Weekly Market Commentary By H.E.R.O. (20 to 24 Sep 2021)

The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators declined -0.4% nett during the week as at the end of 24 Sep 2021, with gains since its inception on 28 Aug 2020 at +31.7% and a NAV of over S$39 million. Month-to-date +0.3% vs MSCI ACWI All World index -1.3%.

• Top performers for the week include: CPaaS innovator Generic Sweden +17.9% and Comet Holding AG, global #1 tech leader in plasma control/RF power and X-ray technology used in critical production processes, +3.4%.
• Eckert & Ziegler (EUZ) announced Health Canada approved Eckert & Ziegler Radiopharma's GalliaPharm® Ge68/Ga-68 generator for use with Advance Accelerator Systems' NETSpot kit used for the localization of somatostatin receptor positive neuroendocrine tumors (NET) in adult patients using Positron Emission Tomography (PET). NETSPOT® is the only registered Ga-68 based radiopharmaceutical in Canada. With approximately 12,000-15,0001 Canadians living with NETs, this form of cancer has gone from being once rare to one of the fastest-growing classes of cancer worldwide.

Volatility in U.S. stocks and major developed currencies is swinging in lockstep by the most in more than a year since June 2020. The Cboe Volatility Index, or the VIX, -- a measure of expected swings in U.S. stocks -- climbed this week to the highest in nearly four months. A JPMorgan gauge of one-month implied volatility in Group-of-Seven currencies touched a seven-week high. This comes during a week when the Federal Reserve and at least 14 other central banks delivered rate decisions and guidance on the next path of monetary policy, with Norway the first advanced economy to deliver a post-crisis interest rate hike, and the Bank of England may be next, adding thrust to this week’s hawkish tilt by the major central banks. While stocks and currencies were unfazed by some U.S. policy makers’ outlook for rate increases as soon as next year, they were whipsawed by headlines that ranged from China Evergrande’s debt crisis to a ban on all crypto transactions and crypto mining by the People’s Bank of China. MSCI ACWI All World index inched up +0.2% while NASDAQ is flat during a volatile week, as stocks bounced back from a sharp selloff at the start of the week tied in part to concerns over a default on its more than US$300B debt by China’s Evergrande and its potential risk to global financial markets. The S&P 500 -- though near a record high -- is set for its first monthly decline since January.

One unknown trader took on a huge US$50M bet on Wed that S&P 500 stocks will rally into the end of this year; should all the contracts be in the money by their respective expiration dates, they would be worth US$136 million – for a profit of roughly 70%. Meanwhile, investors pulled $28.6 billion out of U.S. stocks for the week of Sept. 22, the most since 2018, according to BofA Securities data. The latest week also showed the first weekly outflow and net selling of equities for the first time this year. Global equities have logged a massive US$725B+ worth of inflows YTD. The Fed said on Wednesday that it could start winding down bond purchases “soon” and could end around mid-2022. Updated quarterly projections also showed officials are now evenly split on whether or not it will be appropriate to begin raising the federal funds rate as soon as next year. In sum, tightening Chinese regulation occurring against the backdrop of central bank tapering and a rapid slowdown in economic activity is combining to rattle global equity markets. Investor attention will soon turn to the earnings season starting in a few weeks. Consensus margin estimates have fallen for 140 companies in the S&P 500 during the past three months and are driving variation in returns among stocks. Over the stretch, firms whose margin estimates fell saw their stocks slide about 1% on average. That compared with a 5% gain for those with rising margin forecasts.

China markets plunged, riveted by the idea that Evergrande could be China’s “Lehman moment” and that the spectacular unravelling of the property group exposes deep flaws in Beijing's growth strategy, that the old build, build, build playbook does not work any more and that it is actually getting dangerous, with MSCI China ETF -3.3%, Hang Seng -2.9%, Hang Seng Tech -4.8%, China Internet ETF KWEB (in StashAway’s portfolio) -4.1%. Stocks pared gains after a report that Chinese authorities signaled reluctance to bail out Evergrande, asking local governments to prepare for its demise, even as Beijing injected more cash into the financial system and regulators instructed the embattled property developer to avoid a near-term default. Jim Chanos told defiant overcomplacent China speculative trading bulls that Evergrande’s crisis could be “far worse” for investors in China than a “Lehman-type situation” because it points to the end of the property-driven growth model in the world’s second-largest economy. “There’s lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest. But all the developers look like this. The whole Chinese property market is on stilts.” Meanwhile, deepening worries over Evergrande have ignited selling in the US$428B corner of the Asian high-yield dollar-denominated debt and structured product market.

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.