Despite plenty of volatility and some bigger than expected hits, our 2022 portfolio continued to beat the benchmarks
The year 2022 was a rather chaotic year for stock markets globally, with a lot of losers and only a handful of winners. The year was marked by geopolitical tension, the resurgence of the pandemic, and surging interest rates. Fear and pessimism swept financial markets throughout the year as they attempt to recover. However, it must be noted that historically, after periods of downturn, stock markets have always recovered well and reached all-time highs subsequently.
The essence of investing, specifically value investing, is to buy undervalued stocks and sell overvalued stocks. Market shocks, more often than not provide investors with an opportunity to buy and sell stocks because they can temporarily distort the price of a stock from its true or intrinsic value. What’s important is the individual investor’s profile, which comprises the willingness to take risks and the capacity to take risks, which should ideally be equivalent.
One of the biggest mistakes an investor can make is to take risks they cannot bear if the worst-case scenario happens. Another mistake, to a lesser extent, is if the investor completely avoids investing in some asset classes permanently, possibly due to emotional biases. If the goal is wealth creation through investing, it is important to review why investment goals were not achieved. This will help the individual investor understand their risk-return profile better and more importantly, that there is always money to be made from every asset class, with proper understanding and enough experience.
Certainly, some people cannot afford to take risks as much as others, but investing, particularly in equity and stocks, almost always can be profitable, if timing the market is not a factor. This is because equity as an asset class is versatile and ought to fit almost every type of investor. The Edge Singapore’s global stock picks and virtual portfolio follows these investing principles.
To recap, The Edge Singapore’s virtual portfolio of 10 stocks was incepted on Jan 24, 2020, with a minimum yearly update to the portfolio and 10 stocks. These initial 10 stocks were equally allocated to a US$100,000 virtual portfolio to reflect a balanced portfolio, in terms of risks, based on our discretion. Our 2020 return was 98.1% while our 2021 return was 13.1%. The 10 stocks for our 2022 portfolio were added on Feb 7, 2022, and sold on Jan 13, 2023.
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The Edge Singapore’s 2022 virtual portfolio of 10 stocks returned –9.8%. Chart 1 shows the performance of individual stocks for the virtual portfolio. The top performer was Tianneng Power International with 42.0% returns while the worst performer was CrowdStrike Holdings with –44.3% returns.
Though the absolute performance of our 2022 portfolio was negative, its relative performance was not the worst. Chart 2 illustrates the virtual portfolio’s performance relative to the major indices of countries in which we have acquired stocks. The best-performing index for the 2022 portfolio period was the Straits Times Index (STI) with 1.8% returns, which was largely defended by the index heavyweights, the three local banks enjoying higher net interest margins from higher interest rates. The worst-performing index, meanwhile, was tech-heavy Nasdaq which returned -20.3%.
Despite a dip in performance for the 2022 period, The Edge Singapore’s global virtual portfolio is significantly ahead of any other benchmark since inception, from Jan 24, 2020, to Jan 13, 2023, as shown in Chart 3. Some of the top performers for 2022 were not the top performers for the overall three-year period, mainly due to a low base effect. Our three-year performance translates to a 26.4% CAGR, excluding transaction costs and exchange rate movements.
Nasdaq-listed CrowdStrike Holdings was our worst performer in the 2022 portfolio with a –44.3% return. The stock severely underperformed the benchmarks, as shown in Chart 4. CrowdStrike is a leader in the cloud security space that provides endpoint security, threat intelligence, workload protection, and cyber-attack response services. The significant drop in share price was mainly attributable to slowing growth, dampened earnings guidance, and rising interest rates. Generally, tech-related stocks are relatively more susceptible to market sentiment, given their high P/E ratios and earnings expectations. A dimmer outlook coupled with rising interest rates can reverse any significant gains in a short period, such as most of the stocks in the tech Nasdaq index. When the market is fearful, sometimes inflated valuations of certain companies might properly correct themselves, but sometimes some good companies can be unfairly engulfed by the same sentiment and the correction is overdone. To see which category CrowdStrike belongs to, we will have to wait until the bear market dissipates.
