Weekly Market Commentary By H.E.R.O. (18 to 22 Oct 2021)

Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose

Weekly Market Commentary By H.E.R.O. (18 to 22 Oct 2021)

October 23, 2021 Uncategorized 0

The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators rose +3.5% nett during the week as at the end of 22 Oct 2021, with gains since its inception on 28 Aug 2020 at +29.8% and a NAV of over S$39 million. The earnings season in Europe started this week and enters full steam from next week, with the portfolio companies expected to report continued strong performance to propel a robust rebound as proven in all previous pullbacks. European long-term investors are reported to be using the significant declines in stocks as an opportunity to build positions.

  • Top 5 holding Biotage +11.7% during the week; the Global Medtech Leader in Platform Solutions for Chemical Molecule Separation and Synthesis of New Therapeutic Substances announced that it has acquired ATDBio and strengthens its position in DNA and RNA Oligonucleotide synthesis and purification.
  • Top 3 holding MIPS, global #1 leader in helmet-based rotational motion protection safety and brain protection, +7.4% during the week. In a sign that that U.S. PPE manufacturers are looking to refresh the classic hardhat design, Ergodyne is offering a helmet equipped with the MIPS (Multidirectional Impact Protection System), an innovation designed to better isolate the brain from the shocks associated with falls and collisions. It is the second U.S. manufacturer to announce a MIPS-equipped construction helmet, after Protective Industrial Products announced a MIPS model of its Dynamic Rocky safety helmet earlier this summer. Ergodyne's helmet is the first to market in the U.S.
  • NIBE, Global Leader in Heat Pump and Environmentally-Friendly, Energy[1]Efficient Solutions for Indoor Climate Comfort in All Types of Properties and Solutions Provider for Intelligent Heating & Control, +7.6% during the week. NIBE’s BriskHeat, a leading provider of surface and immersion heating products, controllers, and insulators, has announced a partnership with Mulberry, the product protection partner for e-commerce brands, to offer protection for products across its catalog.
  • Pharmanutra, Italy’s #1 Nutraceutical Leader in Iron-Based Nutritional Supplements and Emerging Top Medical Device Player for the Recovery of Joint & Movement Capacity in Osteoarthritis Diseases, has been granted a process patent in India for the production of Cetylated Fatty Acids (CFAs). The process patent granted in India comes a few months after the same certification was granted in China, further consolidating the PharmaNutra Group's international development projects in Asia, where it already distributes CFA-based products through its partnership with the Thai company American Taiwan Biopharm Co. (ATB), which has successfully marketed the Cetilar® products in Thailand since 2019 and will begin marketing them in Malaysia and Singapore in early 2022.

U.S. stocks pare their weekly gain after declining on Friday, following Fed’s chair Powell signaling some concern about inflation and that the taper is on track to begin soon and end by mid-2022. He also noted that "it's time to taper... not time to raise rates." MSCI ACWI All World index +1.2%, S&P 500 +1.6%, NASDAQ +1.3%, Russell +1.1%, Stoxx 600 +0.5%, FTSE -0.4%, DAX -0.3%, Topix -1.1%, Kospi -0.3%, China CSI 300 +0.6%, Shanghai +0.3%, Philip SREITS -0.5%, Keppel DC REIT -1.7%. Global supply-chain constraints and shortages that have led to elevated inflation “are likely to last longer than previously expected, likely well into next year,” Powell said.

Market measures of future levels of inflation have climbed to a decade high this month, as investors digested company reports on how tangled supply chains, pent-up demand and rising energy prices were affecting their businesses. The 10-year “break-even” inflation rate, derived from US inflation-protected government securities, rose to 2.62% on Thursday, its highest level since September 2012 and above the Federal Reserve’s long-run inflation target of 2%. The five-year break-even rate rose to 2.86% on Thursday, the highest since March 2005. Compared with the rest of the world’s central banks, the market’s timetable for when the Fed will start raising interest rates looks positively subdued. Most others, with the exception of the European Central Bank, are expected to move at a far speedier pace. U.S. traders are now pricing a full rate hike into the Fed’s September policy meeting next year. But by that time, New Zealand’s central bank would have hiked five times, Canada’s three times and England’s four times, according to the interest-rate swaps market.

