Weekly Market Commentary By H.E.R.O. (21 to 25 Dec 2020)
During the week ended 25 December 2020, the the Portfolio of Global Dividend-Yielding Innovators gained over +0.9%, vs MSCI ACWI All World index -0.2%, S&P 500 -0.2%, NASDAQ 100 -0.2%, NYFANG -2.9%, Hang Seng -0.4%, Topix -0.8%, FTSE -0.4%, DAX -0.3%, Facebook -3.3%, Amazon -0.9%, Alibaba -14.6%, Tencent -4.1%, China Mobile -2.3%, Nestle -1%, Unilever -0.9%, Keppel DC REIT -0.7%.
Since the recent inception on 28 August 2020, the Portfolio of Global Dividend-Yielding Innovators has generated double-digit returns, and outperformed major world indexes in MSCI ACWI All World Index, S&P 500 and NASDAQ, during which MSCI ACWI All World index +8.1% in USD (or 5.8% in SGD as USD weakened 2.2% against SGD over the same period), S&P 500 +5.6%, NASDAQ +9.5%, NASDAQ 100 +5.4%, Euro Stoxx Tech index +0.1%, Shanghai Composite index -0.2%, Gold (physical spot in USD) -4.1%, 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 -7%, Mondelez -0.8%, P&G -0.8%, Unilever -3.4%, Conagra -4.7%, General Mills -6.7%, Campbell Soup -6.9%, Church & Dwight (Condom) -8.5%, McCormick -8.6%, Kellogg -12.4%, Reckitt Benckiser (Lysol, Dettol, Durex) -13.5%, Kimberley Clark -14.4%; Local Defensive steady supermarket hero Sheng Siong -9.3% and China’s best-run supermarket operator Yonghui Superstores -22.1%; REITS with Keppel DC REIT -4.2%, NetLink Trust -1%; China Mobile -20.3%, Alibaba -23.2%, Netease (China's internet gaming giant whose revenue is around half of Tencent's gaming business) -8.1%; Healthcare giants J&J -0.8%, Merck -6.4%, Sanofi -7.9%, GSK -9.5%, Gilead -12.5%, AstraZeneca -13.4%; Microsoft -2.7%, Adobe -3.2%, Visa -3.3%, Amazon -6.7%, eBay -7.7%, Facebook -8.9%, Mastercard -8.2%, S&P Global -13.7%, Salesforce.com -16.7%; Korea Big Tech with Kakao -7.8%, Naver -15.3%, Netmarble -18%; Exchange operators Nasdaq Inc -2.4%, Euronext -9.8%, Deutsche Boerse -12.4%, ASX -17.3%; Glove companies Top Glove -25.9%, Hartalega -24.1% and Riverstone -42.9%, and medical apparel maker Medtecs -30.9%.
The separate equity portfolios of H.E.R.O. Innovators of our clients generated over +58.4% in average returns, as at 25 Dec 2020, since the H.E.R.O. research methodology was provided for and implemented in March 2020, vs MSCI ACWI All World index +42.1% and Singapore STI index +12.4% over the same corresponding period.
- Key contributors during the week were led by: (1) Sweden's Dominant #1 Cloud Accounting & Financial SaaS Leader (+9.1%); (2) Nordic Global #1 Leader in Advanced Communication and Hearing Protection Systems to Enable Communication In Noisy & Mission-Critical Environments (+7.6%); (3) Global Leader Specializing in Helmet-Based Rotational Motion Safety and Brain Protection (+6%); (4) Nordic Global Leader in Medical Imaging Software (+5.9%); (5) Japan's Largest Database of Medical Data (+4.7%).
Virus mutations, “This is probably it for a while” COVID relief aid, Brexit trade deal, and BABA crash dominated the news flow during the holiday-shortened week. The toxic frothy fangs of the dark Cyclical creatures and Value Traps are chipped by news of the mutated super COVID viruses - the B117 from UK, 501.V2 from South Africa, an unnamed variant from Nigeria and A701V from Malaysia - that are far more infectious and that even young people are catching it a lot more easily, prompting worries over the efficacy of the Pfizer-BioNTech and Moderna vaccines against these new fast-spreading variants. If these vaccines don’t work, this pandemic could be entering a far more deadly new phase.
