Weekly Market Commentary By H.E.R.O. (14 to 18 Dec 2020)
During the week ended 18 December 2020, the the Portfolio of Global Dividend-Yielding Innovators gained over +4%, vs MSCI ACWI All World index +0.7%, S&P 500 +1.25%, Hang Seng -0.03%, FTSE -0.3%, Google -2.9%, Intel -4.6%, Alibaba -1.7%, Tencent -1.4%, Meituan -5.2%, JD.com -1.3%, Unilever -1.6%, GSK -4%, Merck -4.1%.
Since the recent inception on 28 August 2020, the Portfolio of Global Dividend-Yielding Innovators has maintained positive absolute returns above its 3% hurdle rate on high watermark, and outperformed major world indexes in MSCI ACWI All World Index, S&P 500 and NASDAQ, during which MSCI ACWI All World index +8.4%, S&P 500 +4.4%, NASDAQ +9.1%, NASDAQ 100 +6.2%, Euro Stoxx Tech index -0.1%, Shanghai Composite index -0.3%, Gold (physical spot in USD) -4.3%, while popular big cap tech and innovation-themed companies declined in the aftermath of the most extreme ever rotation recorded in history, including Consumer Staples with Nestle -6%, Kraft Heinz -0.3%, Unilever -2.5%, Conagra -5.3%, General Mills -6.3%, Church & Dwight (Condom) -7.1%, McCormick -8.7%, Campbell Soup -8.8%, Kellogg -12%, Kimberley Clark -13.7%, Reckitt Benckiser (Lysol, Dettol, Durex) -14.1%; Local Defensive steady supermarket hero Sheng Siong -9.3% and China’s best-run supermarket operator Yonghui Superstores -19.8%; REITS with Keppel DC REIT -3.5%, NetLink Trust -0.5%; China Mobile -18.4%, Alibaba -10%, Netease (China's internet gaming giant whose revenue is around half of Tencent's gaming business) -6%; Korea Big Tech with Kakao -9.5%, Naver -15.2%; Healthcare giants Merck -7.1%, Sanofi -7.1%, GSK -7.9%, Gilead -9.5%, AstraZeneca -10%; Visa -2%, eBay -2.2%, Adobe -2.6%, Microsoft -4.5%, Facebook -5.9%, Amazon -5.9%, Mastercard -7%, S&P Global -12.1%, Salesforce.com -16.1%; Exchange operators Nasdaq Inc -2.5%, Deutsche Boerse -11%, Euronext -11.2%, ASX -16.6%; Glove companies Top Glove -24.2%, Hartalega -25.2% and Riverstone -47.3%, and medical apparel maker Medtecs -36.8%.
The separate equity portfolios of H.E.R.O. Innovators of our clients generated +58% in average returns, as at 18 Dec 2020, since the H.E.R.O. research methodology was provided for and implemented in March 2020, vs MSCI ACWI All World index +42.4% and Singapore STI index +12.7% over the same corresponding period.
- Key contributors during the week were led by: (1) Nordic Global Leader in Pet Health & Nutrition (+17.7%); (2) Finland's Most Popular Webstore (+17.3%); (3) Nordic Global #1 Leader in Sauna & Spa Tech (+16.1%); (4) Nordic Global Medtech Leader in Glaucoma & Eye Diseases (+15.3%); (5) Germany's & Europe's #1 Market Leader in Integrated IT & Software Solutions for Public Passenger Transport (+11.2%).
“We will keep buying until substantial further progress has been made in the recovery” was the key message by Fed’s Powell during the policy meeting on Wednesday. Besides verbally committing to the massive monthly asset-purchase program to keep buying US$120 billion in U.S. government bonds, Powell also commented that the Fed is saving its ammo for the “double dip” to reassure that the Fed is always there with substantial firepower to catch the ball from dropping. Even though markets were expecting more action in WAM (weighted average maturity) targeting or a QE twist, the qualitative guidance was enough to spark a dive in the dollar and a rally in haven (gold) and tech stocks.
Notably, Norway’s central bank said this week that it may be able to raise interest rates earlier than previously thought, reinforcing the view it will be the first among holders of the world’s major currencies to tighten policy as the economy recovers. The Norges Bank commented that their latest forecast implies a “gradual rise from the first half of 2022 as activity approaches a normal level” after the pandemic. The outlook stands out among the world’s key central banks from the U.S. to emerging markets, which are all expected to maintain ultra-loose policies for years to support their pandemic-stricken economies. While rate hike is generally deemed to have a negative impact on longer-duration assets that include tech stocks, market reaction to the Norges Bank’s statement indicate that what matters far more is the position of economic strength from which one is able to voluntarily carry out rate hikes at one’s unpressured pace and target. The Norwegian krone railed – and so did our Nordic portfolio stocks, as the structural growth innovators are all local market leaders benefitting from more robust domestic economic conditions that are relatively insulated against the vagaries of global macroeconomic swings, commanding a strong domestic foundation from which they have leveraged upon to successfully expand and grow their proven business model overseas.
