In the “Hunt for Red October” (Chew On This, Issue 1061), I called October 2022 the cruellest month, and potentially the year’s bottom. This appeared to hold at least for a couple of weeks.
Signs are encouraging on a number of fronts. As markets climb multiple walls of worry and try to discount the forward, the media commentators and analysts have caught up with more positive comments, including a few who are asking whether the tech sector has bottomed after the Nasdaq bounced 1,000 points off its triple test of 10,300 points in the last month. That leaves the Nasdaq at merely 28% below the level at the start of the year, and only 43% below the 16,200 points attained at the November 2021 high we warned about last year.
On Nov 12, American rock band Guns N’ Roses belted out its signature November Rain in its sell-out Singapore concert. It seemed that nothing could rain on the market’s current parade, especially for the Straits Times Index, which achieved a remarkable ‘V’ just a fortnight after dipping below 3,000 points momentarily. On Nov 11 alone, the market enjoyed a 1.8% bounce.
News that will ordinarily be a source of uncertainty and risk aversion in a normal year, seems to be super-coated and viewed more in a glass half-full and not half-empty, as investors search for silver linings after a torrid year of pain. Has all the bad news been priced in, at least for this year? Can we can look at the resumption of a normal, “before-Covid” world of globalisation and growth?
Unfortunately, perhaps not. According to Bank of America’s survey, investor sentiment registered recently zero out of 10. With expectations so low, just a low rate of Covid infections could trigger a rally, which if sustained, will fuel itself as investors of all shapes and sizes scramble to catch up to mark their books for the year-end close.
After all, should things look not as bad as October, then they cannot be caught short heading into 2023 — notwithstanding a possible recession that may result from an aggressive monetary policy to try to stem inflation.
See also: Staying grounded while flying mile-high
Cloudy with a chance of meatballs
The “red tide” of Republicans in the US midterm elections did not quite pan out as Donald Trump would have liked. What resulted was barely a red trickle — as at point of writing, the Senate turned more “blue” (Democrats flipped Pennsylvania) and may even end up with an outright majority of 51 if Georgia’s runoff on Nov 26 holds blue. The usual pattern of the sitting president’s party losing 40 House seats or more at the midterm, also did not materialise. The House might have even turned mild red with a small Republican majority, or not — as the counting has not finished.
Markets prefer Republican red, but the uncertainty of Trump seemed to have faded a tad. The notorious former US president continues to declare on Truth Social, his alternative social media platform, that of course, his candidates won the midterms — and if they did not, it was stolen.
See also: The curious incident of the debt in the day-time
Some degree of return to normalcy helped, much like how boring newly-appointed UK Prime Minister Rishi Sunak and his Chancellor Jeremy Hunt stabilised the yo-yo pound caused by their respective predecessors, Elizabeth Truss and Kwasi Kwarteng. The economic numbers and prospects look awful in the UK; it looks like the upcoming budget will have a lot of painful cuts in spending, but hey, that is normal and markets like it.
On Nov 10, cooling signs in the US labour market gave more cheer to those on Fed watch, with the S&P rallying from a low of 3,500 points or so in October to around 4,000 points — resulting in a mere 16.5% decline for the year. A recovery in the West that looks sustainable to December is, however, led this time by cyclicals and tech companies with profits, unlike the short-covering June/July fluff rally that fell back. Elon Musk may have buried Twitter with US$12 billion ($16.5 billion) of debt, with he himself having to sell US$20 billion of Tesla stock just in November. This has both kept a lid on Tesla’s share price, as well as cast doubts on Twitter’s ability to survive with revenues, not profits that cannot service the interest expense.
But at the very least, Twitter is now his problem and his only, and not that of public Twitter shareholders, if they sold. From the West to East, from the avatars of the metaverse to those involved in actual door-to-door delivery, tech-platform businesses have taken the opportunity to kitchen-sink and lay off workers. Meta Platforms’ 11,000 cuts, Sea’s series of undisclosed cuts across the board, and GoTo’s rumoured 1,000 cuts, are but just a few of such headline news.
Unfortunately, the cost-cutting measures have not helped to inject much positive sentiment into the share prices of this sector. Grab Holdings rallied to as high as US$3.15 on Nov 16, but that was still 76% below its much-vaunted debut price last year. On the other hand, with exceptional results and a 4.2% dividend yield, Venture Corp’s 12% bounce off $16 to $18 keeps it positive on total returns for the year. After all, Venture, a traditional blue-chip manufacturer, has an actual ‘E’ to work out a PE multiple, which is in the low teens.
