Weekly Market Commentary By H.E.R.O. (30 Aug to 3 Sep 2021)
The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators rose +3.4% nett during the week as at the end of 3 Sep 2021 to extend its gains since its inception on 28 Aug 2020 to +34.1% with a NAV of over S$40 million in its first-year anniversary.
U.S. markets pared its weekly gains, with MSCI ACWI All World index +1.3%, S&P 500 +0.6%, following U.S. hiring data on Friday (with 225,000 net new jobs) badly missed estimates (from July’s blowout 1.05 million gain), impacted by the Delta infection surge, the latest in a string of weak numbers landing just as enhanced U.S. unemployment benefits are set to expire as of 6 Sept. and the Fed considers pulling back pandemic-era stimulus. Gold reversed losses during the week to advance on Friday to rebound 0.6% for the week on speculation that the weak jobs hiring data could spur the Fed to delay the inevitable taper. European shares fell on signals the region’s policy makers will start discussing a reduction of bond purchases, with Stoxx -0.1%, DAX -0.5%, FTSE -0.1%. American equities still notched their seventh straight monthly advance -- the longest winning streak since January 2018 -- amid a tonic of strong corporate profits and moderate monetary policy. Fourteen streaks of seven months or longer for the S&P 500 have occurred during the past 60 years. More than 1,000 U.S. executives and officers have snapped up shares of their own firms this month -- the most since May of last year. Although Congress seems likely to pass a bipartisan infrastructure bill this fall, the near-term economic impact will pale in comparison to the multiple rounds of stimulus introduced since March 2020. Meanwhile, as Wall Street debates the timing for Federal Reserve stimulus cuts, quality companies that can weather a slower-growing economy and margin pressures as input costs go up, proxied by S&P 500 firms with strong balance sheets, have outperformed those with shakier finances for three straight months, the longest stretch since May 2020. That’s a reversal from the start of 2021, when shares in companies with tattered finances thrived as the economy reopened, beating quality firms by the most on record.
Meanwhile, China's official Services (non-manufacturing) PMI Index unexpectedly collapsed in an “absolute shocker” from a healthy 53.3 to a contractionary 47.5 - the second lowest print on record with just the Feb 2020 peak covid print lower, badly missing the 52.0 Bloomberg consensus, and the largest one-month drop (-5.8) outside of the covid recessionary plunge in February 2020. China’s economic recovery is faltering as virus variants linger, and that’s already seeping through into management commentary. Decelerating Chinese growth is set to weigh on global profits, and potential negative surprises could be seen as early as the fourth quarter. That’s on top of Xi’s “common prosperity” initiative in Beijing’s recent crackdown on industries like tech, entertainment, education, healthcare, and property, etc, to tackle societal ills. Following similar announcements from compatriots Tencent, Pinduoduo and others, Alibaba announced that it will by 2025 donate or spend 100 billion yuan, roughly two-thirds of the group's earnings in the last fiscal year, on 10 initiatives including helping small businesses, upgrading technology and healthcare infrastructure in less-developed areas, and protecting gig-economy workers. The bigger risk is that these pledges are not one-off costs. Authorities may soon revoke preferential tax treatment for many companies once considered to be high-tech. Applying the standard 25% blended rate to Tencent would shave off 9% of adjusted annual earnings in both 2022 and 2023. More frequent regulatory fines for anti-trust breaches and other infractions, as well as a raft of new requirements on data and consumer privacy will also dent profit margins. Beijing is considering an investment in Didi that would give state-run firms control of the embattled Chinese ride-hailing company. China plans to tighten oversight of e-commerce companies like Alibaba and Pinduoduo, including by holding them accountable for intellectual property violations. E-commerce platforms will be restricted from online business operations or even have their licenses revoked if they fail to deal with serious violations of IP rights by vendors on their platforms, according to a draft revision of the country’s e-commerce law posted by the State Administration for Market Regulation. China’s securities regulator said it plans to rein in the country’s private equity and venture capital funds, stop public offerings disguised as private placements and fight embezzlement of assets. The CSRC will also crack down on money managers that illicitly take public deposits, offer loans or embezzle fund assets.
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.