Meanwhile, markets continue to cling on to the hopes of a massive fiscal stimulus in a COVID relief package, as negotiations continue into the weekends, with Trump signing the stopgap spending bill to provide funding until midnight Sunday to keep the U.S. government operating and avert a shutdown of the government, which had been operating on temporary funding that expires at the end of the day on Friday. Lawmakers had earlier passed a one-week funding extension last Friday to give themselves more time to pass legislation before leaving Washington for the rest of the year. Despite a week of talks, they were still without a deal.
On late Saturday, Republican Senate leaders and Democrats reached a compromise over COVID-19 relief package. The relief package under discussion is expected to include $300 a week in enhanced unemployment benefits, a second round of stimulus checks and funding for schools, health-care providers, vaccine distribution and small businesses. Under the deal, the central bank would retain its ability to set up emergency lending programs without congressional approval. But it would face a narrower constraint: The Fed wouldn’t be able to replicate programs identical to the ones it started in March at the beginning of the pandemic without the approval of Congress. The Senators' spokesperson commented: “This agreement rescinds more than $429 billion in unused CARES Act funds; definitively ends the CARES Act lending facilities by Dec. 31, 2020, stops these facilities from being restarted, and forbids them from being duplicated without congressional approval. This agreement will preserve Fed independence and prevent Democrats from hijacking these programs for political and social policy purposes." Congress will vote on the relief package on Sunday. Could this be the start of the "BUY on the expectations, SELL on the news" for markets/Cyclicals?
On Friday, Trump signed the legislation that could kick Chinese companies off of U.S. exchanges unless American regulators can review their financial audits, escalating tensions between the two countries. The new law marks a watershed moment in a long-running dispute over China’s refusal to let the Public Company Accounting Oversight Board examine audits of firms whose shares trade in the U.S., many of which are fraudulent vehicles to extract money from shareholders, such as Luckin Coffee, dubbed the Starbucks of China, which paid a US$180 million fine this week to end SEC probe after intentionally fabricating more than US$300 million in sales to give investors the false impression that the company was experiencing miraculous growth. The requirement for the inspections by the agency, which was created in the wake of the Enron accounting scandal, is meant to prevent fraud and wrongdoing that could wipe out shareholders. Also on Friday, the U.S. Commerce Department announced it is blacklisting China’s top chipmaker SMIC, drone maker unicorn DJI Technology and more than 60 other Chinese companies “to protect U.S. national security”, joining the likes of Huawei on a list that denies them access to U.S. technology from software to circuitry. China in turn vows countermeasures. On top of the large gaps in China’s semiconductor knowledge, Beijing has testy relations with chip leaders whose cooperation it would need to get up to speed in the technology. Beyond US-China tensions, it also has poor relations with Taiwan, and relatively strained relations with Japan and South Korea. Relations with the EU are now also under scrutiny. U.S export controls imposed on Chinese tech firms are not expected to be significantly relaxed under Biden, who will most likely continue the cards that Trump played against China and work with allies to drive Beijing into making more concessions.
In one of the most glaring signs of the increasing deterioration of the fragile financial foundations of China as the wave of credit defaults accelerates and intensifies – and the wilful blindness and reckless cavalier attitude of foreign investors in continuing to pour money into the country’s capital markets – Beijing has given the green light for the first national asset management company (AMC), or Bad-Debt Bank, to be established in more than 20 years, as the country’s banking system braces for a record spate of corporate defaults, years of reckless borrowing and decade-high dud loans as the coronavirus pandemic weighs on banks and borrowers. The new AMC joins a quartet of asset managers established two decades ago to clean up the books of China’s four largest state-owned lenders: Huarong for ICBC, Great Wall for the Agricultural Bank of China, Orient for Bank of China and Cinda for China Construction Bank. They took over trillions of yuan worth of bad loans from the four lenders, cleaning up the banks’ books sufficiently for them to tap the global financial markets including Hong Kong for fresh capital to reinforce their balance sheets. Notably, foreign investors attracted by the seductive story of Beijing-backed AMCs buying distressed asset at a bargain price had been burnt very badly: Huarong (2799:HK) is down 72% since its debut on 2015, while Cinda (1359:HK) is down 68% since 2013. As the late philosopher-poet George Santayana elucidates, “Those who cannot remember the past are condemned to repeat it”.
