It is December. Equity markets around the world have rebounded from their Red October lows and savoured their November Rain as described by this column in Issues 1061 and 1062 respectively.
For those who bought at the bottom, there was quite a bit of Thanksgiving shopping to do, as rebounds from the abyss of investor pessimism are typically sharp. Enjoy the final weeks of the year as markets settle into a holding pattern with perhaps a bit of unintended year-end window-dressing, supported by cash-fuelled portfolio managers buying on dips so that they don’t appear so light, especially if they have underperformed.
Make no mistake. We are still in the midst of a global multi-year bear market from 2021 fluff that carried all things bright but is now recognised as not so beautiful. This list includes the notorious meme stocks and companies running on growth at all-cost business models to crypto and alt-coins balancing on stilts. Ironically, the bear is still growling in the West while becoming more decoupled from China, which is starting to build its base from the recent lows.
However, the rotation to reality through 2022 is almost complete. More sensible valuations are now in store as investors hoard cash, having leveraged down as interest rates spiked. Now both public and private equity investors have less reason to pay unsustainable valuations just to squeeze in through the door as it was a sellers’ market then, just like at the top of every cycle.
Hindsight is 20:20
Some hubris has resulted from SoftBank to Sequoia, in the good company of BlackRock and Temasek, as they wrote down their FTX investment recently. It apparently crumbled under a lack of proper internal controls for a hyper-fast company which hit a US$32 billion ($44.11 billion) valuation less than three years after its founding. Together with it went the ambition of the Bahamas to be the leading jurisdiction for crypto businesses.
Even the best of investors do get caught up in a bit of Fomo as they seek bets on the future. When one takes a long-term stance by being early, the bets come with attendant risks, including some egg in their face if they do not pan out. The US$275 million put into FTX by Temasek is equal to 0.09% of Temasek’s net portfolio as of March 31. Mathematically, the sum is a rounding error but it hurts nevertheless and lessons will be learnt.
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As will be the case when Temasek’s investments do not work out, the general public and critics take to social media to tweet and amplify. Yet, our sovereign wealth fund (or global investment company, as it prefers to be described) had made many other successful contrarian bets and has delivered an outstanding long-turn return. It managed to do this by keeping calm and continuing to “tend to the fields and fry other fishes” as described by its former CEO Ho Ching in a Facebook post.
Prior to that, Bloomberg and The Straits Times flashed headlines like “5% of investors in FTX were from Singapore”. This led to the inevitable public outcry which pinned the blame on the regulators. It is worth bearing in mind two things. First, being from Singapore does not mean these FTX investors are all Singaporeans. Some key global market makers, traders and participants including folks at the infamous Three Arrows Capital were based here before they allegedly fled to “greener” pastures in the Middle East. These Singapore-based whales have North Asia, Eastern European or US origins and are not necessarily typical Singapore consumers the regulators are trying to protect.
Second, even so, regulators cannot stop Singapore retail investors from going all over the world to invest. Plenty of warnings about the volatility and suitability of many asset classes including crypto for retail had been sounded but there is no assurance of safety. Just like accessing pornography, regulators can block certain websites but Singaporeans can try and get around by using virtual private networks. A more concrete example could be happily crossing the Causeway to buy dodgy real estate. So, as one former regulator puts it: How can his ex-colleagues help protect us from ourselves?
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The leading crypto prices have chilled by up to 80% in this extended winter. There is still a bright side. Businesses, regulators and investors can perhaps now focus on the case studies and technology behind cryptos that remain potent and unexploited. They will now be able to do so without the distraction of the speculative elements or negative stigma that many of the leading lights of this industry carry.
Whether good or bad, the same lesson holds just like investing in companies with celebrity CEOs who tweet too much. Many have come down to earth and with that their public company’s stock price. Putting anyone on a pedestal could end up like Icarus, whose man-made wings burnt getting too close to the sun. Boring can often be good as equity investors in Singapore have learnt.
