Weekly Market Commentary By H.E.R.O. (13 to 17 Sep 2021)

Following nearly 12 consecutive weeks of positive weekly gains, the Portfolio of Dividend-Yielding Global H.E.R.O. Innovators corrected -2% nett during the week as at the end of 17 Sep 2021, with gains since its inception on 28 Aug 2020 at +32.3% and a NAV of over S$39 million.

• Top 3 holding Swedish helmet safety technology company MIPS rose +3.2% during the week; Protective Industrial Products, Inc. (“PIP”), a global leader in hand protection and PPE for the industrial, construction, and retail markets, announced a partnership with MIPS, making PIP the first North American based safety company to incorporate the patented Mips (Multi-directional Impact Protection System) helmet-based technology into their products.
• Top holding Germany’s Eckert & Ziegler (EUZ) is expected to benefit in a major way following the announcement by National Comprehensive Cancer Network (NCCN) on an important change to the guidelines for prostate cancer. The NCCN guidelines are considered a global standard to guide oncology practice and reimbursement. The updated guidelines now include Ga-68 PSMA-11 (prostate specific membrane antigen) PET/CT to be considered as an alternative to standard imaging of bone and soft tissue for the detection of unfavorable intermediate, high and very high risk as well as recurrent prostate cancer, signaling the emergence of PSMA-PET imaging as a state-of-the-art imaging modality. EUZ is the global leader in radiopharmaceutical isotope technology for diagnosis and therapy of cancer and EUZ is the world’s #1 supplier of pharma-grade generators producing Ga-68.

U.S. and global stocks hits four-week low as investors grappled with signs of slowing global economic growth and the implications for monetary policy, with the S&P 500 headed for its worst two-week performance since late February, and it was its first close since June 18 below its 50-day moving average. MSCI ACWI All World index -0.9%, S&P 500 -0.6%, NASDAQ -0.5%, and Europe also tumbled with Stoxx -0.9%, DAX -0.8%, FTSE -0.9%, with many European stocks plunging 5% to 15% during the week over contagion fears from China’s economic slowdown and Evergrande fallout, spelling very attractive buying opportunity in selected world-class structural growth innovators. Treasury yields and USD rose on the data, cutting into gold which tumbled -1.9%. Losses in eight of the last 10 sessions have pushed the stock market to a level where the psychology of dip-buying may finally get a meaningful test. Retail investors' appetite for U.S. stocks has fallen in the past week, data from Vanda Research showed on Wednesday, increasing the odds for a broader sell-off in the S&P 500. Concerns that a potential hike in corporate taxes could eat into earnings also weighed on markets, as leading Democrats sought to raise the top tax rate on corporations to 26.5% from the current 21%. While the tax proposal that emerged from the House Ways and Means Committee this past week was less draconian for investors than had been feared, the overall package is likely to be trimmed from the $3.5 trillion sought by the White House. And all of that may get entangled with negotiations over the debt ceiling, which could roil the markets. Stocks with the largest buybacks have lagged peers in recent weeks, potentially reflecting concern about the recent proposals to impose an excise tax on share repurchases. The Federal Trade Commission turned up the heat on Big Tech again Wednesday, voting to rewrite the rules governing mergers between companies that don’t directly compete and promising to step up scrutiny of smaller deals that have gone unchecked by regulators. Meanwhile, global debt surged to a record US$296 trillion, with the pace of China’s debt buildup much steeper than in other countries, though the amount of debt relative to the size of the global economy declined for the first time since the onset of the pandemic as growth rebounded. The total debt load stood at about 353% of the world’s annual economic output, a nine-percentage-point drop from the peak during the first three months of 2021. The net percentage of fund managers who say the global economy will improve over the next 12 months fell to 13% in the latest BofA survey, down 14 percentage points from August the lowest since April 2020, and down from the 91% peak in March 2021. But what’s striking is that the same fund managers who haven't been this pessimistic on the economy since the early days of the pandemic haven’t adjusted their portfolios, remaining complacently overweight cyclicals, with overweights on banks, commodities, and industrials.

