Revisiting the VIX

 28 November  2020

Dear Fellow Investor,

Revisiting the VIX

Weekly VIX (Volatility Index) signalling positive market action in the US markets and by proxy world markets

The VIX is a good measure of extremes in sentiment. The spike high in March  2020 signalled extreme bullishness and triggered a  10,000 point drop in the  Dow Jones.  World markets followed.  Presently we are slowly recovering. There is no indication of a potential collapse. In fact odds favour higher prices for most markets.

Weekly EWM, the Malaysian ETF representing KLSE blue chip shares. The EWH, EWJ and EWS, country funds for Hong Kong,  Japan and Singapore are showing similar bullish charts.

The KLSE is recovering with an upside bias as news flow regarding Covid vaccines is positive. In the Star headline today, Pfizer and BioN Tech  vaccines will be made available in early January free of charge to 6.4 million Malaysians  if proven safe for humans.  

Once the gloom of Covid is lifted expect market recovery to at least pre Covid levels. Couple this with low interest rates and massive money printing by all world central banks expect new equity highs .  Gold and bit coin corrected last week due to vaccine optimism but the fundamental reasons of wealth protection by holding gold and bit coin have not changed.    Governments will continue to expand their money supplies, increase social spending, and keep interest rates low or negative.  

Governments can not create gold or bit coin out of thin air unlike fiat paper money and credit. Continue to hold gold.

Keep safe,
Bill

Bogie the biker dog dressed in sunglasses, jacket and helmet is a celebrity on Philippines highways

The 11-year-old crossbreed from the Philippines takes daily motorcycle rides with his owner Gilbert Delos Reyes, balanced perfectly with his hind legs on the edge of the seat.

Recovery Continues

21 November  2020

Dear Fellow Investor,

Recovery Continues

According to Bank Negara, real GDP  growth in the 3^rd quarter 2020 came in at -2.7 % which beat the consensus estimates of -4.1 %

Based on BNM charts documenting recovery since the pandemic started in January 1920, wholesale and retail trade, industrial production, gross exports, manufacturing PMI, and electricity generation have recovered.  Credit card spending is still 16 % below January 2020 levels.

Uncertainty about the budget being approved by parliament on 25 November is keeping the KLSE in a holding pattern.

Looking beyond the short term, the finance ministry forecasted Malaysia’s growth  in 2021 to be 6.5 to 7.5 % .

Covid continues to dominate the news cycle. Infections are spreading world wide while death rates are declining.  Governments are imposing lockdowns which effect business and employment. However;  major advances in therapeutics and vaccines are evolving so on balance expect recovery.

Last week, I reviewed our investment in SATS, a Singapore airline caterer. This is a lead indicator of Asian market recovery as their business leverages on airlines and logistics.  One investment moat they have is the licensed cold chains to deliver Covid vaccines which require -79 C  temperatures for safe shipment. 

On Friday the share price closed @ Sgd 4.17 up from the panic low of 2.62 in May 2020.

Asian banks are also recovering from 20 year price to book lows despite the pessimism and fear. OCBC has risen from Sgd 7.81 in May 2020 to Sgd 9.96 on Friday.

High quality value shares are recovering in most markets amidst the backdrop of low interest rates, anticipation of more economic stimulus and massive cash sitting in money market funds earning a yield less than inflation.  I  read in the US there is over 7 trillion USD in these money funds. This could be fuel for a 2021 recovery.  Combine all of that with a Covid vaccine and the odds favour the bulls. Even Warren Buffet, the king of value investors  is buying undervalued shares in Japan for his Berkshire fund.  

Keep safe
Bill

It is now legal to walk your dog in Adelaide Australia after a long dog walking lockdown.   Hopefully Australia will open up soon . Lots of investment opportunities including resource companies are there.

Waiting for his walk.

Light at the End of the Tunnel

 14 November  2020

Dear Fellow Investor,

Light at the End of the Tunnel

In the last 2 weeks, world stock markets including Singapore and Malaysia have staged impressive recoveries.  Commodities including crude oil, gold and palm oil have performed well. Our shares are recovering.

