Weekly Market Commentary By H.E.R.O. (29 Nov to 3 Dec 2021)

Markets swing wildly during the week, with MSCI ACWI All World index -1%, S&P 500 -1.2%, NASDAQ -2.6%, Russell -3.9%, Hang Seng Tech -3.8% and MSCI China -4.6%, as the mental doom loop of anxiety builds up over the omicron variant after Moderna’s CEO foresees “material drop” in current vaccine jabs’ and treatment effectiveness against the omicron variant and warned it would take months for pharmaceutical companies to manufacture new variant-specific vaccines at scale, and a significant change in tone to more hawkish from the Fed pivoting towards a tighter monetary policy, with whipsaw trading session that saw the Dow Jones Industrial Average swing by nearly 1,000 points from peak to trough, ushering in an unsettling phase of volatility in the final month of 2021. S&P 500 endured its biggest two-day rout since October 2020. The selloff is also the broadest since the worst pandemic fears last year, according to a gauge tracking shares hitting 52-week lows relative to those at highs. Officials confirmed multiple cases of the omicron variant across at least 10 states in the U.S., and the U.S. and a growing list of nations announced further travel restrictions this week as omicron spreads globally.

Many high-flying loss-making speculative tech stocks tumbled with dramatic losses in the unforgiving week, with Cloud Software ETF SKYY/CLOU/WCLD -7%/-6.6%/-10.8%, ARKK Innovation ETF -12.7% and China Internet ETF KWEB (in StashAway’s portfolio) -12.5%. Tesla, Netflix, Nvidia and Facebook-owner Meta Platforms have all lost over 10% in the past few weeks. That wiped several hundreds of billions from their market values, with Meta alone losing some US$224 billion since its shares hit a September record. The crash comes at an inopportune time for those who have poured US$1 trillion into equity funds in 2021 in anticipation of another year-end rally. Big finishes have been a safe bet in the past: the market has rallied in all but three Decembers since the global financial crisis. Omicron-fuelled market swings made November the worst month for global hedge fund performance since the virus first shut down economies at the start of the COVID-19 pandemic. Computer-driven trend-following hedge funds suffered "significant" losses in fixed income, commodities and equities, creating a "perfect storm". Net leverage of hedge funds, a measure of industry risk appetite that takes into account long versus short positions, fell the most since April 2020, and hedge funds dumped more than $2 billion of stocks last week, exiting the market at the fastest pace since April. U.S. high-yield junk bonds and related high-yielding structured products fell in November by the most in more than a year on fears the spread of the Omicron coronavirus variant will hinder the ability of low-rated companies to repay their debts. Meanwhile, according to CNBC, CEOs and corporate insiders have sold US$69 billion worth of stock so far this year, a new all-time record, and 30% higher than last year. Bitcoin plunged over 20% along with other cryptocurrencies, with leveraged buyers of Bitcoin flushed out in Saturday’s crash. More traders are turning to the options market for protection, with the Cboe equity put/call ratio this week jumping to the highest since July. Investors were exiting the highest-volume names at a clip not seen in two decades, with the Bloomberg U.S. Pure Trading Activity Portfolio, which is long stocks with the highest turnover against those with the lowest turnover, having its worst week since 2001.

Powell, who has spent months arguing that the pandemic surge in inflation was largely due to transitory forces, told Congress on Tuesday that it’s “probably a good time to retire that word.” Powell acknowledged that inflation is proving more powerful and persistent than expected, noting that “factors pushing inflation upward will linger well into next year”, and said the Fed will consider ending its asset purchases earlier than planned. For investors, an urgent question becomes whether Tuesday’s congressional testimony was a watershed moment for the monetary policies that have helped the S&P 500 effectively to double since Christmas 2018. That’s when Powell’s last big pivot occurred -- the dismantling of interest-rate hikes that made the fourth quarter of that year one of the worst for equities ever. Investors are also aware of Powell’s history of giving in to markets when their verdict is severe. In October 2018, he famously said that despite several increases, policy rates remained “a long way” from neutral and that financial conditions were “accommodative.” Three months later, with the S&P 500 points away from a 20% plunge, he reversed course, saying the central bank was flexible and that officials were “listening carefully” to the financial markets.

Meanwhile in Asia, the Hang Seng Tech Index, which tracks mostly Chinese technology stocks traded in Hong Kong, plunge to its lowest level since the gauge was launched in July last year. Members of the index have seen about US$1.5 trillion of combined market value evaporate since a February peak. A brutal 2021 selloff for Chinese stocks trading in the U.S. has now erased more than US$1 trillion in value since February and shows no signs of easing as regulators on both sides of the globe continue to put pressure on the firms. The Nasdaq Golden Dragon China Index -- which tracks China-exposed firms listed in the U.S. -- plunged 9.1% on Friday, the most since 2008, and to the lowest in almost 19 months, after Chinese ride-hailing group Didi Chuxing, under pressure from China’s cyber security watchdog, said it plans to delist its shares from the NYSE, highlighting that naively over-optimistic traders and speculators can no longer ignore China-U.S. decoupling risks. Alibaba stock hit a record low in Hong Kong amid fears that the Chinese e-commerce giant may be forced to lose its primary listing in New York. Reports suggested that Chinese regulators will restrict or even ban companies from going public on foreign stock markets through variable interest entities, closing a loophole long used by the country’s technology industry to raise capital from overseas investors, raising the prospect that Alibaba and other groups may be forced to ditch their listings on the New York Stock Exchange or Nasdaq. In addition, the SEC shared this week its final plan for forcing Chinese firms to de-list from American exchanges should they refuse to open their books and abide by stringent American auditing standards. Once it takes full effect, the rule will clear the way for over 270 Chinese firms with a combined market capitalization of $1.8 trillion to be booted from the top US exchanges, and over 150 of them do not qualify to list in Hong Kong. China’s suspension of new video game licences has stretched into the final month of the year, clouding prospects for gaming giant Tencent and NetEase. The continued selloff this week of China tech stocks, and Hang Seng Tech index/ETF which fell to its lowest since its inception in 2020, came after big international financial institutions increased their calls for bargain hunting last month.

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.