Weekly Market Commentary By H.E.R.O. (23 to 27 Aug 2021)
The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators is up +3.1% during the week as at the end of 27 Aug 2021 to extend its gains since its inception on 28 Aug 2020 to +29.9% with a NAV of over S$38 million in its first-year anniversary.
A kinder, gentler Fed tightening is the key message from a dovish Powell speech that the Fed won’t be in a hurry to begin raising interest rates after tapering monthly bond purchases sparks the 52nd all-time high for U.S. stocks in 2021, after initially dropping on the headline that "tapering is on the way", with S&P 500 +1.5% and MSCI ACWI All World Index +1.9% during the week, and the dollar weakened, pushing gold to rebound +2.1% and SREITS to fall -1.7%. While it has now been 10 months since the S&P suffered a 5% drawdown or greater, market breadth and trading volumes slumped, with the 50-day average daily trading volume across all members of the S&P 500 Index declining to the lowest since the coronavirus pandemic first began to roil markets in late February 2020, and the equity benchmark’s average volume this year is still below its 10-year average for the month and is set to be the lowest since 2018. Back in January 2021, 1,876 constituents of the Nasdaq index were in positive territory while 1,039 stocks ended in the red; in August, 1,457 of the stocks are in positive territory and 1,936 constituents are negative. Investors in the US have started to dial back their use of leverage for the first time since financial markets were rattled by the coronavirus crisis last year, removing some of the borrowed money that has since fuelled a rally in stocks. Investors had borrowed $844bn against their portfolios in July, down from a record $882bn a month earlier and the lowest level since March. Stock issuance in 2021 is setting a new record, blowing away the last high set in the run-up to the Tech Bubble in 2000, while buybacks have been accelerating, but alongside that, corporate insiders are dumping their own stock.
Meanwhile in Asia, Chinese tech stocks’ best weekly rally since January is already showing signs of fatigue, with the early week gains fizzling out toward the end of this week amid headlines of fresh crackdowns. The flurry of activity included: new regulation to tame “internet service recommendation algorithms”, which are the fundamental technology behind the country’s popular apps; a regulatory vow to step up tax enforcement; a top court ruling against labor abuses in the private sector; a government denouncement of excesses in “fan culture”, including banning social media platforms from publishing celebrity popularity rankings and regulating fan merchandise sales, with the fan club page of one of China’s most popular actresses, Vicki Zhao Wei, taken down, and TV shows are no longer allowed to charge fans to vote for their idols in popular competitions; China’s plans to ban U.S. IPOs for data-heavy tech firms; and SEC vowing to make Chinese companies open their books to U.S. regulators—or risk being delisted from American stock exchanges as soon as 2024. China’s bond futures slid the most in two weeks amid concerns over wealth management rules, even after the central bank added cash to money markets to maintain interbank liquidity levels. China's push to wean property developers from excessive borrowing is spilling over into loan losses at banks and pain in credit markets as cash-strapped builders fall into distress, raising the risk of fallout rippling across the economy. Debt and land-buying curbs and hundreds of new rules are hitting developers far harder than they had expected, setting off a scramble to sell assets as well as a steady drumbeat of bankruptcies, defaults and cut-price takeovers. The premium over risk-free yields that investors demand for China's developer-dominated high-yield debt has surged 300 basis points in three months, whereas European and U.S. premiums have fallen. The divergence is the widest on record. Bank loans are also turning bad where exposure is high, with bad debts in the property sector tripling for Shenzhen's Ping An Bank in the first half. China’s state media has denounced the group buying industry’s cash burn strategy as a number of start-ups have either filed for bankruptcy or reduced operations amid the financial hardship caused by their “subsidy wars” to seize market share. It also indicated that group buying operators’ subsidy wars only provided a sense of “false prosperity”, a lesson that should have been learned from what has happened before in the country’s bike-sharing and ride-hailing industries. Alibaba-backed community group buying provider Nice Tuan has ceased operations in multiple cities in August. Many of China’s technology giants have squeezed into the group buying market since the coronavirus pandemic started, acquiring new users with the lure of low-priced goods and providing community leaders with high commission fees. These setbacks signal that the Chinese internet industry’s once-foolproof formula – achieve explosive growth on the back of subsidies and later raise prices to generate profit, while collecting massive amounts of user data – is no longer viable. Mixed tech earnings this week also failed to give investors confidence. Live streaming giant Kuaishou and electronics component maker AAC Technologies both missed profit estimates and saw their shares plunge.
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.