Game of thrones
Much of late November for some of us was enjoying a few upsets in the World Cup, even if the opening wins by the Saudis and Japanese over Argentina and Germany fell to Poland and Costa Rica right after. Closer to home, former Prime Minister Najib still remains in prison while former twice-imprisoned Anwar Ibrahim is finally Prime Minister.
In a grand coalition, the Unity Government as guided by the Malaysian King, the parties of Pakatan Harapan who campaigned against the corruption of Barisan National, are now in bed with them, until perhaps Dec 19, when parliament sits and the first order of business is a confidence vote for Anwar’s government to show it has the numbers again.
While this makes for interesting memes, a stable Malaysian Government is ultimately good for Singapore and our economy — much like the largest Asean country is Indonesia where presidential elections are due in 2024. It presents a source of economic opportunity just from the demographics of a young and energetic population, on top of its wealth of commodities. Add Thailand, the Philippines and include current private investment darling Vietnam, the potential from 700 million consumers in Asean, educated and generally industrious for global investors and FDI as well — especially from China — is a secular trend to ride on.
This is perhaps why Singapore’s Straits Times Index has topped year-to-date equity index performance this year as its constituents include Asean giants such as Wilmar International, Thai Beverage, Jardine Cycle & Carriage while the Singapore contingent has significant Asean revenue contributions. Asean indices generally saw flat to single-digit percentage declines for the year compared to declines of more than 20%–30% in global equity indices. Malaysia had caught up a tad with the rest of Asean after Anwar got the king’s nod.
Analysts have pointed out that recently, Asean did not rally as much as North Asia with Hang Seng’s 20%, Kospi and Taiex and CSI300 up 10%–15%. Indonesia missed out on the November rally altogether and Malaysia was out of sync for the year. Hence, the story for Asean is over, they say. This is a myopic view because Asean stocks have simply not fallen as precipitously to begin to warrant a one-month rally of this magnitude.
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The analysts have suggested that semiconductor and tech manufacturing stocks in Korea and Taiwan are drivers of growth for investors to position themselves from bombed-out valuations. If this thesis is true, then one should not overlook Venture Corp, AEM Holdings or Grand Venture Technology here which have also rebounded and appear still modestly valued compared to their US counterparts.
The China thesis appears more compelling, though more so for China A than Hong Kong per se. Assuming a sustainable rebound is focused on the “rotation to reality” theme that this column has been promulgating since the column started last September, that means investing in core manufacturing and consumer stocks with pricing power, now with Chinese interest in Asean and with resources benefiting in an inflationary market added to the mix. Relative to a still deflating real-estate drag in Hong Kong on the Hang Seng Index composition or out-of-fashion new economy stocks like Alibaba Group Holdings and Tencent Holdings in the Hang Seng Tech Index, Asean will likely continue to do well, even while onshore Chinese equities re-emerge from its Covid and market isolation.
Safer in numbers
One other interesting data point is the primary IPO market. As primary equity capital raised in 2022 fell 90% to US$17 billion and US$16 billion in the US and Europe respectively, US$71 billion worth of IPO deals cleared onshore in China with more realistic valuations. As liquidity eases in the lending market and reserve requirements, its Covid-emerging economy is running counter-cyclical to the US and Europe heading into the 2023 recession. How does one position to benefit from this for 2023?
For traders, there is attractive volatility daily in the OCBC Securities-Lion Hang Seng Tech ETF. Higher risk but still safer than a single stock bet on any Chinese tech stock listed in HK. If one buys the broad-based growth outside of tech, the OCBC-Securities Lion China Leaders ETF could make a good investible allocation for the year-end. A more diversified mix of both with Asia exposure in mind, the CSOP Asia Low Carbon ETF — which has gained 10% since its launch recently with $150 million — could potentially benefit from institutional portfolio allocation from China. Together with some income-generating REIT ETFs which now offer attractive growth entry points and a core in my safe-at-home STI ETFs, I am looking forward to reflective travel in December.
Chew Sutat retired from the Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
