WEEKLY MARKET COMMENTARY BY H.E.R.O. (14 Sep to 18 Sep 2020)
The Portfolio of dividend-yielding global H.E.R.O. Innovators rose during the week ended 18 September 2020, with the invested portfolio up significantly vs MSCI ACWI All World index +0.1%, Euro Stoxx -0.97%, DAX -0.66%, FTSE -0.42%, and S&P 500/NASDAQ crumbled for the third consecutive week by -0.64%/-0.55% to suffer its longest losing streak in over a year, demonstrating her resilience in turbulent market conditions and extending her overall outperformance against major world indexes since her recent birth on 28 August 2020, during which MSCI ACWI All World index tumbled -3.56%, S&P 500 -5.37%, NASDAQ -7.72% (NASDAQ is down over 12% since recent high in September, led by FANG stocks -17%), and Greater China stocks slumped with Hang Seng index -2.82%, CSI 300 index -2.21% and HSCEI -4.97%.
- Nordic, Swiss and Japan H.E.R.O. innovators were resilient winners and key contributors during the week, led by: (1) Nordic’s CRM SaaS Leader (+19.3%); (2) Global Leader in Analytical Equipment and Disposables in Automated Cell Counting & Analysis (+13.5%); (3) “Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS) (+12.1%); (4) Pioneering Inventor & #1 Global Leader Specializing in Helmet Based Rotational Motion Safety and Brain Protection (+10.6%); (5) Global #1 Leader in Advanced Communication and Hearing Protection Systems to Enable Communication In Noisy & Mission Critical Environments (+8.8%); (6) Japan’s #1 SaaS Cloud Leader in Integrated Real Estate and Facilities Management Software (+8.6%).
- 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 one of 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.
“You are expelled!” boomed Trump to Tencent in the download ban of the WeChat app in the U.S. app stores beginning Sunday, as U.S.-China relationship deteriorated into dangerous choppy waters. In addition, the Committee on Foreign Investment in the United States (CFIUS) is opening up a regulatory investigation into gaming companies that have dealings with Tencent and Chinese firms regarding their data security protocols, which could possibly unravel Tencent’s gaming empire and its myriad investments in the U.S. China vowed retaliatory moves, including releasing details on Saturday of its “unreliable entities list” more than 15 months after its announcement, in which firms and individuals on the blacklist will be banned from trading with and investing in China. Investment between the United States and China has tumbled to a nine-year low in the first half of 2020, hit by bilateral tensions that could see more Chinese companies come under pressure to divest U.S. operations. A recent Pew research Centre poll found that 73% of Americans have an “unfavourable attitude towards China”, up from 50% last year because of the pandemic and more than double what the same poll found in 2007. A quarter of Americans now describe China as an enemy of the US, almost double the share who said that in 2012. Anti-China sentiment has increased sharply in Congress, with the number of bills that negatively mention China by name at a record high. Many normal, routine bills now include anti-China provisions. On Wednesday the US Democrat presidential candidate, Joe Biden, proposed what amounts to an anti-China tax penalty – Biden will impose a 10% tax penalty on companies that move operations overseas, and give a 10% tax credit for those that create jobs in the United States, abandoning the pro-globalisation stance that has been a core Democrat position since the 1990s. This deterioration isn’t being driven entirely by the United States – a lot of it comes from the aggressive stance of Xi Jinping, including tensions with India and Australia.