Britain and the European Union succeeded on Thursday Christmas Eve in agreeing a trade deal to regulate their relationship after 31 December, a long-awaited accord that comes 4-1/2 years after Britons voted to leave the bloc. The impact on UK financial markets of that vote and the years of negotiations and missed deadlines since has been profound - Britain’s currency tumbled to around 20% below long-term fair value, stock prices underperformed almost every other major market since 2016 and businesses held back on new investment. Though the compromise avoids painful tariffs and a dangerous rupture in relations, it’s a much harder form of Brexit than Johnson and others envisaged during the referendum of 2016. The costs are about to become clear. Exporters will face new forms and customs checks. UK-based banks will no longer be able to offer their services across the EU. Trade in stocks and derivatives will depend on the whim of regulatory equivalence granted by Brussels. British citizens will face new restrictions on their ability to work and study in the bloc. Even with a deal, the UK’s Office for Budget Responsibility estimates this will lower UK GDP by about 4%. Is the Brexit trade deal a case of “the best is yet to be” or “the worst is yet to come”? With headline focus on the “win” but muffled about the cost of the deal, one thing remains clear: As Winston Churchill elucidates, “If you’re going through hell, keep going.”
Alibaba’s shares tumbled the most ever on Christmas (down 14.6% during the week), following Beijing’s inquiry into alleged monopolistic practices, and BABA’s Ant was also summoned to a high-level meeting over financial regulations. Sell-side analysts continue to remain bullish and say that the tumble was an overreaction. China’s market regulator has also summoned Tencent, JD.com, Meituan, Pinduoduo, and Didi Chuxing for a meeting and imposed nine “must nots” on their community group buying services in Beijing’s latest move to tighten its control over Big Tech. The State Administration for Market Regulation (SAMR) said in a statement that it had conducted a “administrative guidance meeting” on Tuesday with the six e-commerce giants, warning them to strictly toe Beijing’s line and to pay attention to problems of “low price dumping and squeezing jobs”.
Under the new requirements, internet firms in the community group buying market are also prohibited from implementing trust agreements in pricing and sales or abusing their market positions. They are required to apply for regulatory approval for mergers and consolidations that may result in monopolies and avoid “misleading and deceitful” marketing. The regulator also said platforms cannot “illegally collect and use consumer data” and they should not take advantage of data to harm consumers’ legitimate rights and interests. China’s regulatory apparatus is becoming more aggressive in managing risks stemming from Big Tech business activities after Beijing learned from experiences in ride hailing and bike sharing. Will the Chinese giants continue to challenge Beijing like in the past by trying to find ways around the regulations, such as skirting the ban on price dumping by giving out red packets or vouchers to consumers? This time round, China Big Tech realize that they cannot tease the Emperor.
Importantly, takeovers will be subject to more frequent competition reviews under the new regulatory rules, as Beijing closes a longstanding loophole. Many big Chinese tech groups are structured as “variable interest entities” (VIEs), a complicated structure that allows them to list overseas while maintaining crucial licences for doing business in China. But Beijing has never officially approved the VIE structure and antitrust regulators have turned a blind eye to acquisitions for fear of endorsing it. Alibaba’s takeover of food delivery company Ele.me is one deal that may have met the requirements for approval from competition authorities, but which proceeded without filing for it. The new guidelines make clear that companies structured as VIEs, such as Alibaba and Tencent, must also submit their acquisitions for antitrust review.
The investment community consensus has persistently ignored the upcoming hundreds of billions in dollar of impairment writedowns needed in the investment portfolios of China Big Tech in the growing complex web of companies that transverse between the corporate and personal holdings of the entrepreneurs who hide their connections via “baishoutao” or “white gloves” with hidden loan guarantees backed by the listco to shield public and regulatory scrutiny, as auditors acquiesce and turn a blind eye over the liberal assumptions embedded in the inflated valuations of the assets, as well as in the listco’s true ownership stakes in the sprawling investees and business associates. The Emperor’s tighter scrutiny over the use of M&As as a financial engineering tool in boosting non-recurring non-operating income and in engaging in opportunistic shifting of assets to mask potential deterioration in the core business will make it much harder for a number of China Tech to keep up with the image of the Good Transformer as an Optimus Prime, and possibly reveal the Decepticons underneath – a dark ominous hum of “Transformers, more than meets the eye..” lurking in the background.
