US elections results

 31 October 2020

Dear Fellow Investor,

Next Wednesday morning early election results from the US elections will be announced.  If there is a clear winner between Trump and Biden expect an immediate snap back rally in world markets. As uncertainty is now removed it makes no difference who wins.

In the medium term, if Biden wins it could mean less tension with China and would benefit Asian markets. If Trump wins expect US markets to rise. Biden plans to dramatically increase personal and corporate taxes and business regulations  which would hurt earnings of most companies while Trump wishes to lower taxes and regulations  which is good for stocks.  With Trump consumers will have more money to spend and businesses more money to invest. Both Biden and Trump wish to spend on infrastructure and that should boost commodities.

VIX Index  is the fear index. It measures the prices of options traded on the CBOT . As fear and uncertainty increase the price of options move higher as hedgers pay up to protect their equity portfolios. Notice the spike in March  when equities collapsed.  Notice the current VIX spike. Not as dramatic as the March spike. This is due to a resurgence of Covid, lockdowns in Europe, UK and increase of Covid cases in the US. It also reflects the battle over fiscal stimulus in the US.  After the election the stimulus issue should be resolved.

The stimulus will be at least 2.2 trillion USD and that will boost markets.  As this is money out of thin air, it could result in inflation and a weaker dollar.  Holding some gold perhaps 10 % could be prudent.  

“Although all eyes are on this important event, investors should be relieved to know that the outcome is unlikely to significantly impact any investment thesis.

Businesses that are primed for growth and can adapt to this pandemic qualify as good candidates to own no matter how the election turns out.

While there may indeed be a short-term knee-jerk reaction based on whoever wins, over time, choosing the right companies means that they will do just fine over the long-term”.   Davis Kuo, Smart Investor  

Despite the extreme pessimism in our local market there are positive signs.  Our current account remains in surplus, exports are rebounding quickly, the Ringgit has stabilized and there is good demand for Malaysian bonds. Progress is being made on vaccines for Covid as several are in late stage clinical trials.   A breakthrough vaccine could be a market recovery catalyst.

Keep safe

Bill

China is opening up for tourists. Already 7 countries including Malaysia are on the list. Air traffic is China is also getting back to normal.  Hopefully Malaysia will soon get back to normal.

Bronze lion in front of the Hall of Supreme Harmony in Beijing Forbidden City    

Ant Group

 24 October 2020

Dear Fellow Investor,

Last week, I attended a zoom briefing on the Ant Group Financial IPO to be listed in Hong Kong next month. It is reported to be the Amazon of money.

Ant Group, which is poised to raise more than $30 billion in the biggest IPO in history. The Hangzhou, China-based company has evolved into a financial conglomerate that may be valued at more than $300 billion, roughly double that of Goldman Sachs and US fintech darling Square put together. The West doesn’t have anything quite like Ant, and it doesn’t seem likely to create one anytime soon.

The idea that there could be an Amazon of finance—an internet-native supermarket for money—has been around since at least the late 1990s. Before Elon Musk started making rockets and electric cars, he founded X.com, which merged with PayPal, to do just that. More recently, so-called neobanks in Europe have said they have the same ambition. But Ant, whose valuation is in line to have doubled in around two years, is really the only company that has pulled it off at hyper-scale. The enterprise has brought millions of Chinese people into the financial system, providing a single app, Alipay, for everything from savings accounts to insurance. Bloomberg

Doing a peer comparison here is how Ant Group stacks up with other payment companies. This shows we are not overpaying based of valuations

Payment company financial ratios

Company	Market capitalization	2019 profit/net income	P/E ratio	Valuation to annual payment volume
Visa	$422 billion	$12.1 billion	39	0.04
Ant*	$300 billion	$2.7 billion	32	0.02
PayPal	$250 billion	$2.5 billion	98	0.32
Square	$79 billion	$0.4 billion	297	0.75

Quartz | qz.com  Data: Companies, Bernstein, FactSet  Note: *forward ratio estimate, Bernstein

Our company Phillip Capital Management is accepting applications for the IPO offering but success rate on the take up is estimated at only 2 %. If you deposit RM 250,000 , you may only get RM 5000 worth of shares.

My suggestion if interested is to wait for the listing and buy when the euphoria lessens.  We can buy via our Global Wrap Accounts.  I am always sceptical of IPOs as the buyer has to absorb the underwriting costs. The underwriters (the sellers) have the advantage as they know the company valuations better than the buyers.   They will list when markets are performing well so as to get a higher price. 

EWH, exchange traded ETF traded on the NYSE which is a basket of blue chip Hong Kong shares.

The EWH is a play on China recovery. Valuations are reasonable at a PE of 14.2 and a dividend yield of 2.87 % .

China is showing positive  GDP growth, has opened up their economy and seems to have their Covid problem under control. This will benefit our EWH holdings.

Recent numbers coming out of Bank Negara are showing Malaysian economic resilience: savings rates up, auto sales up, credit card usage at a pre pandemic high and consumer spending rising.  Sentiment remains pessimistic which is holding the KLSE down.