Consumers around the world are about to get socked with even higher prices on everyday items, companies from food giant Unilever to lubricant maker WD-40 warned this week as they grapple with supply difficulties. The maker of Dove soap and Magnum ice-cream bars jacked up prices by more than 4% on average last quarter, the biggest jump since 2012, and signaled elevated pricing will continue into next year. A similar refrain came from Nestle, P&G and Danone, whose products dominate supermarket aisles and kitchen cupboards. Consumers in emerging markets have so far faced the biggest inflation, as seen in Nestle’s results. The Swiss food giant, which makes Nespresso coffee and DiGiorno pizzas, raised pricing in such countries by 2.6% in the first nine months of the year, three times the rate of developed markets. Investors are increasingly concerned higher cost pressures and global supply-chain bottlenecks will push the Fed to raise interest rates faster than expected. However, a solid start to the earnings season had offset those fears. Meanwhile, the Cboe volatility index or VIX, which measures expected fluctuations in the S&P 500 Index, has been on a downtrend for the past month and dropped to 15.7 on Tuesday, near the lowest since February last year. The gauge is now well below its lifetime average of about 19.5, according to data compiled by Bloomberg stating in 1990.

A warning on ad spending from Snap wiped out more than $140 billion of market value from the social media company and its peers including Facebook, Google, Pinterest and Twitter. This week saw "get out and party" recovery stocks underperform the "stay at home and sulk" stocks, while Cyclicals modestly outperformed Defensives on the week. Bitcoin ended the week just above $61k, well off the $67k record high; the newly launched Bitcoin (futures) ETF (BITO) ended below its opening level and the premium over spot has faded since.

Meanwhile, a worse-than-expected third quarter economic performance for China has indicated there could be more pain ahead in the final three months of the year, while stoking fears of “stagflation”. China’s cash-strapped developers are becoming reluctant to bid for land during the nation’s property slump, threatening to undermine a $1 trillion revenue source for local governments and deepen the economic slowdown. About 27% of land parcels offered by local governments went unsold in September as no developer submitted bids -- the highest rate since at least 2018, according to data compiled by China Real Estate Information Corp., which tracks auctions across 128 Chinese cities. China Evergrande Group’s payment of interest on a dollar bond is positive news for debt holders, but uncertainties remain on whether the distressed developer can secure cash for looming repayments, according to analysts: This “does not solve the company’s problem, and does not change the fact that it is the living dead.” A combination of raw material inflation and weak consumer spending has made the third quarter a brutal period for China’s biggest companies, with property, agriculture and power generation sectors set to show the worst plunges in profit. Roughly a quarter of China’s over 4,000-listed firms have already published earnings or preliminary results for the season. While still early, analysts concur that overall year-on-year growth will be disappointing, accentuated by the comparison to last year’s high base when China was the only major economy that grew during the pre-vaccine stage of the pandemic. The corporate outlook is also clouded by a prolonged chip shortage and an energy crunch limiting manufacturing capacity. Beijing’s crackdown on the tech sector and a growing debt crisis among highly leveraged property developers are adding to the lackluster season.

Market sentiment and excessive optimism over Cyclicals may be punctuated by warnings from scientists that Merck's "revolutionary" COVID drug molnupiravir - which purportedly cut hospitalizations in half during a study that was cut short - could cause cancer or birth defects, according to a report published Thursday by Barron's. Molnupiravir works by incorporating itself into the genetic material of the virus, and then causing a huge number of mutations as the virus replicates, effectively killing it. In some lab tests, the drug has also shown the ability to integrate into the genetic material of mammalian cells, causing mutations as those cells replicate. If that were to happen in the cells of a patient being treated with molnupiravir, it could theoretically lead to cancer or birth defects.

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.

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