that the US may consider restricting
Chinese companies from raising funds in the US. More US-listed Chinese companies have shown
willingness to return and list on HKEx. Besides, amidst the uncertain environment due to China-US tensions,
Chinese unicorns (large unlisted sci-tech innovation enterprises) are more willing to raise IPOs in Hong
Kong instead of the US. The proportion of the new economy sectors in the indices will largely increase,
accompanied by an upward revaluation of the indices. We believe HSI has seen its tipping point. Regarding
earnings, the growth rate will be driven by financial, communication services (Tencent) and consumer
discretionary (e-commerce) sectors in the coming two years. We think it is not difficult to meet the market's
expectation.
6FSM Portfolios
Fixed Income
The last Federal Open Market Committee (FOMC) in 2020 was held in mid-December. The authority did
not announce any easier monetary policy as expected, but only promised to keep the interest rates
unchanged “until labour market conditions have reached levels consistent with the committee’s
assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed
2% for some time”. In light of the forward guidance, the central bank is not moving interest rates through
2023, and promised to extend its bond-buying programme. During this quarter, US 10-year Treasury yield
continued its growth from 0.6% at first, then to 0.7% and 0.9% at the end of this quarter, creating a new
high for the past eight months. However, hedging instruments such as Treasuries still recorded a strong
rebound during the quarter. Risk appetite in this quarter further improved, and higher risk bonds rallied
following the rebound of the previous quarter. Thus, USD high yield bond rose by 6.5%. Due to the fallback
of currency, the Asian bond category, by contrast, rose only 2.1% in 4Q, ranking the last.
People’s Bank of China (PBOC) put more efforts when entering the late 4Q. It conducted a 4-day reverse
repurchase operation in December again after three months. Besides, it expanded MLF in November and
December. The scale of MLF operated in December created a historical high, way beyond the market's
expectation, which was used to stabilize the seasonal capital demand came at quarter-end and to maintain
sound and ample liquidity. The total social financing as of December is 2.13 trillion Yuan, a 13.6% growth
YoY. The government maintained the growth rate of social financing high to expand fiscal expenditures.
Meanwhile, the year-on-year growth of M2 was 10.7%, slightly beyond expectation. The M1 also recorded
a 10% YoY, hitting a new high since February 2018. The economic recovery continues to be promising and
PBOC has indicated that it would tend to adopt a prudent monetary policy.
Strategy:
s
With the launch of vaccines and the constant economic recovery across the globe, inflation is anticipated
to return, causing the Treasury yield to grow. We think the US 10-year Treasury yield is highly possible to
rise. Fed is expected to take action to interfere if the interest rates surge, and the yield volatility range will
enlarge. As the market regains risk appetite, coupled with the above factors, it is expected that low-risk
bond types will continue to be under pressure, and volatility will rise, but yields will continue to linger at low
levels. In terms of yield spread, emerging market bonds and Asian high yield bonds have relatively low
valuations. At the same time, central banks still have room to ease policies. Plus their current high yields,
the two markets can provide stable and high cash flows for investors in the low-interest environment. Thus,
we think these two bond categories still have room to narrow down yield spreads.
Among Asian high yield bonds, Chinese property bonds still carry investment value. The recovery of the
domestic property market is strong, and the fundamentals such as sales, property prices and land
investment are sound. The strong intention to buy lands indicates that property developers hold a positive
outlook. On the other hand, the growth rate of residential areas with their constructions newly started has
slowed down in recent months due to the oversupply in the market. Jackson Chan, our fixed income analyst,
anticipates that the sales growth rate will slow down, but the overall sales growth is expected to achieve
10% as the sales figures were seriously impacted because of the pandemic. Although it is expected that
the regulatory policy will continue to be tight, under the mainstream consensus of deleveraging and debt
reduction, the existing policies have limited impact on the industry, and the overall leverage level is
expected to fall in the next few years. In terms of yield spread, B-rated Chinese property bonds are relatively
attractive. Among them, we are more optimistic about first-tier large-scale developers, and the second- and
third-tier developers with rapid growth or healthy credit quality are also worth attention.
7FSM Portfolios
Risk Disclosure Statement - Portfolios
Investment risk - Past performance may not be a reliable guide to future performance. The value of the underlying investments and the return
derived from them can fluctuate and go down as well as up. There can be no assurance, and no assurance is given, that the portfolio will
achieve its investment objectives. There is also no guarantee of repayment of principal.
Single-country/sectorial risk - The portfolio may invest in securities that may have concentrated holdings in a single country or sector, and
thus may have greater exposure to the market, political, legal, economic and social risks of that particular country or sector than securities that
diversify country risk across a number of countries. As a result, the value of the single-country or -sectorial securities may be more volatile than
securities that diversify across a larger number of countries or investments.
Fixed income securities and downgrade risk - The portfolio may invest in fixed income securities. Fixed income securities are subject to the
risk of an issuer’s ability to meet principal and interest payments on the obligation (credit risk), and may also be subject to price volatility due
to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk).
The portfolio may invest in fixed income securities that are interest rate sensitive. An increase in interest rates will generally reduce the value
of fixed income securities, while a decline in interest rates will generally increase the value of fixed income securities. The performance of the
portfolio will, therefore, depend in part on the ability to anticipate and respond to such fluctuations on market interest rates, and to utilize
appropriate strategies to maximize returns while attempting to minimize the associated risks to investment capital. Fixed income securities are
also exposed to the risk of being downgraded, which can cause a significant drop in the value of the portfolio.
For the full version of the portfolio risks, please refer to https://secure.fundsupermart.com.hk/hk/main/download/risk_ch.pdf
Important Information
The above portfolio is managed by iFAST Financial (HK) Limited (“IFHK”), which is licensed with SFC in conducting Type 1 (Dealing in
Securities), Type 4 (Advising on Securities) and Type 9 (Asset Management) regulated activities.
These materials are issued by IFHK and have not been reviewed by SFC. All information presented is compiled from sources believed to be
reliable and current, while accuracy cannot be guaranteed. The performance information and data presented herein are received at month-end
or quarter-end but are not independently verified. This document should not be construed as an offer, solicitation, investment advice, research
or recommendation by IFHK on the relevant portfolio. Investors shall consider their own personal circumstance and the specific risks of the
relevant portfolio before making any investment decision. Investors shall not rely solely on these materials in making investment decisions and
shall seek for independent professional advice on the portfolio risks and suitability.
Investment involves risks and past performance is not a guarantee of future return. The portfolio’s investment return and principal value will
fluctuate where an investor’s units, when redeemed, maybe worth more or less than the original principal. Current performance of the
investment portfolio may be lower than the performance quoted here. Track records are based on individual investment portfolio and do not
represent the performance of actual client accounts. There are inherent limitations with investment portfolios, such as the limited impact of
market factors related to executing trades or liquidity, among other limitations. The target results are not an indicator of the returns a client
would have realised or will realise in relying on the portfolio. For more information and disclosures, please visit https://www.fsm.com/. The
copyright of this document is owned by IFHK and it should not be copied, reproduced, sold or distributed without prior consent from IFHK.
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