Once the vaccines actually start being administered at scale and the pandemic recedes, a lot of investors are going to wake up to the fact that the global economy is still dogged by a host of thorny problems that both predate and have been exacerbated by the virus. The current unsustainable market euphoria over Cyclicals, Value Traps, Zombies and Vampires has created opportunities for long-term investors in the inexorable rise of a selected group of fundamentals-based structural growth innovators who have remained resiliently positive throughout the most extreme ever market rotational change over the past four to six consecutive weeks, setting the roadmap going into the next year and beyond in a post-pandemic future. These winners solve high-value real-world problems to generate visible and vigorous quality earnings growth before and during the pandemic, as well as are poised to enjoy continued healthy demand and staying power in a post-pandemic future when the world recovers painfully and slowly to transition from the Pandemic Health Crisis to the next crisis – the PTSD Post-Pandemic Growth Crisis.
The K-shaped recovery divergence, coupled with the worsening U.S.-China relationship, points towards the new world order in the post-pandemic future that marks the ascent of the quiet Nordic powerhouse region – comprising of Sweden, Denmark, Norway, Finland and Iceland with a combined GDP of over US$1.6 trillion, combined population of around 27.3 million people, and the highest regional GDP per capita in the world at over US$62,000 – where they are a Winter War kind of country: innovation happens when things are tough, not when they’re easy and comfortable.
We will continue to avoid the overcrowded and popular frenzy-gripped frothy emerging markets, such as China, Korea and India, that are driven and dominated by retail traders, as they are far more vulnerable to destabilizing selloffs, systematic corporate misgovernance and accounting fraud blow-ups and black swan risks. The Nordics has the lowest macroeconomic and corporate governance risk as a region and also the strongest in terms of resiliency in coping with the vaccine rollout transition and rebounding well in a PTSD Growth Crisis situation, far ahead of any country/region. Most importantly, the Nordic is less vulnerable to destabilizing fund flow sell-off, and market microstructure wise, the investor shareholding base in the Nordic companies is largely longer-term institutional investors and pension funds, unlike the volatile short-term speculative retail-driven trader flow in many other countries, including the U.S. where the longer-term forex risk has increased. Also, the Nordic is quite distinct from the Eurozone (EU) where fiscal and monetary coordination/disunity are always a problem, so it's regarded as an oasis on its own even though it is technically in Europe but is not part of the EU's problems.
Our portfolio companies have shown resilience and scalability during this tumultuous environment and the management continue to make key strategy decision to expand their market leadership in their respective fields. The quiet HE.R.O. innovators have invested wisely in innovations that sharpen their exponential competitive edge for long-term value creation, strengthened their market position in the value chain that supercharged their cashflow dynamics, developed new channels, new markets and new customer base for revenue growth while improving their profitability at a time when most businesses are struggling, and nurtured their human capital and corporate culture to foster innovation and ESG sustainability.
While the short-term day-to-day price movement can be volatile, what continues to be crystal clear is that the quiet structural growth H.E.R.O. innovators remain the most visible and vibrant pathway in a foggy, volatile, whipsawing, uncertain market to deliver sustained outperformance with their healthy fundamentals results.
Interesting Readings to be a Better Investor & Person
8 Quotes by Carl Jung That Could Change the Way You Think and Live
“The shoe that fits one person pinches another; there is no universal recipe for living.”
“I’m not what happened to me, I’m what I choose to become.”
Your life is not defined by what happens to you, but by how you deal with it.
A great story to visualize this powerful lesson is the parable of the egg, potato, and coffee beans:
If you put each of them in boiling water for long enough, the potato will become soft and weak, the egg will become hard, and the coffee beans will change the water to something entirely new. You can view the boiling water as the challenges you face in your day to day life. No matter how big or small these challenges might seem, you can always choose how you react to them. You can be a soft potato or an egg that becomes even stronger through storms. Or you choose to be adaptable just like the coffee beans and make the most out of the challenges you face.
“That which you most need will be found where you least want to look.”
“You are what you do, not what you say you’ll do.”
“Your visions will become clear only when you can look into your own heart. Who looks outside, dreams; who looks inside, awakes.”
“Knowing your own darkness is the best method for dealing with the darkness of other people.”
“The greatest and most important problems of life are all fundamentally insoluble. They can never be solved but only outgrown.”
“Everything that irritates us about others can lead us to an understanding of ourselves. “
There’s no universal recipe for living: What might be the best way to live life for someone else might be a disaster for you. Don’t trust anyone who’s trying to convince you of their view of the world. Build your own rules.
Sometimes, you need to go where you least wanna go: The solutions to your most profound problems might be hidden in the darkest places. Don’t be afraid of digging deeper and exploring the unknown.
You can be a potato, an egg, or a coffee bean: You’re not what happens to you but what you choose to become.
Stop talking, start doing: You’re not what you say you’ll do but what you actually do. Or, as Nike states: Just do it.
