Weekly Market Commentary By H.E.R.O. (26 to 30 July 2021)
The Portfolio of Dividend-Yielding Global H.E.R.O. Innovators rose +2.2%, led by top 3 holding Swedencare which leapt +18.9% during the week after reporting 2Q revenue jump of +400% (1H2021: +322%) and operating profit +676% (1H2021: +384%) with EBIT-margin of 27.5% (17.7%) [1H2021: 26.9% (23.4%)]. Another top 3 holding Eckert & Ziegler rose +6.6% during the week after announcing updates that half-year results are stronger than expected, which already exceeded 75% of the guidance given for the full business year, and upgraded 2021 profit forecasts by 20%, with complete results published in mid-August.
U.S. and global markets slumped during the week, with MSCI ACWI All World index -0.3%, S&P -0.4%, Nasdaq -1.1%, Hang Seng -5%, MSCI China -4.8%, Hang Seng Tech ETF -6.4%, China Internet ETF KWEB (in StashAway’s portfolio) -8.7%, Phillip S-REITS -0.9%, led by growth fears from Big Tech as Amazon.com plummet after reporting slowing growth in its e-commerce business, and U.S.-listed Chinese technology shares clocked their worst monthly performance since the financial crisis in 2008.
However, S&P 500 posted its sixth positive month in a row in the month of July, the longest streak of monthly gains since 2018, and has now gone 185 days without a pullback of at least 5%. Other megacap tech stocks Apple, Microsoft Facebook also reported earlier in the week, and all fell after their reports. The continued flattening of the yield curve that’s pricing higher stagflation risk is casting a pall over bonds and REITS and whipsawing bond traders. U.S.-China tensions escalated throughout the week with the SEC saying it would stop processing registrations of U.S. IPOs and other sales of securities by Chinese companies. Speculative growth names and loss-making U.S. cloud software stocks fell, with ARKK Innovation ETF -2% and Cloud Software SKYY/CLOU/WCLD -0.9%/-1.2%/-1.4%. Investors are looking to a mounting pile of cash at U.S. companies to provide support for the stock market in coming months, as executives announce plans to increase share buybacks, boost dividends or pour money back into their businesses. Cash on the balance sheets of S&P 500 companies has swelled to a record US$1.9 trillion, compared to US$1.5 trillion before the pandemic crisis in early 2020.
U.S. CDC announced new guidance that vaccinated people wear masks indoors in certain parts of the U.S. after reporting that the delta variant of COVID-19 is “as transmissible as chickenpox,” and could spread as easily from vaccinated persons as the unvaccinated, adding that governments and health officials must “acknowledge the war has changed” regarding the variant that has spread quickly across the U.S. and rest of the world, which is described as the “fittest and fastest variant yet." Around the globe, a Covid-weary world Is facing a distressing reality check: people and governments are finding out that Covid won’t be thrashed into extinction, but is more likely to enter a long, endemic tail, resulting in a stop-go world economy, with sporadic lockdowns and reopening dragging major economies in and out of recession. BioNTech’s CEO Dr. Ugur Sahin commented that “The vaccine protection against the new variant is considerably lower.” A study in China found that people infected with the Delta variant carry 1,000 times more virus in their noses compared with the original version first identified in Wuhan in 2019. China reported during the week its biggest outbreak since Wuhan after an outbreak centered around the city of Nanjing has spread across the country to 13 cities in at least 5 difference provinces. Meanwhile, the pandemic’s impact on global trade risks worsening in coming weeks as more factories across Southeast Asia brace for closures amid one of the world’s deadliest outbreaks. Factory shutdowns are accelerating in Vietnam, while Thailand is prepping for outbreaks among its manufacturers and the Philippines tightens restrictions in its economic heartland. Malaysia, one of the hotspots of the disease, reported 17,786 coronavirus cases on Saturday, a record high. Malaysia’s king has rebuked Prime Minister Muhyiddin Yassin’s government for misleading Parliament over the status of coronavirus emergency measures, sparking renewed calls for the embattled leader to resign. The region’s death toll now has nearly overtaken Latin America as the world’s worst. Thai baht crashed to a 15-month low.
The nearly US$1 trillion selloff ignited by Beijing’s shock ban on profits at tutoring companies, which has included a ban on companies using the precarious VIE structure, and forcing Meituan to pay higher wages and providing health insurance to workers has triggered a new round of soul searching about the investment case for Chinese assets in the new reality of the Xi Jinping era, as the Nasdaq Golden Dragon China Index -- which tracks 98 of China’s biggest firms listed in the U.S. -- plunged 22% in July, and Shanghai Composite also suffered its worst month since Oct 2018 even with The National Team's rescue this week with commentaries and reports in state-run media sought to shore up sentiment, as the short-squeezed relief rebound on Thursday proved short-lived against the avalanche of selling pressure which renewed on Friday to punish speculative sentiment-based buyers. Goldman Sachs strategists wrote in a note that the word ‘uninvestable’ featured in recent conversations with clients regarding investing in Chinese stocks. The Ministry of Industry Information Technology on Friday told 25 of its largest tech companies to carry out internal inspections as part of a new six-month long campaign to root out illegal online activity and crack down on a wide range of “tough problems” in the internet industry. Investors also rushed to exit bets on China's health sector this week, fearing the regulatory crackdown that sparked panic selling in the tech and education sectors might hit the medical industry next. Medical expenses are one of three key areas of living costs, besides property and education, seen as Beijing's targets for social change, heightening expectations that authorities will make healthcare their next focus of market reform. China's PMI factory activity expanded at a slower pace in July, as growth risks mount.
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.