The initial reaction to China’s 20th National Party Congress was one of worry, as President Xi Jinping consolidated his power. Nonetheless, in the weeks that followed, it has appeared that the meeting has indeed marked a capitulation line in the sand. A series of positive news ensued: gradual relaxation of quarantine measures, and a raft of measures to support the ailing property sector.
On Nov 14, Xi and US President Joe Biden met in Bali on the sidelines of the G20 summit. The fact that this can actually happen has given optimists some hope that there is still a channel at the highest level on issues relating to Taiwan, even if the domestic rhetoric may be more severe for political purposes. Such rhetoric helps to work up some sentiment during the US midterm campaigning, perhaps. And on the Russia-Ukraine war front, even the “temporarily occupied” regional capital of Kherson has been liberated before winter — with Russian President Vladimir Putin not seen when the generals announced it in Russia. Could this be the beginning of the end?
Perhaps the most significant tea leaf for November is the implosion of FTX. Bitcoin fell below “replacement” mining cost of around US$17,500, in the aftermath of the twists and turns that unfortunately once again cost Fomo speculators in crypto shirts and pants.
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The bank run on FTX’s FTT token was followed by emerging stories in the media of possible Securities and Exchange Commission violations and mysterious hacks of the token, resulting in the broken trust in the overall crypto industry, which bears little intrinsic value on its own. However, these incidents may have undermined the hope for mainstream regulated use of DeFi applications and technology in the near term. Institutional investors have now backed off from adopting or investing crypto, and JP Morgan’s strategist Nikolos Panigritzoglous, who famously said Bitcoin will replace gold and accorded this “asset” a target price of US$146,000, has now revised that number to US$13,000.
Perhaps most of the speculative fervour has already chilled through the crypto winter, leaving fewer big participants still juggling the leverage taken off at the high, on the way down. The meatball is that unlike May and June, when a few midsized players from traders like Three Arrows to platforms like Celsius failed, there was no risk-off for traditional equity assets. Ironically, Crypto has finally proved that it is not correlated with traditional assets. As Bitcoin melted down after stabilising for months at US$20,000, equities rallied from Shanghai and Singapore to New York.
A just transition
Far from the metaverse in Sharm El Sheikh, an Egyptian resort town, the great and the good, including former UK PM Boris Johnson, descended for the annual Conference of the Parties (COP). This was preceded by a wake-up call in The Economist that argued that the world will miss its climate targets, in its Nov 5 issue headlined “Say goodbye to 1.5°C”.
Perhaps it is because of the energy crisis resulting from the Russian invasion, companies and countries have slowed down in delivering on the commitments. Or that there was just a lot of bluster in declaring targets without actually knowing how to achieve them, or this year’s temperance in inserting the moral concept of “just” to transition. Indeed, the ‘S’ in “ESG” will be a much bigger focus hereon, and it is tough to balance between coal and the communities which depend on it. Or simply that for many of the purists and advocates for good, translating the philosophical to the practical is not easy.
The critique of Sembcorp Industries’ Indian coal-fired plants divestment to the Omani group while financing the sale with a loan as greenwashing by academics, is a case in point. Sembcorp did everything correctly by accounting standards, meeting the guidelines of its sustainability-linked bonds, saved the company’s shareholders and bondholders a higher interest expense, and reduced direct greenhouse gas emissions by 38% for the company. But yes, the plants are still there; and yes, Sembcorp financed the buyer who in this environment would not have found it easy to get banks to finance coal.
As a listed corporation, it is doing right by all its stakeholders. So, what would the academics have the company to do? Scrap the plant (which was newly-built and arguably more environmentally efficient than other similar infrastructure), destroying value, along with the community and the local economy which depends on it, along with the direct impact on jobs of workers and livelihoods of the families? Or find a buyer who could take it off, and get best value rather than a deep discount if the buyer could not get commercial financing?
An analogy would be as follows: Imagine if one bought a petrol car before the green plan was introduced, through no fault of the buyer. As a result, he is unable to subsequently keep the car, so he needs to sell it. If he is unable to find a buyer in a smaller market, and a willing buyer who is able to give a reasonable value and keep it running, who cannot obtain financing from banks that are implementing green financing in their business, should the buyer take a complete loss and scrap it, take a deep haircut, and send it to Indonesia, for example? Or should he help finance the buyer, and in so doing, help support the workers who still get paid for maintaining it until they learn new skills to support other green cars?
It may be a just transition — but whose justice is it? And are there credible alternatives, and who bears the costs? These are thoughts we continue to chew on, as we head towards Thanksgiving on Nov 24. For those who were brave enough to hunt through the red ink in October, it’s no bad thing to skim a little profit off and enjoy some well-deserved turkey and into Christmas, as cashed-up investors play catch-up. The year 2023 is looking like a much-better vintage for real assets.
Chew Sutat retired from 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
