Weekly Market Commentary By H.E.R.O. (9 to 13 Aug 2021)

The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators rose +1.7% nett, led by GARO, Nordic's #1 highly-profitable leader in EV charger infrastructure solution innovator, which jumped +28.9% during the week after reporting excellent 2Q2021 results in which sales +43% and EBIT +82% with EBIT margin 16.1% (12.7%), driven by very strong growth in EV charging infrastructure solution business sales +88%. In addition to the continued rapid growth in Sweden, noteworthy positive trends were posted in the UK, Ireland and Finland as well as in other European markets.

U.S. markets inched higher to climb the wall of worries to another record even as Delta variant concerns persist and EU regulators warning of mRNA vaccine side effects, led by Cyclicals (financials and materials), with MSCI ACWI All World index +0.6%, S&P 500 +0.7%, though tech and general broader market languishing, with NASDAQ -0.1%, Russell -1.1%, Cloud ETFs SKYY/WCLD -1.1%, ARKK Innovation ETF -2.4%, and Asia is weak with Taiwan TWSE -3.1%, KOSPI/KOSDAQ -3%/-1.8%, Hang Seng Tech ETF -2.1%. Euro Stoxx 600 is outpacing the S&P with its 10th consecutive record high in a row - the longest such streak since 1999. The S&P 500’s 48 all-time highs since the end of December mark the best start to a year since 1995. Over the last century, there has been just one other year when the benchmark set more high-water marks by this point in the summer -- in 1964. Q2 earnings season is almost over and after the last busy earnings week, 444 S&P 500 companies (90% of index earnings) have reported, with 80%/86%/72% of companies beating on EPS/sales/both, which represents the highest in post-reg FD history, as markets supposedly enter into a stage of “peak growth, peak margins, peak sentiment”.

UMich Consumer Sentiment crashed in preliminary August data to the lowest level in nearly a decade, with the headline plunging from 81.2 to 70.0 - that is weaker than the April 2020 COVID crisis lows. The slump in confidence risks a more pronounced slowing in economic growth in coming months should consumers rein in spending. The Sentiment Index has only recorded larger losses in six other surveys over the past 50 years, all connected to sudden negative changes in the economy. The only larger declines in the Sentiment Index occurred during the economy’s shutdown in April 2020 (-19.4%) and at the depths of the Great Recession in October 2008 (-18.1%). Gold flash-crashed to as low as $1,677/oz on Monday before rebounding on Friday to close the week 1% higher following the weaker dollar driven by the consumer sentiment crash. A measure of U.S. financial liquidity whose declines foreshadowed two of the decade’s worst equity routs is flashing alarms even before the Fed embarks on its planned winding down of asset purchases. The gap between the rates of growth in money supply and GDP, an indicator known as Marshallian K, just turned negative for the first time since 2018, meaning GDP is rising faster than the government’s M2 account. The Marshallian K fell below zero in 2010, a year when the S&P 500 Index suffered a 16% correction. A similar dip in 2018 portended a selloff that almost killed that bull market.

From “chip shortage” to “winter is coming” as commented by Morgan Stanley in an influential report, as the SOX Philly Semiconductor Index dropped for six consecutive sessions - the longest such streak since the October 2018 Fed "policy error" when stocks cracked after Powell threatened to tighten far more than markets expected, only to end his hiking cycle prematurely just two months later, resulting in the first bear market in a decade. A new round of regulatory pressures are arriving for U.S. Big Tech. On Wednesday, three U.S. senators introduced a bill that seeks to rein in the power the likes of Apple and Google have over their respective app stores; Apple and Google "are so beyond the pale in their abusive tactics. It is a blatant, craven textbook abuse of economic power." The U.K. Competition and Markets Authority said on Thursday that it may seek to unwind Facebook's $400 million acquisition of Giphy. Top Covid-19 vaccine makers Moderna and BioNTech backed off recent record-setting highs amid a slump in biotech stocks during the week.

