Weekly Market Commentary By H.E.R.O. (6 to 10 Sep 2021)
The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators rose +0.7% nett during the week as at the end of 10 Sep 2021 to extend its gains since its inception on 28 Aug 2020 to +35% with a NAV of over S$40 million. Top 3 holdings Swedencare +3%, MIPS +3.8%, Eckert & Ziegler +9.1%, while Top 10 holdings GARO +8% and Biotage +5.5%. Swedencare and Dr. Jan Pol, the charismatic and celebrated veterinarian and star of Nat Geo WILD’s #1 hit reality television series, "The Incredible Dr. Pol," entered into a licensing agreement to develop a complete portfolio of dog and cat products with Dr. Pol’s guidance to complete his existing branded portfolio of care and select nutritional supplements all which will feature the Dr. Pol brand imprint. In “The Incredible Dr. Pol,” viewers travel with Dr. Pol across rural Michigan as he tirelessly cares for family pets and livestock in need of his expertise and kindness. Now airing in its 19th season on Nat Geo WILD, the series continues to break ratings records for the network. Eckert & Ziegler (EUZ) continues to climb after announcing that it has successfully submitted an amendment to their Drug Master File (DMF) to the U.S. FDA for GalliaPharm®, their proprietary Ge-68/Ga-68 generator. GalliaPharm® is mainly used in combination with tracer kits for diagnosis of neuroendocrine tumors and prostate cancer. Gallium generators offer a low-cost alternative for the radiolabeling of biomolecules with Gallium-68 in PET, an imaging examination method used to detect the presence or absence of diseased tissue. PET imaging is primarily used in the diagnosis of cancer, cardiology or neurology. Radioisotopes such as Fluorine-18 can be used alternatively but require investments of millions of dollars in large-scale equipment (cyclotrons). The Ge-68/Ga-68 generator on the other hand, is an easily transportable, small system that is much more cost-efficient, leading to cost reductions for nuclear medicine providers while increasing flexibility. In addition, through its waste management business, EUZ has accumulated the largest European stock of Radium-226 (Ra-226) due for a disposal. This liability turned into a significant asset, as Actinium-225 (Ra-226 is a precursor of Ac-225), came to prominence as the “next Lutetium-177” perfectly fitting for the next wave of radioligand therapies.
For the first time in three months, U.S. equities fell for a fifth consecutive session, with MSCI ACWI All World index -1.5%, S&P 500 -1.7%, NASDAQ -1.6%, Russell -2.8% during the week, while Europe stocks declined with Stoxx -1.2%, DAX -1.1%, FTSE -1.5%. Loss-making growth stocks in Cloud Software SKYY/CLOU/WCLD -2.8%/-3.4%/-4.7%, speculative growth ARKK Innovation ETF -3.7%, while Phillip SREITS -0.8%, Gold -2.2% (Gold -5.9% YTD) as the U.S. dollar strengthened and Treasury yields climbed.
Over the past week, economists across Wall Street have shredded third-quarter gross-domestic-product forecasts. Biden’s workforce vaccine mandate unveiled on Thursday highlights just how fraught the economy is. The latest global wave of COVID-19 infections, driven by the Delta variant of the coronavirus, has disrupted production at factories in Southeast Asia, key raw materials suppliers for manufactures in the United States. Congestion at Chinese ports is also adding to the pressure on U.S. supply chains. Profit warnings are coming fast and furious as Q3 profits brace for big hit: A series of updates this week from PPG Industries, Sherwin Williams to Brown-Forman (Jack Daniels) and data-center equipment provider Vertiv in slashing their outlooks suggests relentless inflation and supply-chain challenges have become too intense to steer around and that these forces will weigh on third-quarter results in a more significant way. In some cases, Vertiv can’t procure critical parts “at any price.” Many industrial companies were already in their third round of pandemic price increases as of July, but the cost relief they had hoped for isn’t materializing and pressures are instead getting worse in some categories; further price increases run the risk of demand destruction in the short term. Even the NY Fed suspended its GDP Nowcast as the wheels are again coming off the US economy. Meanwhile, two senior U.S. Senate Democrats on Friday unveiled a proposal to impose a 2% excise tax on corporate stock buybacks as lawmakers scrambled to find ways to finance President Joe Biden’s $3.5 trillion domestic investment plan. More than half of the S&P 500 has suffered a decline of over 10% since May, in a broad set of declines that captures more than half of the constituents of six of the 11 sharemarket sectors, including tech, and there is a sense of pessimism and exhaustion throughout equity markets. Nine out of 10 companies in the Russell 2000 have fallen at least 10% since May, with just over half declining by a fifth. The U.S. equity risk premium -- the extra return investors receive for holding stocks over risk-free government bonds -- has turned negative for the first time since 2002. The $1 trillion that has flowed to global stocks in 2021 is bigger than the last 20 years combined. Meanwhile, the European Central Bank said it will slow down the pace of its pandemic bond-buying program in a “moderately lower pace” than in the previous two quarters, adding that this move shouldn’t be seen as tapering. Officials also reiterated a pledge to keep the 1.85 trillion-euro (US$2.2 trillion) program running until March 2022 or later if needed, signaling they’re not yet ready to discuss how and when to end emergency stimulus, relieving market concerns that stimulus measures might get pulled back more quickly.
Meanwhile in Asia, KOSPI/KOSDAQ -2.4%/-1.5%, MSCI China ETF -0.2%, China Internet ETF KWEB (in StashAway’s portfolio) -1.6% during the week. South Korea’s tech giants Kakao and Naver plunged -16.9%/-9.4% after lawmakers warned the nation’s internet giants against abusing their market dominance in the pursuit of profits, and Kakao was called a “a symbol of greed.” South Korea also became the first country to force Google and Apple to allow other payments processors into their app stores. The 91-year-old George Soros wrote in the Wall Street Journal that BlackRock’s move into China was a “tragic mistake” and warned that defiant complacent investors in China face “a rude awakening”. The Hang Seng Tech Index tumbled 4.5% on Thursday, the most in six weeks, with Tencent dropping by almost twice that amount in its worst day in more than a month. NetEase slumped 11% in a decline that accelerated after a report that China would halt approvals for new online games. Fitch hammered another nail in the coffin of Evergrande - "China's Lehman" with a Singapore GDP sized-US$305 billion in liabilities to banks, shadow lenders, companies, investors, vendors and home buyers - with a 3-notch downgrade which saw Evergrande's long-term foreign currency issuer rating drop from CCC+ to CC, and which saw the rating agency say that "default of some kind appears probable" as the company struggles to address its worsening liquidity issues. The Fitch downgrade came a day after Moody’s also cut Evergrande’s credit rating by three notches to Ca, which implies it is “likely in or very near default.” Evergrande plans to suspend interest payments on loans from two banks due Sept. 21. and asked a lender to wait for instructions about an extension plan. Shares of the troubled developer have tumbled about 77% this year, while many of its dollar bonds are hovering below 30 cents. The Shanghai Stock Exchange said in a statement that it had temporarily suspended trading in Evergrande’s bonds and that its bonds were no longer eligible collateral in the repo market after the ratings downgrade.
As euphoric traders piled into the trendy Cyclicals/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 fiscal stimulus hopes and 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. 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. 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.