As euphoric traders piled into the trendy Cyclicals and Value Traps, we believe that there is a high probability of downside risk in chasing and catching them at exactly the wrong time after their sharp run-up from being blinded by the vaccine euphoria — the light at the end of the tunnel — and things can turn very nasty suddenly, as markets tend to underestimate how long that tunnel is, and how dangerous that tunnel is. This situation is very vulnerable for cyclicals to degenerate or revert back into its true ugly colors as cheap-gets-cheaper Value Traps once the vaccine euphoria fades or something negative happen on the mass vaccination roll-out or the vaccine does not prevent people from carrying and spreading the virus to others or new mutated virus strains erupt to render the vaccines ineffective.
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 (companies who cannot cover their interest expense with cash from operations) and Vampires (junk-rated corporations with negative EBITDA) 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
10 Powerful Life Lessons from The Alchemist
December 26, 2020 by Paulo Coelho
The Alchemist by Paulo Coelho is one of the best-selling books in history, with over 65 million copies in 56 different languages. The story of Santiago, the shepherd boy on a journey to realize his “Personal Legend” has inspired people all over the world to live their dreams. Here are ten of the most popular passages and lessons to apply to your life:
1. Fear is a bigger obstacle than the obstacle itself.
Tell your heart that the fear of suffering is worse than the suffering itself. And that no heart has ever suffered when it goes in search of its dreams, because every second of the search is a second’s encounter with God and with eternity.
Any new pursuit requires entering uncharted territory — that’s scary. But with any great risk comes great reward. The experiences you gain in pursuing your dream will make it all worthwhile.
2. What is “true” will always endure.
If what one finds is made of pure matter, it will never spoil. And one can always come back. If what you had found was only a moment of light, like the explosion of a star, you would find nothing on your return.
Truth cannot be veiled by smoke and mirrors — it will always stand firm. When you’re searching for the “right” decision, it will be the one that withstands the tests of time and the weight of scrutiny.
3. Break the monotony.
When each day is the same as the next, it’s because people fail to recognize the good things that happen in their lives every day that the sun rises.
Gratitude is the practice of finding the good in each day. Life can easily become stagnant, mundane, and monotonous, but that changes depending on what we choose to see. There’s always a silver lining, if you look for it.
4. Embrace the present.
Because I don’t live in either my past or my future. I’m interested only in the present. If you can concentrate always on the present, you’ll be a happy man.
There’s no point dwelling in the past and letting it define you, nor getting lost and anxious about the future. But in the present moment, you’re in the field of possibility — how you engage with the present moment will direct your life.
5. Your success has a ripple-effect.
That’s what alchemists do. They show that, when we strive to become better than we are, everything around us becomes better, too.
Growth, change, and evolution are weaved into the fabric of reality. Becoming a better version of yourself creates a ripple effect that benefits everything around you: your lifestyle, your family, your friends, your community.
6. Make the decision.
When someone makes a decision, he is really diving into a strong current that will carry him to places he has never dreamed of when he first made the decision.
It’s easy to get overwhelmed by the unknowns and finer details of your dreams. Actions will flow out of having confidence in your decision; sitting on the fence will get you nowhere.
7. Be unrealistic.
I see the world in terms of what I would like to see happen, not what actually does.
Some of the greatest inventions would not have happened if people chose to accept the world as it is. Great achievements and innovations begin with a mindset that ignores the impossible.
8. Keep getting back up.
The secret of life, though, is to fall seven times and to get up eight times.
Because the eighth time could be your breakthrough. Some of the greatest novels in history were published after receiving hundreds of rejections. Thankfully, those authors never gave up.
9. Focus on your own journey.
If someone isn’t what others want them to be, the others become angry. Everyone seems to have a clear idea of how other people should lead their lives, but none about his or her own.
It’s easy to be influenced by others, but you’ll be miserable if you end up living someone else’s life. There’s nothing wrong with taking advice and learning from others, but make sure it aligns with your desires and passions.
10. Always take action.
There is only one way to learn.
It’s through action.
You can study, read, and listen until you turn blue in the face, but the full experience is when you take action, and let the rubber meet the road. Once you’re done aiming, pull the trigger.
|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.