Weekly Market Commentary By H.E.R.O. (19 to 23 Oct 2020)
The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators maintained her overall absolute positive and relative outperformance against major world indexes which were negative since her recent inception on 28 August 2020. During the week ended 23 October 2020, MSCI ACWI All World index traded flat, S&P 500 -0.5%, NASDAQ -1%, NASDAQ 100 -1.4%, DAX -2%, Euro Stoxx -1.4%, China CSI 500 -1.5%, Shanghai -1.8%. Over the same corresponding period since her recent inception on 28 August 2020 with absolute positive returns generated, MSCI ACWI All World index declined -0.5%, S&P 500 -1.2%, NASDAQ -1.3%, Stoxx -1.9%, and Greater China stocks slumped with Hang Seng index -2%, Shanghai Composite index -3.7%, CSI 300 index -2.6%, and Gold (physical spot in USD) -3.2%.
The separate equity portfolios of H.E.R.O. Innovators of our clients generated around +50% in average returns since the H.E.R.O. research methodology was provided for and implemented in March 2020.
- Key contributors during the week were led by: (1) Australian Global Leader in SaaS Cloud Medical Diagnostics Imaging Visualization Software (+12%); (2) Japan’s #1 Platform for M&As (+6%); (3) Global Labtech Leader in Instruments and Consumables for the Biopharmaceutical and Life Science Industry and #1 in the Growing Single-Use Technology Market (+4.7%); (4) Nordic Global Leader in Pet Health & Nutrition (+3.9%); (5) Australian Global Leader in Respiratory Humidification Medical Devices (+2.6%).
- 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.
Markets are transfixed this week by the yield drama in which the 10-year US treasuries (10Y UST) yield spiked up to above 80 bps for the first time since early June when the U.S. economy began to re-emerge from widespread lockdowns to halt the spread of the coronavirus. Banks shares, which have been stuck for months, jumped to the best month in four years. The spread between 2-year and 10-year Treasury yields topped 70 basis points, the widest since early 2018. The KBW Bank Index climbed 3.7% for its best week relative to the market since June. The SPDR S&P Regional Banking ETF jumped more than 6% for the third time in four weeks, and is up 19% in October, its strongest month since Nov 2016. Cyclicals and rates-sensitive industries whose fate is pegged to a swift V-shaped economic recovery from the pandemic also rose significantly, with violent rotation away from structural growth companies. Global index losses would have been far steeper if not for the gains in banks due to the massive sector rotation into financials and rates-sensitive sectors, with many stocks across the markets taking heavy losses, including a late selloff in Chinese stocks before Friday's close.
A widely cited driver for the increase in yields is the belief that no matter who wins the election, massive fiscal stimulus will arrive thereafter, especially even more if there is a Blue Wave Democratic sweep, and more issuance to fund fiscal stimulus could weighed on Treasury prices. The Treasury Department has issued record a record US$15.5 trillion through the end of September to fund the stimulus package Congress passed earlier this year. The heavy supply has had a muted effect on prices so far, given the Fed’s near-zero interest rates and hefty debt purchases. Rising yields are a potential problem for the Fed as they raise the cost of borrowing for companies and individuals and threaten economic growth. Meanwhile, Reuters reported that money market funds were in turmoil this week as a widely-used benchmark for U.S. short-term interest rates dropped to record lows, joining its European peers. The three-month U.S. dollar Libor hit a record low during the week, and is down more than 100 basis points from highs hit in March at the peak of market volatility triggered by the coronavirus crisis.
Notably, as feverish traders and market commentators crowded into the consensus trade of a “Biden win + Blue Wave sweep” with expectations of massive stimulus to drive a V-shaped economic recovery, which drove the dramatic and alarming steepening in the U.S. treasury yield curve during the week, there are some large traders who are betting aggressively against this consensus view, whereby (1) Treasuries will experience just modest declines following the November 3 vote, and that (2) on the weeks following the vote, bond yields will remain stuck in a range, or a strangle option trade that 10Y UST yields will remain between 0.65% and 1% between the election and the options’ expiry on December 24. Also, gamma positioning is already betting on a sharp - and potentially quite rapid - move higher. The positive option skew on US bonds suggests markets are already discounting the potential for US rates to move higher, according to Goldman Sachs research. The U.S. Senate remains a likely formidable roadblock to anything substantive getting done pre-election.
After this week’s clobbering of Big Tech and structural growth companies that was prompted by a rotation into financials, it is more likely that markets will start to readjust to the grim realities of surging pre-winter COVID cases and adapt to an elevated-albeit-stuck-in-range 10Y UST yields, snapping back to the long-term opportunity in accumulating the exclusive group of quality structural growth companies who have reported strong earnings and operating cashflow growth with visible recurring-revenue business model with multi-year predictability and continued resilient corporate progress.
Some examples of winners in the H.E.R.O. portfolio in a volatile and noisy market that will remind investors to not succumb to be emotionally jumpy include:
- Global Labtech Leader in Instruments and Consumables for the Biopharmaceutical and Life Science Industry and #1 in the Growing Single-Use Technology Market, which was up +4.7% during the week, after reporting on 20 Oct 2020 strong profitable growth with nine-month sales +25.2% yoy, and that revenue is expected to increase at the upper end of, or slightly above, the range of its previous forecasted 22% to 26%, with EBITDA margin to improve to 29.5% from the previously guided 28.5%, as biopharmaceutical customers prepare to build up production capacities for coronavirus vaccines and therapeutics.
- Nordic Global Leader in Pet Health & Nutrition, which was up +3.9% during the week, after delivering record high results with 3Q sales jumping 119% yoy (20% above market expectations) and EBIT rising 70% yoy on margin of 26.8%. CEO Mr. L commented: “When it comes to addressable markets the number of pets has increased in almost all markets and as pet parents now value and spend even more time with their four-legged friends even stronger bonds are made, a factor that is positive for us as a distributor of premium products.”
- Australian Global Leader in SaaS Cloud Medical Diagnostics Imaging Visualization Software, which was up +12% during the week, after reporting last week on 15 Oct that it had won a 7-year multi-million software subscription contract with one of the largest university hospitals in Germany & Europe, replacing the existing legacy PACS imaging systems.
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
On Being Podcast with Krista Tippett and Sharon Salzberg: Shelter for the Heart and Mind
How can we keep walking forward, and even find renewal along the way, in this year of things blown apart? How can we hold to our sense of what is whole and true and undamaged, even in the face of loss? These are some of the questions Sharon Salzberg, a renowned teacher of meditation and Buddhist practices, has been taking up in virtual retreats this year, which have helped ground many — including Krista — on hard days. She teaches how to stay present to the world while learning kindness toward yourself.
|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.