Nidec - Market Review

13 June 2020

Dear Fellow Investor,

This week, I will review our holding in Nidec which is in our PGWA accounts. During the March and April market panic Nidec dropped over 30 % but has since recovered.  Nidec is well positioned in Asia and with the Covid crises burning out and with China/ Asia/ US/ Europe nascent  recoveries their prospects are bright.  Reading the Nidec 2019 annual report,  their competitive advantage is their global learning center founded in Kyoto in 2017 which expands their industrial science center founded in 2015. They focus on leading edge technologies including robotics and automation to help their clients be more efficient and profitable. Operating in Kyoto is an advantage because Kyoto is home to the leading technical universities in Japan.  Many of the scientists and engineers  who graduate join the Nidec research center.

Core business

Nidec is a global leader of brushless DC motors. Brushless DC motors have advantages over other types of motors in power efficiency, silence, and durability. Nidec possesses the number-one world market share in a wide variety of products, such as hard disk drive motors, optical disk drive motors, vibration motors on handsets, brushless motors for inverter air conditioners, and brushless motors for electric power steering on automobiles. It continues to benefit from the growing demand for power-efficient motors, driven by strengthening environmental regulations. Nidec targets to increase its revenue to JPY 2 trillion in fiscal 2021 from JPY 1.5 trillion in fiscal 2019.

 

On 11 June, Thursday, world markets suffered a major correction. Technology and growth shares were hit hard, especially the crowd favourite FANG stocks.  Nidec was down 1.9 % but not hit as badly as the overbought FANGs, airlines, hospitality and healthcare sectors.

 

Our core portfolios in Singapore, Hong Kong and Malaysia  were not much affected as we focus on value rather than growth. This includes REITs and consumer stocks

 

The strange death of value investing

 

Below is a quarterly 30 year Bloomberg  chart showing the spread between an index of growth stocks compared to value stocks.

It shows that growth stocks such as Tesla and the FANGS are trading at 30 year bubble price extremes versus  value stocks.

In my opinion this extreme could reverse and those who chase the pure growth sector could be badly burned.   Those who invest in value stocks will lose in a major correction but not lose as much and recover faster.

Pension fund support

Many pension funds who are mandated to hold government bonds do not even earn enough from the low interest rates offered by bonds to pay fund expenses much less earn an investment return. Imagine all the teachers, fire fighters, police and workers who lose their pensions when these funds can not pay their obligations. It is already happening in the US.  

Governments know this and that is who they are allowing pension funds to buy stocks. For his reason they are buying stocks that offer a reasonable return.  This is providing support to stock markets . Bank Negara is wise and allows EPF to buy shares. This provides some support to the KLSE.  

Perhaps Warren Buffet has seen this growth/ value chart and that is why his Berkshire fund holds mostly cash and value stocks.  Warren Buffet does not like to buy highs and is a patient man.

My view is that monitory stimulus by all major economies and near zero rates will support world  stock markets for the next few months but that will not prevent the growth bubble to burst.  The pin could be a Joe Biden win in November.  I am not forecasting that but we have to be prepared for the worst case.

Invest well and grow your wealth, Bill

Critter of the week is an odd couple, An appaloosa horse and a dalmatian. I have a dalmatian and it is a wonderful and loyal friend.