The main catalyst includes a Covid vaccine developed by Pfizer which has shown good results.

Below is a headline from the Guardian news in  London:

Scientist behind BioNTech/Pfizer vaccine says it can end pandemic

Exclusive: BioNTech’s CEO Uğur Şahin says he is confident vaccine can ‘bash the virus over the head’

The immediate reaction from this news was positive for value shares.

Recession lock down shares such as Zoom and Amazon were hit while there has been a shift into value shares.  

A good example of a value share which we hold is SATS which is an airline caterer listed in Singapore. A month ago price was at  2.80 and insiders of SATS were heavily buying anticipating a return to normal. As of Friday it has advanced to 3.80. Most of SATS business is in Asia and Asia is gradually opening up. Even Singapore Air has caught a bid.  Singapore and Malaysian banks which have been under stress are recovering from multi year low price to book valuations will benefit from a lessening of pandemic fears.  

The results of the US election are still uncertain. The media has declared Biden the winner but legislative power as to who controls the senate( upper house of congress) is not decided. Without control of the senate, Biden can not get his socialist agenda approved including massive tax increases and phasing in his Green agenda. Odds favour he will not get control.

Foreign funds bought Malaysian shares and bonds last week for the first time in 7 weeks, Singapore and Hong Kong have also seen large inflows of foreign funds.  These funds are buying heavyweight undervalued blue chips.

EWH traded on the NYSE contains blue chip Hong Kong shares most of which have China exposure. It benefits from China growth and pandemic recovery. Notice the 10 % jump in the last 2 weeks.

 

EWM is the Malaysia Fund traded on the NYSE. It holds blue chip value shares. It broke out from a multi month congestion last week showing foreign fund inflow .

Take care

Bill

The benefit of the MCO is it allows us to explore Malaysia without hoards of foreign tourists. A favourite place of mine is Port Weld near Taiping. It is famous for their eagle sanctuary tour.    

No clear winner in the US election

7 November  2020

Dear Fellow Investor,

As of today there is no clear winner in the US election as all the votes are not yet counted. Biden is leading in a few key states which will determine the winner. The odds favour Biden to win although the results are being hotly contested.  Contrary to opinion polls, there was no blue wave in which the opposition party Democrats would sweep to power and have absolute political control in a landslide.  Markets reacted favourably to the results as there was no clear winner and odds favour that the Republicans would continue to control the senate and the upper house of congress. If the Republicans control the senate, Biden could not pass his socialist policies including universal basic income, personal and capital gains tax increases, green new deal which eliminates natural gas and crude oil production, student loan forgiveness, free health care and supreme court packing to install socialist activist judges.

Trading nations including most world markets and  Singapore, Hong Kong, Japan and Malaysia  had strong up moves  on the potential of US legislature gridlock. If Biden is declared the winner, he  will take a less confrontational trade approach to Europe, Asia and China. He wishes to re-join the TPP and renew European trade agreements.

The US Dollar and the VIX dropped while gold, bitcoin and most commodities  jumped  higher.  This anticipates currency debasement, massive money printing and more stock market gains as well as monetary and fiscal stimulus. Mitch McConnell who is the majority leader of the US Senate and Joe Biden although of different political parties are close friends going back many years and may agree on stimulus aid for economic recovery.  

On the home front, the Malaysian budget announced yesterday is the largest in history. There is money for everyone. The technology  and consumer indexes performed well Friday anticipating growth moving forward.

Expect a rebound in 2021  as world growth picks up, lockdowns are less and progress is made with  Covid vaccines and treatments.  China is now distributing a vaccine to  their front line workers and there are 8 vaccines in 3^rd stage trials and if proven will be mass distributed.   

There are very few or no Covid cases in Korea, China, Taiwan and Singapore. Malaysia is making progress. Death rates have dropped. Gradually we are getting back to normal.  Hopefully we can soon travel again.

Take care

Bill

The donkey and the elephant are the symbols of the Democrats and Republicans in the US. The divide gets deeper. Growth, jobs, economic and pandemic recovery could bridge the gap.

 

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.