Weekly Market Commentary By H.E.R.O. (18 to 22 Jan 2021)
“We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust. When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years,” GMO’s Grantham warned on Biden’s massive stimulus plan further inflating the frenzied market rally that has extended after markets posted the best Inauguration Day rise in 36 years as Biden takes office at the 46th president.
- MSCI ACWI All World index +1.7%, S&P 500 +1.9%, Stoxx +0.2%, FTSE -0.6%, DAX +0.6%, Topix flat.
After lagging behind the broader market for months on “FANG fatigue”, U.S. megacap tech stocks suddenly jumped up this week ahead of earnings, catalysed by the surprising news from Netflix in its fourth-quarter shareholder letter that it plans to break even on a free-cash-flow basis this year, having previously forecasted a loss of up to US$1 billion. Netflix claims that with more than 203 million subscribers paying on average US$11 a month, it now generates enough cash to cover its production costs and that it would not need to raise external financing: “We believe we no longer have a need to raise external financing for our day-to-day operations.” Netflix, which has US$16 billion in debt outstanding, said it would soon pay down US$500 million of maturing debt from cash on hand, adding that it would “explore” stock buybacks—something it hasn’t done since 2011. Notably, the Goldman Sachs Non-Profitable Technology Index of U.S. listed firms continue to ramp up, led by the speculative Chinese electric vehicle and hydrogen fuel cell stocks with nearly 20% weight. In addition, insider selling in the U.S. companies exploded to a record high in 2021, with the sell-to-buy ratio poised for the highest monthly reading in data going back to 1988, according to Washington Service.
Meanwhile, insiders and large shareholders are taking advantage of Asia’s bull market rally to cash out through a series of share placements, more than in any other full January period since 2015. In particular, China is bracing for another record year of bond defaults when a trio of the central bank’s debt limits kick in this month, as they crimp the ability by borrowers to use loans to repay their outstanding debt. One in five of China’s biggest real estate developers including China Evergrande Group will be barred from borrowing any more money from banks according to the three red lines on debt drawn by the People’s Bank of China. Only 6.3% of all rated Chinese developers can comply with the central bank’s red line limits on debt, according to S&P’s analysis.
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
There’s a dark side to looking on the bright side. Here’s a healthier antidote
An organizational psychologist explains that while it is well-intentioned, toxic positivity suppresses emotions. That can lead to stronger negative emotions such as anxiety and depression, which can also manifest as physical illness.
By Dr. Laura Gallaher, from Fast Company
Raise your hand if you have ever heard “Well at least . . .;” “It could be worse;” “Look on the bright side;” or other expressions that are offered in response to real negative emotions. You’ve likely been on the giving or receiving end of phrases such as these, which means you’ve experienced what is called toxic positivity.
While it is well-intentioned, toxic positivity suppresses emotions. That can lead to stronger negative emotions, such as anxiety and depression, which can also manifest as physical illness. Experiences of toxic positivity are not limited to well-meaning friends and family. It’s also increasingly taking hold in the workplace as leaders lean into optimism in the face of massive COVID-19 economic and social impacts.
The phrase toxic positivity means only focusing on positive things while ignoring, suppressing, or avoiding anything that may trigger negative emotions. This invalidation of real feelings of fear, anxiety, and sadness can take a toll on mental health. Accepting emotions, on the other hand, has the opposite effect. A 2018 study found that accepting negative emotions and thoughts without judging them (a key piece of the practice of self-acceptance) is linked with greater psychological health.
When toxic positivity occurs in the workplace, it is often triggered by fear of negative energy permeating the team. It happens when people in an organization are discouraged from saying what they are really thinking and feeling. The result is that people start to withhold a lot of their own thoughts and feelings, creating high levels of emotional labor (projecting one set of emotions while actually feeling others). The first casualty of this type of environment is trust.
Humans intuitively know if there is a disconnect between what someone is saying and what they are actually feeling. While you don’t always know exactly what is going on, your built-in radar signals that something is off. When this happens, you come to the conclusion that you can’t quite trust what this person is saying to you at that moment.
Toxic positivity can also ramp up triangulation. If, for example, a leader focuses on getting teams to be positive and is not actually listening to what people are struggling with, then that person who is struggling will start talking to others instead of going directly to the person who could help them solve the challenge. When healthy conflict and honest conversations are discouraged, business performance and results will suffer.
Toxic positivity shows a lack of compassion, something that leaders need to exhibit now more than ever in these turbulent times. When someone is feeling upset about something and your response is “try to be more positive,” you are basically communicating to that person that they are wrong for feeling what they are feeling and for being open with you about what they are feeling. This denies, minimizes, and invalidates authentic human emotions. This is the opposite of compassion.
Referencing the current crisis, consulting firm McKinsey noted:
“When people exhibit fear and a desire for protection and self-preservation, compassionate leaders validate those feelings as normal. Instead, provide safe workplace forums for stakeholders to express emotions. It will help individuals move past pain, stress, and anxiety, and refocus on their work and the organization’s mission.”
THE WORKPLACE ANTIDOTE TO TOXIC POSITIVITY
Positivity and real human connection emerge by honoring someone’s experience of the world and really hearing what is true and real for them. Humans want to be heard and understood. Active listening is the most effective way to do that.
There are two levels of listening for validating emotional experience. The first is to ask anyone who is struggling to tell you more and help you understand. The second way is to paraphrase back what you are hearing them say and what you are hearing that they feel (“It sounds like what you are feeling is . . .” or “What I hear you saying is . . .”).
To avoid toxic positivity, you want to make sure the person truly feels heard and validated for whatever it is they are feeling. This allows them to go through the natural bell curve that emotions follow, process the negative emotions, and move through them. After this happens, the discussion can move to talking about solutions and what you can do to help. At this point you can also be intentional about shifting the focus away from what the person feels they are losing or what they feel is painful to the recognition that every single change has both gains and losses. Ask them what they see as the potential for benefit or gain in the situation.
Another key antidote to toxic positivity is honesty. Being transparent and truthful, having the data to back up what you are saying, and trusting what you are saying provides reassurance that will be perceived as very genuine—because it is.
Disney Pixar’s movie Inside Out captures the importance of leaning into emotions and avoiding minimizing or dismissing negative emotions. Movie director and cowriter Pete Docter told Slashfilm, “There are so many books on how to be happy and what you need for happiness and you want that for your kid too. We literally tell our kids ‘Don’t be sad,’ and yet there is a real value to all the other emotions that is part of the richness of life, and it’s not until you really recognize that [that] you really have the ability to connect with the world in a deeper way.”
KEE Koon Boon ("KB") | Email: email@example.com | 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
Our investment strategies distinguish from those of all other tech- and innovation-themed funds with its singular focus on quiet innovators, which present structurally mispriced opportunities and avoid overcrowded misopportunities that stem from the human tendencies to equate flashy popularity with excellence, and have an active ratio of over 95% (vs the MSCI World Index). The portfolio companies are exceptional innovators and focused market leaders in their respective fields with unique, scalable, recurring-revenue and high-profitability business models delivering innovative products and services indispensable to our well-being in daily life and run by high-integrity, honorable and far-sighted entrepreneurs with a higher Purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – Honorable. Exponential. Resilient. Organization.
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.