Meanwhile, a Covid outbreak that has partially shut Ningbo-Zhoushan port in China, one of the world’s busiest container ports, is heightening concerns that the rapid spread of the delta variant will lead to a repeat of last year’s shipping nightmares. The Baltic Dry Index that serves as a global benchmark for bulk shipping prices is up more than 10% since a month ago as the delta variant began to spread rapidly. The cost of shipping a 40-foot box container from Shanghai to Rotterdam has jumped to $14,000 from $2,000, 18 months ago. Factory-gate inflation is popping higher in the United States, China and Japan, the note said. That is squeezing many firms' profit margins and raising the risk of a follow-through jump in consumer prices. Data on Thursday showed U.S. producer prices posted their largest annual increase in more than a decade in the 12 months through July, adding pressure on the Fed to reduce stimulus at its next policy meeting in September.

Asia’s economies are already showing a hit from the surging delta variant of Covid-19 as consumers stay at home and airplanes idle on the tarmac. Early warning signs are showing up in Google mobility data capturing the impact of government restrictions on movement. Flight capacity in China is pointing to a slump in travel, manufacturing in Southeast Asia is hurting and Australian business sentiment has tumbled. South Korean markets finished a rough week ahead of a holiday Monday with record foreign outflows in chipmakers and all-time high Covid cases spurring panic selling. Kospi Index fell for a seventh straight day Friday, the won hit a ten-month low and global funds dumped record amounts of key semiconductor stocks such as Samsung Electronics.

China has released a five-year plan to strengthen regulatory control over strategic sectors including technology and healthcare, and hints that its Big Tech antitrust scrutiny could be permanent. This could possibly spell the death knell and drive the final stake into the through the heart of China stocks – and the last call for investors to sell and exit China funds and stocks. China’s banking and insurance watchdog is stepping up scrutiny of the nation’s insurance technology platforms, widening a regulatory dragnet that has roiled global investors; the regulator has ordered companies and local agencies to curb improper marketing and pricing practices, and step up user privacy protection. A warning in state media Friday that regulators will show no tolerance in cracking down on speculators in the chip market sent related stocks lower on Monday. China anti-graft watchdog calls for business drinking curbs in the wake of a sexual assault case involving Alibaba’s employees, hitting alcohol-related stocks from Moutai, Wuliangye Yibin to Shanxi Xinghuacun Fen Wine. Tencent and iQIYI’s wildly popular music idol talent shows are facing a government crackdown, after rampant commercialism and the extreme behavior of fans attracted the attention of the authorities; iQIYI, dubbed “China’s Netflix”, falls further into record-low territory. Chinese regulators have barred cosmetic surgery loans from structured debt products, a warning shot for the country’s big -- and controversial -- plastic surgery industry. Companies offering dermatological injections and other non-surgical procedures and manufactures of ingredients for cosmetic chemicals, including Bloomage Biotech, Shanghai Haohai Biological Tech and IMeik, crashed during the week. Concerns may spread to homegrown beauty brands such as Yatsen and Shanghai Jahwa. Logistics firms and those providing on-demand delivery services may face pressure, after guidelines enhancing food delivery riders’ rights hit shares of Meituan and others. Labor intensive companies whose competitive prices have largely relied on incomplete benefits and low pay may also be asked to rectify, hurting margins.  Mounting signs of a liquidity crisis at the real estate giant China Evergrande Group rippled through the country’s offshore credit, triggering new contagion risks for global investors. China is toughening regulations around condominium transactions with an aim to contain speculative and illegal deals within three years, amid growing social discontent about soaring property prices. Among the measures that authorities are taking are the introduction of eligibility rules for property purchases and the intervention in the secondhand market in big cities to prevent price inflation. China’s credit growth unexpectedly collapses in July: Total social financing: RMB 1060bn in July badly missed consensus of RMB 1700bn. This was the lowest TSF print since Feb 2020 when the Chinese economy was effectively shut down. China bonds see their worst rout in a year on the surge in inflation data which is fueling concern that price pressures in the world’s second-largest economy may not be transient.

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.