Korea-listed Naver Corp was among the worst performers in the 2022 portfolio with a return of -40.4%. The stock significantly underperformed the benchmark KOSPI index, as shown in Chart 5. Naver is a global information and communication technologies (ICT) company, providing South Korea’s Number 1 online search portal. Naver along with its subsidiaries and affiliates provide services which include the Line messenger, Snow camera app and metaverse platform Zepeto. The strong drop in share price was mainly attributable to underwhelming results and M&A. Naver’s sales and profits are expected to be lower or at best flat in the upcoming quarters, reducing analyst target prices and worsening market expectations. The company in October 2022 also announced a bid for a second-hand apparel marketplace, and recently acquired Poshmark, for a premium of 15% above its trading price, which was further detrimental to its share price. If a company is focused on growing its footprint through M&A, perhaps costs might just be a short-term concern for Naver.
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New York-listed Avantor was also among the weakest performers in the 2022 portfolio with a return of –39.3%. The stock strongly underperformed the benchmarks, as shown in Chart 4. Avantor is a leading global provider of mission-critical products and services to customers in the biopharma, healthcare, education & government, and advanced technologies & applied materials industries. The share price underperformance was mainly attributable to the shift away from Covid-related businesses. As Avantor supplies chemicals for vaccine development and manufacturing, including solutions that support Covid-19 vaccines, this business has been less profitable in the latest quarters. It is to be noted that the company’s organic growth, which excludes the Covid impact, has been strong, consistent, and growing. The company also is seeing success in deleveraging, and its series of M&A is expected to only affect the company’s financials over the shorter term. Further, Avantor’s share price was adversely affected by the general fear and scepticism of the market trying to correct itself for inflating Covid-related stock’s valuations as the profitability of such businesses wane.
New York-listed Magna International was among the underperformers in the 2022 portfolio with a return of –13.1%. The stock slightly underperformed the benchmarks, as shown in Chart 4. Magna is a global mobility technology company that is one of the world’s largest suppliers in the automotive space. Magna makes the body, exteriors and chassis, powertrain, active driver assistance, electronics, mechatronics, seating systems, roofing, lighting systems and mirrors for the automotive industry. The slight share price underperformance was due to Covid-related headwinds during the earlier phase of the year, an inflationary cost environment and supply chain restrictions. As the demand for the automotive industry recovers, it is still not expected to recover to pre-pandemic levels. Magna’s margins are expected to be thinner moving forward as investments into electrification and the shift towards electric vehicles are key challenges for the company moving forward.
Hong Kong-listed China Construction Bank Corp (CCB) was also on the list of underperformers for the 2022 portfolio with a return of –11.1%. The stock underperformed all the benchmarks, as shown in Chart 6. CCB is a leading commercial bank in China providing a comprehensive range of commercial banking products and services. It is one of the largest banks in the world by market cap with subsidiaries in various sectors, including fund management, financial leasing, trust, insurance, futures, pension and investment banking. The stock’s underperformance was mainly attributable to interest rate cuts from the central bank and slowing growth in wealth in the nation. Although the stock is a good dividend play, lower expected earnings will adversely affect the share price. CCB’s profit growth is expected to be lower than previously forecasted due to higher operating expenses, lower margins due to lower interest rates and loan repricing, and higher reserves for an expected economic downturn. However, a lower share price means a higher dividend yield, so it is not all too bleak for investors.
Bursa Malaysia-listed Bumi Armada was the last of the underperformers in the 2022 portfolio with a return of –7.1%. The stock underperformed the benchmark FBM KLCI Index by a decent margin, as shown in Chart 7. Bumi Armada is an international offshore services provider that owns and operates offshore support vessels for exploration, development, and production activities in the offshore oil and gas industry. The stock price underperformance was mainly attributable to lower oil prices. As the price of oil continues to recover, so does the company’s share price, along with its strong results over the most recent periods. As the price for oil increases, the volume of demand and activities for oil and gas-related services also increase, benefitting companies such as Bumi Armada, and the converse applies if prices are lower. Perhaps, it could be a good diversification tool for exposure to the commodities sector, but each type of commodity is distinct and cannot be automatically considered a risk-reducing addition to an investor’s portfolio.
