Weekly Market Commentary By H.E.R.O. (15 to 19 Nov 2021)

Global stock markets and FX encountered choppy trading, wild swings in prices and heightened volatility during the week with the strongest U.S. dollar in 16 months, driven by another round of national lockdown in Austria amid record new infections spreading in Europe, increased inflationary pressure and traders bringing forward bets for the Fed to hike interest rates. During the week, MSCI ACWI All World index -0.5%, S&P 500 +0.3%, while Russell tumbled -2.9%, FTSE -1.7%, Hang Seng -1.1%, Hang Seng Tech -1.5%, MSCI China -2.8%, China Internet ETF KWEB (in StashAway’s portfolio) -6.7%, Cloud Software ETF SKYY/CLOU/WCLD -3%/-4%/-4.7%, ARKK Innovation ETF -4.4%, Gold -1% (Gold -2.8% YTD) and Bitcoin -9.4% as at Friday close. Meanwhile, global fund managers were the most overweight to U.S. equities in eight years, mostly in Big Tech which has stayed relatively buoyant amidst the wild gyrations in the markets, while Europe has never been this cheap versus the U.S. The MSCI Europe Index this month hit a record of about 30% discount to its U.S. counterpart, based on forward P/E ratios, after the latest earnings season fueled further upgrades to estimates for the region’s companies. The yen slid to its weakest level against the dollar in more than four years – and weakened by -8.5% against SGD since 28 Aug 2020. Stay away from U.S. stocks and bonds next year, and seek out better returns in Europe and Japan. That’s the advice of Morgan Stanley’s strategy team, which sees fading monetary support and high valuations holding back American assets in 2022, even as growth improves and inflation moderates. Fundamentals are more attractive in Europe and Japan, where central bankers will be more patient and inflationary pressures are lower, according to the strategists in their annual investment outlook.

After a slew of disappointing macro data in September (including the Q3 GDP slump), China's credit impulse contracted at its most aggressive pace since April 2011. During the week, Hang Seng -1.1%, Hang Seng Tech -1.5%, MSCI China -2.8%, China Internet ETF KWEB (in StashAway’s portfolio) -6.7%, led by Alibaba which plunged -15.9% after a bad earnings miss and slashed outlook for fiscal 2022 revenue amid intensifying competition, dwindling consumer spending and regulatory curbs. Tencent throws out popular fish shooting games from app stores amid China’s tightened video gaming regulation, as regulators frowned upon the gambling elements in these games. China's market regulator on Saturday said it was fining companies including Alibaba, Baidu and JD.com for failing to declare 43 deals that date as far back as 2012 to authorities, saying that they violated anti-monopoly legislation. A Chinese court ruled on Friday against blue-chip Kangmei Pharmaceutical (600518) and some of its former executives, handing victory to investors in China's first class-action lawsuit against corporate fraud. Kangmei, which was engaged in intentional and systematic financial cheating worth 30 billion yuan ($4.60 billion) between 2016 and 2018, must pay 55,326 investors a total of 2.46 billion yuan (US$385.5 million) to reimburse their losses. Former Chairman Ma Xingtian and his wife, as well as four former executives, are liable for the obligations.

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.