Looking at the outside won’t ever lead to a satisfying life: Instead, look inside your own heart — what is it that you really want?
Knowing your own darkness will help you to deal with the darkness of others: Spending more time with yourself is the best exercise to better understand others.
You don’t need to solve every problem: Sometimes, you can outgrow or just accept them.
If someone irritates you, it might be because of your own flaws: Ask yourself why you feel triggered by other’s misbehavior.
|The H.E.R.O. Investment Framework
The H.E.R.O. framework, methodology and strategy are powering equity portfolio asset for our clients. The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators is the only equities strategy in the market that focuses on both dividend yield and innovation-driven capital gains to enhance total shareholders’ returns. It is also the only dividend-yielding equities strategy in the market that is entirely not dependent on and with zero exposure to: (1) cyclicals (concentrated in economically-sensitive and rate-sensitive sectors such as financials, property & construction, energy & materials) that may not be resilient in economic downturns, and (2) cheap-gets-cheaper yield- and value traps. It also applies the proprietary forward-looking fact-based accounting fraud detection system that was pioneered and taught at the Singapore Management University, ranked top five in the world accounting rankings, and presented to the top management team of Singapore’s top financial regulator Monetary Authority of Singapore (MAS), to mitigate downside risks which escape detection by typical western-based forensic tools.
I. Strategic Focus on Quiet Innovators & The H.E.R.O. Investment Framework
H.E.R.O. is operationalized into a systematic 4-step investment process and investment framework powered by sustainability & ESG principles to identify the winners, to distinguish between the true innovators and the swarming imitators, between the devoted missionaries forging a greater Purpose and the mercenaries.
We use the framework and positive criteria of the United Nations Sustainable Development Goals (SDGs) to integrate environmental, social, and governance (ESG) considerations into the research and investment process in selecting companies that generate sales in products and services that contribute to the achievement of the UN SDGs. The central focus of our impact investing is on innovators who contribute to the UN SDG Goal 9: Industry, Innovation, and Infrastructure — “Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation”.
H.E.R.O. is unique in eliminating the downside risks from accounting tunneling fraud and misgovernance through unusual related-party transactions, consolidation accounting craftiness (opportunistic shifting of expenses and debt into unconsolidated entities), and hidden balance sheet liabilities at the wider pyramidal business group level etc., which escape detection by western-based forensic tools through a proprietary forward-looking fact-based accounting fraud detection system developed by KB, and taught at the Singapore Management University, ranked top five in the world accounting rankings, and presented to the top management team of Singapore’s top financial regulator Monetary Authority of Singapore (MAS). For instance, prevalent across Asian companies, previously Big-4 audited “cash” in the balance sheet are often misclassified “cash equivalents” disguised from improper short-term related party loans employed by the insiders to expropriate or tunnel out cash from the company after initially propping up financial numbers artificially to create false positive signals to lure in funds.
|II. Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose
“Innovators” are companies that generate sales in technologically enabled new products and services that potentially transforms the way the world works. We seek to identify companies capitalizing on innovation in offering faster, cheaper, more productive, more cost effective, more compelling products and services, or that are enabling the further development of an innovation theme in the markets in which they operate.
Not only do the H.E.R.O. innovators generate high profitability at the inflection point of their exponential growth trajectory, more importantly, they are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out.
|II. Quiet Innovators Thrive in Stormy Times
Prepare and position a winning portfolio for a post-pandemic world with innovators who thrive in stormy times and transform crises and trauma into opportunities for the future. The coronavirus crisis has helped accelerate innovation and enhanced the leadership of innovators. Market positions are not redistributed during sunny and calm times, but during times of crisis. The pandemic crisis has changed the behavior of both consumers and businesses. Companies offering faster, cheaper, more productive, more cost effective, more compelling and innovative products and services are gaining significant share.
Market leadership and resilient winners in stormy market environment and in the post-pandemic future will be much less about the overcrowded popular trades in mega-cap tech and loss-making tech/biotech, as defined by FAANGT-STAMP (U.S.: Facebook, Apple, Amazon, Netflix, Google, Tesla; Asia/China: SEA, Tencent, Alibaba, Meituan-Dianping, Pinduoduo), who also do not pay any dividends (with the exception of Apple and Tencent), and will be led more by highly-profitable quiet innovators, including dividend-yielding cloud Software-as-a-Service (SaaS) companies.
Notably, of the 90+ cloud software companies listed in the U.S., nearly all (>95%) do not pay any dividends, with many still looped in a negative free cashflow position, while the 20 global SaaS portfolio companies in the Portfolio of Dividend-Yielding Global H.E.R.O. Innovators are unique in being exceptional market leaders in their respective field with ample internal cashflow generative capacity to reinvest for higher-margin growth and still consistently produce rising dividend yield to reward shareholders.