Uncertainty about stimulus and the US election on 3 November is also keeping world markets in a holding pattern. We are defensively positioned no matter the outcome.

Keep safe

Bill

Ali Baba Fin Tech arm, Ant Financial

Trending up sectors in KLSE indexes

 17 October 2020

Dear Fellow Investor,

Reviewing the KLSE indexes, only the technology  and healthcare sectors stand out and are trending up. The rest are flat to down. There are major uncertainties keeping Asian markets in a holding pattern. Some include Covid, lockdowns, economic stimulus payments, US election, earnings drops, unemployment etc.

Once the 3 November US elections are over many uncertainties will be resolved. No matter who wins, Biden or Trump, expect major stimulus.

Much of the stimulus will flow into the pockets of consumers . This will be positive for consumer stocks and  stock markets in general. It will also be negative for the US Dollar as stimulus money will be created out of thin air.

Real interest rates will turn more negative and this will support precious metals. It would be difficult for the Federal Reserve to raise interest rates to protect the dollar as debt servicing would become impossible and this would precipitate business defaults and an economic collapse.

Asian markets and currencies should benefit as capital shifts to markets where there is deeper value.  China, small cap Japan, Singapore, Malaysia and Hong Kong  are on my value list.

Expect markets to churn until 3 November . Newsflow in Malaysia continues to be negative and pessimistic but there are some bright spots: car sales are increasing, unemployment is dropping, bank deposits are increasing and consumer spending is picking up. There is also progress on the Covid vaccine and this could quickly turn the investment scenarios positive should there be a breakthrough. Our critter of the week is a Corona sniffer

This week no zoom broadcast but hopefully next week.

Take care

Bill

A Corona sniffer.

Energy exposure

 10 October 2020

Dear Fellow Investor,

Today will review our energy exposure.

Our energy exposure includes 2 holdings: Dialog and Wellcall Holdings. The below Bloomberg chart of Dialog shows on balance more  insider buying (green arrows) than selling(red arrows).  The same could be said for Wellcall. Both have solid balance sheets/ reputable management and are able to earn money in spite of Covid related issues.  The test of quality management is how they adapt to adverse circumstances. Both have met the test.

Overall the downstream Malaysian Energy companies such as Gas Malaysia and Pet Dag have been  stable  in the down trending KLSE. Cash flows and low debt have supported their prices. However; upstream energy companies have not performed as well due to high debts and liquidity issues. 

 

Fleet Street Letter from London which I subscribe to  reports on energy this week and I wish to share some of their insights about energy.

The above Bloomberg chart shows the crude oil demand chart since 1990.

 

Before the Covid crash  the world consumed 100 million barrels per day. That briefly dropped to 82 million barrels per day but has recovered to 92 (MBPD)  

 

As lockdowns end expect oil demand to recover. Supply has been constrained due to lockdowns and that should be a catalyst for higher oil prices.

Green or alternative  energy is the hot topic but it will take more than 20 years to replace fossil fuels according to Charlie Morris editor  of the Fleet St Report.

 

“I love the sentiment behind alternative energy, but other than nuclear, I remain unconvinced. Consider how much diesel is consumed in making, transporting, constructing and maintaining a wind turbine and how much oil is consumed in the process.

In the future, will there be enough energy generated by wind turbines to build the next generation of wind turbines? Their construction would require electric mining equipment, electric smelting, electric shipping and electric haulage. Maybe this happens one day, but not for at least 20 years. Electric trucks? Nikola (NKLA) was a fraud. Electric ships would surely require a nuclear reactor.”

 

With oil recovery expect the spill over to benefit the Malaysian economy and our local market.

Saturday 11 am will hold a zoom briefing on the oil market.

The big winner

 2 October 2020

Dear Fellow Investor,

The big winner of yesterday’s Trump/ Biden debate was economic stimulus.

No matter who wins the 3 November election, both political parties want stimulus which includes more debt, more spending and more bailouts.

This will be bearish the US dollar, bullish silver, gold and stocks.  It also has the potential to ignite inflation which is bullish for gold and commodities.

Asian stock markets will also be positively effected by US/ European and China stimulus.

Based on this scenario, continue to favour Malaysian technology, high quality consumer shares, selected plantation shares  and quality reits  for income.

Japan, Singapore and Hong Kong  markets should also benefit from the massive economic stimulus .  If Biden wins and he makes good on his promise to massively raise taxes and place restrictions on business, capital will flow to Asia where capital is treated better.  A drop in the US Dollar is the signal that capital is moving out of the US.

On a local alert our U Plant/ Kimloong shares went up this morning despite the US palm oil import ban on Felda products. As  our plantation companies we hold are well managed and treat their workers fairly, they are not effected by the import ban.

On Saturday, I will have a zoom broadcast starting at 11 AM. to discuss in more detail investment implications of the US election.  For those who can not attend will post a U Tube link.