Cyclicals & Value Trap optimists pinning their hopes on a V-shaped recovery were rammed by rising coronavirus cases and a dim economic outlook that weighed on sentiment. European countries announced new restrictions on Friday to curb surging coronavirus infections in some of their largest cities, while Britain was reported to be considering a new national lockdown as hospital admissions double every eight days. Equity markets have become hyper-leveraged to every snippet of good news on vaccines news and there appears to be growing desensitization and sensibility towards developers experimenting with the "quick-and-dirty" messenger RNA technology that provokes the immune system into a response. This gene-based biotech leapfrogs the normal laborious process and avoids the need for a costly production of the vaccine from hens' eggs. Yet mRNA is famously unstable and hard to manage. No such vaccines have ever been approved for human use. No one dare to really claim that they know how effective they will be, or how long any immunity will last. Markets were also frazzled by Fed’s balance sheet inertia and Powell’s comments that “Monetary policy should not be the first line of defense.” Markets have been imploring for more QE since the Fed’s balance sheet has ballooned from US$4tn since the pandemic panic in March to just over US$7tn, but were spooked after Powell’s reluctance during the FOMC meeting this week to promise more specific actions to adapt its balance sheet policy to generate that inflation and aid the US economic recovery. Meanwhile, HSBC shares slumped below level last seen in the 2008 financial crisis and markets braced for the first CMBS mega-casualty with US$700 million of Starwood portfolio on the verge of default.
Big Tech continue to tumble, led by Facebook which extended its correction to over 16% from its recent September high, after a report that the Federal Trade Commission is preparing to file an antitrust lawsuit against the social-media giant (prior FTC probe of FB’s privacy practices resulted in a record-breaking $5 billion settlement), and that Kim Kardashian, whose account is the 7th most followed account on Instagram with 188 million followers and with 30 million followers on Facebook, told her 66.7 million Twitter followers that she was "freezing" her Instagram and FB account and asked them the join her. Apple extended its correction to over 20% from its recent September high, after it disappointed investors by not announcing a US$100 billion buyback during its reportedly boring iWatch unveil and plans for its subscription bundle Apple One, its first iPhone-free event in 8 years.
Following the accounting fraud implosion of fintech darling Wirecard, the German regulatory and business community were rocked again by another scandal of a prominent financial darling. Grenke is attacked by short-seller Viceroy Research who claimed in a 64-page report that the asset leasing firm, whose main activity is offering finance leases to businesses, is "uninvestable due to blatant accounting fraud, including dozens of undisclosed related party transactions, and the complete lack of internal controls right down to individual due diligence on customers.”
The Sydney Morning Herald reported that Grenke was a financier for Australian television advertising company Viewble Media which trapped thousands of small businesses around the country in an alleged scam. Viewble's customers paid $430 a month to a finance company under three-year contracts with a total cost of up to $15,500 for a television with the potential to earn money from display advertising from neighbouring businesses. However, the advertising never eventuated, leaving the businesses paying a high price for basic equipment. Viceroy alleges Grenke uses the same model for financing printers and photocopiers and that Viewble was one of several ponzi schemes enabled by its lease financing: "Advertising revenues inevitably never came through and customers were left holding the bag. Grenke’s actions suggest it was party to a larger conspiracy to defraud, as it knocked back complaints, denied knowledge of the existence of the scheme (despite it being written into its contracts), and continued to allow these scammers to write new contracts to the tune of hundreds of millions of dollars." Viewble collapsed into liquidation last year, leaving more than 1,100 Australian small businesses out of pocket. Viceroy alleges Grenke has financed dozens of fraudulent schemes across the globe since its inception. Analyst Gabriel Bernarde said the firm had spent many months speaking with victims of frauds and class action groups which have been set up in their wake: "Given the vast number and enormous size of these reseller frauds, and Grenke's association with every one globally, it was hard to come to the conclusion that they were somehow innocent.”
We were reminded of Thailand’s collapsed Group Lease PCL, another stock market darling, which is loosely tied to the Tokyo-based J Trust financial empire, whose investors include US Commerce Secretary Wilbur Ross and the behemoth California Public Employees Retirement Fund. Group Lease, which provides loans for peasants to buy motorbikes and agricultural equipment in several Southeast Asian countries, was alleged and subsequently found to be involved in accounting fraud involving related entities who were round-tripping group money through Singapore borrowers, disguising group money as dubious interest income from circular loans between related parties in order to create the illusion of earnings and to inflate the value of Group Lease.
