Weekly Market Commentary By H.E.R.O. (8 to 12 March 2021)
A sudden selling bout pushed the 10-year U.S. Treasury yield to suddenly spike up on Friday and break above the 1.6% level to end at 1.635%. The world’s most watched bond rate has failed to close above 160 bps in more than a year, though has surpassed that level in volatile intraday trading several times in recent weeks. With Friday’s sudden spike, Treasury yields have returned to levels seen after the disastrous seven-year U.S. bond auction on 25 Feb, and Treasuries have tumbled and are down -11% YTD, the third-worst start to a year since 1973. Yields have calmed down earlier during the week on (1) mild U.S. inflation data, (2) seemingly strong demand for the 3-year and 10-year treasury auction and (3) ECB stepped up the pace of its emergency bond-buying, which calmed nerve-wrecked bond trades and helped spark a tech rebound, though a proxy for international participation that includes foreign central banks was the lowest since August. NASDAQ initially crashed over 2% on Friday before recovering to close 0.6% lower, on expectations of renewed retail buying interest from the new second round of stimulus “stimmy” check set to arrive in the mailbox of American household during the weekend and into the week. Still, the past month since mid-Feb 2021 was the worst ever period for growth stocks relative to “value/cyclical” (financials/energy/materials) since the bursting of the dot com bubble from March 2001.
Will the COVID pandemic be over by Independence Day on 4th of July? “There’s a good chance you, your families and friends will be able to get together in your backyard or in your neighborhood and have a cookout …and celebrate Independence Day,” Biden said. Now that the US$1.9 trillion Biden fiscal stimulus is a done deal, the White House now turns its attention to a once-in-a-generation infrastructure bill as the next stage of the American Rescue Plan. This infrastructure bill will not be just roads and bridges; Democrats view an infrastructure bill as the “infrastructure” necessary to build the economy of the future, though funding infrastructure investment will very well involve raising taxes which would certainly put off Republicans, and even moderate Democrats may also be opposed to it. Market chatter has not settled on whether the inflation will be short-lived bursts or something longer-lasting, and all eyes are on the next FOMC meeting on 17 March for clues about what the panel might say or do about bond yields.
The US$1.4 trillion rout in China markets remained relentless as Chinese stocks post its worst NPC loss since 2009 despite the rescue of the “National Team”. The week-long National Peoples’ Congress (NPC) legislative meeting is the Communist Party’s biggest political event of the year and the government has always manipulated the markets to post positive returns before and during the meeting. Even as markets and tech rebounded during this week, China markets slumped, with China CSI 300 -2.2%, Hang Seng -1.2%, and Big Tech were punished, led by Tencent -4.2%, JD.com -7.3% after regulators fined a dozen companies, including Tencent and Baidu, amid Beijing’s ongoing antimonopoly crackdown of internet companies. Plus, Alibaba’s Ant Group CEO suddenly resigned, and reports surfaced that Alibaba could face a hefty fine.
Like Ant, Tencent will probably be required to establish a financial holding company to include its banking, insurance and payments services, and be regulated more like a bank, which would further curb its ability to lend more and expand as rapidly as it has done in recent years. Along with Ant, proposed rules to break up market concentration in digital payments and rein in consumer lending online will damage prospects for Tencent’s WeChat Pay and its wider fintech business. Tencent’s fintech business had revenue of about 84 billion yuan ($13 billion) in 2019, accounting for 22% of the total and making it the largest earnings driver after online entertainment.
Losses in the China markets are expected to worsened even as China corporate earnings are set for the biggest jump in a decade, due to a cluster of factors: (1) The “Stagflation is coming” meme spread by the famous economist Ren Zeping has gone viral and created increasing fear, (2) the collapse in the all-important China Credit Impulse, (3) Concerns over further tightening by Beijing policymakers to rein in the multi-year spending spree as fears mount that borrowing by the public sector and local governments could become the next crunch point and the “extend and pretend” strategy has finally reached its bursting limits, (3) a strengthening USD crushing emerging markets currencies and sentiments, and (4) the loss of the allure as the only major economy demonstrating growth as other global nations are recovering from COVID.
The RISING portfolio stocks remain well-anchored to very strong and powerful fundamentals with clear and visible growth prospects and robust end markets, and are very likely to rebound resiliently from the sentiment-led rotation once the 1Q2020 earnings reports start from mid-April onwards, and the current correction is a great opportunity to accumulate existing stocks and potential new companies. Seeking the support and approval of an important round of rebalancing to BUY more U.S.-listed companies (2 new stocks in Maxar Technologies and The Toro Company and existing U.S. stocks), and to SELL out of the last remaining positions in Asia/emerging markets (Japan’s Lasertec and Australia’s Pro Medicus) and rotate some Nordic stocks into U.S. stocks (Sweden’s Sectra after a weaker-than-expected results last week, smaller-positions stocks of S$300k each in Sweden’s Nordnet and Finland’s Musti), taking profits for an overall 12% returns.
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 who have remained resiliently positive throughout the most extreme ever market rotational change since November 2020, setting the roadmap this 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.
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.