Weekly Market Commentary By H.E.R.O. (15 to 19 Feb 2021)
The battering ram of the steepening yield curve has mercilessly pummelled the gilded castle of havens and defensives during the week, with gold, bonds, REITS and yield-based structured-notes products down significantly in a blood bath rout – and the downward trend that portend further losses looks likely to continue at least till mid-2021. Gold slumped to a 7-month low, making its worst start to a year in 30 years since 1991, and gold faced its worst-ever existential crisis as the world’s first regulated bitcoin ETF started trading on Thursday, exacerbating the gold-to-bitcoin fund flow into the trillion-dollar bubble. Gold is predicted to decline substantially and consistently across all the various scenarios, reflecting its close relationship with real yields themselves.
- During the week ended 19 Feb 2021, the the Portfolio of Global Dividend-Yielding Innovators gained around +1.5% nett in SGD, vs MSCI ACWI All World index -0.5%, S&P 500 -0.7%, NASDAQ -1.6%, DAX -0.4%, Apple -4.1%, Facebook -3.3%, Adobe -4%, Nestle -2.5%, Keppel DC REIT -1.7%, Gold -2.2% (Gold -6% YTD).
- Since the recent inception on 28 August 2020, the Portfolio of Global Dividend-Yielding Innovators has outperformed major world indexes in MSCI ACWI All World Index, S&P 500 and NASDAQ in SGD terms, during which MSCI ACWI All World index +15.7% (in USD, or +12.7% in SGD), S&P 500 +11.4%, Gold (physical spot in USD) -9.2% (or -11.5% in SGD), and overall NAV has risen above S$40 million (€25 million).
- The separate equity portfolios of H.E.R.O. Innovators of our clients is up +7.8% YTD 2021 in SGD as at 19 Feb 2021, and has generated over +74.3% in average returns in SGD since the H.E.R.O. research methodology was provided for and implemented in March 2020, vs MSCI ACWI All World index +52% and Singapore STI index +13.9% over the same corresponding period.
Speculative overhyped loss-making tech pretenders with negative operating cashflow and Chinese companies with accounting irregularities who have performed messianic walk-on-water performance feats also came under pressure under the siege of the spiking yield which exposed their hyped-up "gains", led by companies such as Fastly which slumped over 30% since 9-Feb after it reported a weak outlook despite an attempt to mask the deterioration in its core business with an acquisition. China drone and “flying car” company EHang crashed over 60% following analysis from short-seller Wolfpack Research which showed the company of orchestrating "an elaborate stock promotion, built on largely fabricated revenues based on sham sales contracts with a customer who appears to us to be more interested in helping inflate the value of its investment in EH (i.e., pump EH's stock price) than actually buying its products."
In contrast, the Nordics remain possibly the only fundamentals-driven trillion-dollar major economic and stock market region in the world, and a number of our portfolio companies made strong double-digit returns on solid fundamentals following excellent 4Q/FY2020 results and outlook which both fortified their highly-profitable defensive economic fortresses further and also create innovative growth catapults to attack and gain market share and new customer base to extend their leadership.
The market narrative has also settled for the overall equity market rally to continue even as yields rise further from their current level and stabilize in the 130-140bps range. But a negative impact in a sustained downward correction in the equity market is expected should the pace of 10-year UST yields hit 150-175bps abruptly, although the gap between the winners and losers will be even wider, as the rising-yield fire will increasingly scorch the dark creatures of speculative loss-making tech imitators and pretenders, and only the highly-profitable true innovators will prevail and ascend in the baptism of fire.
As euphoric traders piled into the trendy Cyclicals, Value Traps, speculative penny stocks, and loss-making electric vehicle and green energy stocks, 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 massive fiscal stimulus great expectations 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.
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
The Proven Path to Doing Unique and Meaningful Work
By James Clear (Source: https://jamesclear.com/stay-on-the-bus)
The Helsinki Bus Station Theory urges you to not simply do more work, but to do more re-work. In this scenario, all the buses start off at the same station and travel more or less the same path for the first bit of their journey. If you gave up on the ride and got off your bus early, you wouldn’t be that far away from all the other riders. It’s only after a certain point that the buses veer off onto their own paths.
We are all creators in some capacity. The manager who fights for a new initiative. The accountant who creates a faster process for managing tax returns. The nurse who thinks up a better way of managing her patients. And, of course, the writer, the designer, the painter, and the musician laboring to share their work out to the world. They are all creators.
Any creator who tries to move society forward will experience failure. Too often, we respond to these failures by calling a cab and getting on another bus line. Maybe the ride will be smoother over there.
Instead, we should stay on the bus and commit to the hard work of revisiting, rethinking, and revising our ideas.
In order to do that, however, you must answer the toughest decision of all. Which bus will you ride? What story do you want to tell with your life? What craft do you want to spend your years revising and improving?
How do you know the right answer? You don’t. Nobody knows the best bus, but if you want to fulfil your potential you must choose one. This is one of the central tensions of life. It’s your choice, but you must choose.
And once you do, stay on the bus.
Morgan Housel on The Hidden Life of Trees. "A fascinating book about the complexity of something that seems basic. One example: Trees that grow up in their mothers’ shade grow slowly, because their moms block most of the sun. Slow growth leads to dense wood, which leads to a strong tree. Trees that instead grow in the open sun, without their mom’s shade, grow very fast, gorging on all the light they can absorb. But fast growth leads to soft wood, which is susceptible to rot and fungus. That analogy – grow fast at your own peril – applies to many fields, as do several of the lessons in this book."
KEE Koon Boon ("KB") | Email: firstname.lastname@example.org | WhatsApp: +65 9695 1860
|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.