Such creative financial engineering to stretch the balance sheet capacity via unconsolidated related entities in an opaque business group structure to eke out complex transactional numbers stood in stark contrast to selected non-banking financial companies (NBFCs) who invest in data analytics technology capabilities to scale up sustainably. Cases include India’s HDFC Bank and Bajaj Finance/Finserv. For instance, CIBIL [Credit Information Bureau (India) Limited] is the quiet monopoly who maintains credit records of over 600 million Indians and 32 million businesses and is the go-to-place for HDFC and Bajaj Finance/Finserv who are big data analytical tech innovators in leveraging upon the CIBIL database to keep their NPA (non-performing asset) risk substantially lower than nearly all of their value-trap peers who are blowing up. We can still recall how after HDFC implemented the CIBIL Consumer Connect solution in Aug 2016 through which its customers can purchase their CIBIL Score and Report directly on its website within seconds, this innovation has enabled HDFC to climb over 70%, double the pace of the Indian index over the same period. Similarly, Sanjiv Bajaj transformed Bajaj Finserv by focusing on and serving customers with the best CIBIL score of 750 and above, sifting the good from the bad, identifying cross-selling opportunities, which allowed them to add new products from consumer electronics to furniture to mobile phones seamlessly. As CEO Sanjiv comments, “Our customer base is all mapped, data cleaned, segmented, put into analytics and credit stamped.” Still, in the complex NBFC value chain and ecosystem, tech-focused credit analytics providers from Experian plc to FICO (Fair Isaac Corporation) - both in our broader Watchlist - could have far lower risks.
In Asia, baijiu titan Kweichow Moutai, the biggest constituent member in MSCI China A-Share index, announced that it plans to issue 15 billion yuan ($2.2 billion) in bonds to help buy highway operator Guizhou Expressway from the struggling local government. Moutai also approved a decision this week for its finance subsidiary to invest in fixed-income securities, a sign that it may start helping fund Guizhou province’s gigantic debt pile. This dangerous incestuous corporate misgovernance dalliance erased US$10 billion of market capitalisation. It will be increasingly harder for ESG-focused funds and true value investors to justify having long-term investment holdings in the likes of Moutai and a China Inc held captive and possessed by the spirits of serious corporate misgovernance that cannot be exorcised.
The gap between the “haves” and “have-nots” of the global economy has been magnified by the coronavirus, with emerging markets the losers in the K-shaped recovery whose divergence looks set to continue, according to Rob Subbaraman, global head of macro research at Nomura: “In the EM world with rapidly rising debt and deep recessions, the cost of servicing debt is going to get more burdensome and we cannot rule out some financial crises or major debt restructuring.” Markets with higher GDP per capita have been better placed to rebound from the March sell-off due to more advanced technology and governance that have given them greater flexibility to respond to the pandemic. They have been able to limit the impact of lockdowns and social distancing, make larger fiscal responses, and are better equipped with the resources needed to curb the outbreak, such as hospitals, test centers and quarantine facilities. This K-shaped divergence, coupled with the ever 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 one of 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.
As S&P 500/NASDAQ crumbled for the third consecutive week by -0.64%/-0.55% to suffer its longest losing streak in over a year, Nordic, Swiss and Japan quiet innovators were resilient winners and key contributors during the week, led by: (1) Nordic’s CRM SaaS Leader (+19.3%); (2) Global Leader in Analytical Equipment and Disposables in Automated Cell Counting & Analysis (+13.5%); (3) “Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS) (+12.1%); (4) Pioneering Inventor & #1 Global Leader Specializing in Helmet Based Rotational Motion Safety and Brain Protection (+10.6%); (5) Global #1 Leader in Advanced Communication and Hearing Protection Systems to Enable Communication In Noisy & Mission Critical Environments (+8.8%); (6) Japan’s #1 SaaS Cloud Leader in Integrated Real Estate and Facilities Management Software (+8.6%).
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