Tokyo-listed Ohsho Food Service Corp was our smallest winner in the 2022 portfolio with a return of 1.3%. The stock outperformed the benchmark Nikkei 225 index marginally, as shown in Chart 8. Ohsho is an operator of Chinese restaurants that operates directly-run restaurants and wholesale food material to franchise stores. The positive share price performance was mainly attributable to a good and consistent set of results. The company faced multiple headwinds throughout the year, such as lower personal consumption due to the pandemic, and rising food and energy costs because of disruptions to global supply chains caused by the Russia-Ukraine war. Yet, Ohsho was able to overcome this to provide a consistent set of results, mainly due to its dynamic and differentiated business strategy such as opening new format stores focused on take-out and delivery as opposed to the traditional dine-in. This is a company that adapts well, and if this continues it will continue to be profitable for the periods that are to come.
Paris-listed Airbus was one of the winners in the 2022 portfolio with a return of 4.9%. The stock outperformed the benchmark MSCI Europe by a decent margin, as shown in Chart 9. The company is a global aeronautics and space company that operates three main segments, which are Airbus aircraft, defence and space, and helicopters. The positive gains in the share price were mainly attributable to a recovery in global travel demand and the reopening of economies, along with lower fuel prices. However, there are many headwinds Airbus ought to face over the shorter term, such as slowing economic growth, supply chain delays, and higher expenses which are expected to thin profit margins. The company’s strong backlogs for aircraft such as the A320 and A350 should more than offset the headwinds, as more planes can be sold and stronger cash flows can be used to address inefficiencies. The future performance of the company hinges on economic factors globally such as inflation, which affects demand for air travel.
New York-listed Waste Management was among the bigger winners in the 2022 portfolio with a return of 8%. The stock strongly outperformed the benchmarks, as shown in Chart 4. The company provides waste management services including the collection, transfer, recycling, resource recovery, and disposal services, and operates waste-to-energy facilities; and serves municipal, commercial, industrial, and residential customers. The strong performance in share price despite the market mostly being in the red is mainly attributable to the nature of its business, which is essential and a necessity regardless of economic conditions. Waste Management proved to be much less volatile when the markets were engulfed by fear and pessimism caused by interest rate hikes. The company continues to extend its footprint in the solid waste industry by increasing its market share and achieving significant cost synergies through M&A. Waste Management’s cash flow has been consistent, and the recent dent in free cash flow was due to capital spending for its new projects. Overall, a solid company with solid prospects.
Hong Kong-listed Tianneng Power International was the top performer in the 2022 portfolio with a strong 42% return. The stock significantly outperformed benchmarks, as shown in Chart 6. Tianneng is a leader in the Chinese new energy battery industry, and the company is a large high-tech energy group focusing on the manufacturing and provision of services of environmentally-friendly products, particularly batteries for electric vehicles. The significant increase in share price was mainly due to the recently announced proposal of its global depository receipts or shares on the Swiss Exchange. Profit increase forecasts maintained the company’s share price while the rest of the market was down in the doldrums. Tianneng’s operating cash flow and free cash flow continue to be excellent, as the company’s share price was previously hit due to a series of profit warnings before the profit increase notice. Despite a surge in share price, Tianneng is relatively cheap compared to peers, with attractive valuations.
Takeaways
There were many lessons and takeaways from our stock picks and virtual portfolio from last year. For one, just because the portfolio underperforms for one period, it does not mean that it will continue to be the same, and the converse is true. Each stock or component in the portfolio must also be monitored, some more frequently than others, depending on their risk. More importantly, investors need to have the mettle and discipline to buy and sell stocks if they no longer align with the investor’s profile.
There is never and should never be a fixed timeline on when to sell stocks in the portfolio. The general market selloff is not necessarily an indication of what is to come, but could in some cases be a great buying opportunity. Some great stocks tend to get engulfed by the greater market fear temporarily too. We strongly believe this and have chosen to retain two of our worst-performing stocks for The Edge Singapore’s 2023 global virtual portfolio.
In the following pages, we will unveil all the picks for our 2023 virtual portfolio.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
Photo Credit: Bloomberg
Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