Focus is now on a meeting of the Federal Reserve next week, with investors debating if a batch of strong economic data this week could spur the bank into shortening its timeline for reducing monetary stimulus. Thursday's data showing an unexpected rise in retail sales came on the heels of a steady factory activity reading and a cooling in inflation, suggesting the U.S. economic recovery was resilient despite a recent rise in cases of the Delta COVID-19 variant. The Federal Reserve, facing a labor market that may be stalling or on the cusp of a surge, is expected next week on Tues-Wed to open the door to reducing its monthly bond purchases while tying any actual change to U.S. job growth in September and beyond. The Fed said it would not change the bond purchases until there was “substantial further progress” in reclaiming the 10 million jobs that were missing at that point because of the pandemic. As of August the economy had clawed back fewer than half of those 10 million missing jobs. Some Fed officials, including Governor Christopher Waller, want to taper sooner rather than later, arguing the purchases are doing little to help hiring at this point and pose a risk if, by keeping long-term interest rates low, they fuel housing or other asset bubbles. With inflation also higher than expected for most of the last several months, other officials have said the bond purchases should end by early next year. However, a recent weakening of inflation, as expected by many other Fed officials, may temper any sense of urgency to act faster. That kind of division over policy, in an era when economic data have veered from frightening to ebullient, means the Fed will want to keeps its options open in the weeks ahead. Many economists contend that attention to the taper discussion is overblown, and that a difference of a month or two in terms of when the Fed begins or ends it makes little difference. But it will send a potent signal that U.S. monetary policy is closing the books on the crisis, and will train focus on the next phase of debate over when inflation will require the Fed to raise its benchmark overnight interest rate - federal funds rate – from the current near-zero level.

Soaring input costs and producers prices, compounded by supply chain disruption woes, are squeezing profit margins and leading to demand destruction – edging markets closer to the stagflationary scenario during the 1970s. The pandemic has thrown the vital but usually humdrum world of logistics into a tailspin, spurring shortages of everything, spurring fear that the demand is going to fizzle out before the component and product arrive. The University of Michigan’s preliminary sentiment index showed U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions deteriorated to their worst since 1980 because of high prices. Meanwhile, the collapse in iron ore prices and sinking valuations of the blue-chip miners over the last few weeks has left investors scrambling to protect further losses as analysts predict the worst may not yet be over for the bulk commodity, as a buyer’s strike which has allowed iron ore to enter freefall could prolong. Iron ore futures on the Singapore Exchange plummeted 21% this week in its worst week ever as the Evergrande meltdown has hurt China's residential property market outlook. Evergrande's 2023 bonds overlaid on iron ore futures suggest metal traders are concerned the massive real estate company might fold, and the stoppage of new residential buildings could hamper future demand. Aluminum soars to a 13-year high, coal futures surge, natural gas prices are on a tear, and power prices are off the charts in some parts of the world. Businesses that can pass along higher costs by raising prices for products ranging from chicken burritos to silicon chips have become the new darlings of global stock markets.

Asian stocks dropped after reports showed China’s economy took a knock in August from stringent virus controls, with retail sales growth plunging further in August, and tight curbs on property and as authorities told major lenders to China Evergrande Group not to expect interest payments due next week on bank loans and trading is suspended from all of its bonds. A debt restructuring could raise the prospect of wider social unrest and contagion in credit markets. Chinese stocks suffered their worst week in a month as Beijing’s move to tighten the screws on Macau casinos and fears of a potential collapse of China Evergrande Group underscored the risks of investing in the nation’s equities market. Hong Kong shares fell to their lowest since early November. China CSI 300 -3.1%, MSCI China ETF -4.1%, Hang Seng -4.9%, Hang Seng Tech -4.3%, China Internet ETF KWEB (in StashAway’s portfolio) -5.6%. Protesters stormed China Evergrande Group offices across the country, including holding the management hostage in their offices, as the developer has fallen further behind on promises to more than 70,000 investors. Construction of unfinished properties with enough floor space to cover three-fourths of Manhattan grinds to a halt, leaving more than a million homebuyers in limbo. In an effort to appease its angry stakeholders, Evergrande plans to let consumers and staff bid on discounted properties this month to repay them for billions in overdue investment products as the embattled developer seeks to preserve cash. The high-yield "shadow bank" products paying as much as 13% a year have become a lightning rod for cash-strapped Evergrande, with investors and staff protesting losses and delayed payments from investments that were marketed as safe. Evergrande is the largest high-yield dollar bond issuer in China, accounting for 16% of outstanding notes, according to Bank of America. Should the company collapse, that alone would push the default rate on the country’s junk dollar bond market to 14% from 3%. China's junk bond yields surged to surpass the March 2020 highs, printing 14.34% overnight, and the highest level since the great repo rate crisis of 2011. Negative news continued to hang over the tech sector, including a Beijing’s plans to break up Ant Group’s Alipay lending business. Government calls for better protection of gig-economy worker’s rights also weighed on confidence, along with a renewed call for internet companies to stop blocking links of their rivals. Biden suggested the possibility of an in-person meeting with Xi Jinping during a phone call, but the Chinese president declined as he continues to avoid leaving his country even for major gatherings amid the Covid-19 pandemic. Xi hasn’t left China for more than 600 days, the longest stint of any Group of 20 leader. Meanwhile, China’s state-run tabloid Global Times labeled George Soros a “global economic terrorist”, “The Most Evil Person In The World" And "The Son Of Satan".

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.