Monthly Review February 2021
Dear Valued Investors,
In contrast to December’s overall stellar showing, January’s performance in global markets was somewhat of a mixed bag – with certain regions outperforming while others significantly underperformed. The best performing markets in the region in local currency terms were the Hang Seng China Enterprise Index (+4.38%), Hang Seng Index (+3.87%), and the KOSPI (+3.58%). The worst performing markets were the PSEI (-7.38%), the Ho Chi Minh Index (-4.28%) and the KLCI (-3.74%). The Chinese Renminbi (+1.53%) and Thai Baht (+0.41%) were the best performing currencies against the U.S. Dollar, while the Korean won (-2.58%) was the worst performing currency.
In January 2021, the MSCI Far East ex-Japan Index gained +4.72%, while the MSCI World Index was down -1.05%.
The Dow Jones Industrial Average Index (DJIA) fell -2.04% over the month, and the S&P 500 index was down -1.11%, while the Nasdaq Composite Index rose +1.42%. The highlight for US markets during January was the inauguration of incoming US President Joe Biden, and what his new administration’s plans might mean for markets. The end of the month saw a frenzy of irrational retail interest in selected stocks, with stocks like GME and AMC climbing in excess of +1,000% from the beginning of the month before subsequently plummeting. Former Federal Reserve Chairman Janet Yellen was sworn in as Treasury Secretary on the 26th, marking the beginning of a new era of unprecedented cooperation between the US government and its central bank.
The Stoxx Europe 600 Index was down -0.80% over the month. The ECB’s radical Targeted Long Term Repo Operation (TLTRO) came under criticism that the central bank had strayed too far into the realm of fiscal policy, by forgiving commercial banks’ obligations to it in order to stimulate the faltering Eurozone economy. The relatively slow pace of vaccinations in the EU compared to the rest of the developed world – with some member countries having not yet started distribution of the vaccine in January – led to chatter of a possible second recession for the Eurozone in 1H21, defined as two successive quarterly contractions.
CSI-300 Index gained +2.70%, while the Hang Seng Index was up +3.87%. Market optimism in the first week of the month soon gave way to concern, as a flurry of new coronavirus cases sprung up out of the blue. Authorities have already directed provinces to stagger the traffic of migrant workers returning to their hometowns for the holidays, with rumours of a possible full-blown lockdown during the festive season of Chinese New Year sending tongues wagging. Jack Ma finally reappeared in the public eye after having gone missing for nearly 2 months following the suspension of the Ant Financial listing, with talk of a revival of the Ant IPO on the cards.
The South Korean market was among the better performers in the region, recording a gain of +3.58% for the month of January. Conversely, the currency was the worst performing one in the region, falling -2.58% against the greenback. This striking dichotomy could be attributed to booming semiconductor demand driving chip stocks higher (i.e. Samsung Electronics, which represents 10% of SK GDP), while the weakened exchange rate was due to foreign capital fleeing the peninsular as new coronavirus cases reached record highs.
The TWSE index gained +2.75% in January, posting a strong showing largely owing to TSMC’s 15% gain m.o.m. on the back of improving market narrative. Taiwan surprised the world by posting a greater YoY GDP growth (2.9%) than China (2.3%) in FY20 – the first time the island nation had achieved such a feat since 1990. This economic miracle was helped by the country’s strong tech sector and its superb handling of the coronavirus pandemic, with the entire nation reporting new daily cases in the single-digits over the past few weeks.
Singapore’s STI gained +2.06% in January, helped by improving coronavirus cases statistics while its neighbouring countries grappled with skyrocketing new daily cases. Investor optimism was apparent as the government assured the public that it had secured an ample stockpile of vaccines for every person on the island nation, while a January PMI of 50.7 provided a soothing balm of expansionary expectations.
Malaysia’s KLCI was down -3.74% in January. Part of the month’s underperformance could be attributed to heightened political uncertainty when the government imposed a State of Emergency for pandemic control purposes, which was interpreted by the market as a stay on snap elections being called. The other half of the negative narrative was rapidly climbing daily COVID-19 cases, with the number of new daily cases exceeding 4,000 per day by month-end.
The SET index in Thailand was one of the better regional performers, rising by +1.22% in January. Thailand’s central bank BOT stated that the nation’s path to economic recovery through 2021 remained “highly uncertain”, and would largely depend on several key factors – the recovery in foreign tourist figures, the efficacy of vaccinations, the breadth and scope of fiscal support, and the rate of growth in the already fragile unemployment rate. Unsurprisingly, the BOT voted unanimously to maintain the policy rate at 0.50%.
The Jakarta Composite Index (‘JCI’) fell -1.95% for the first month of 2021. Inflation for the month remained subdued at 1.6%, as a spike in COVID-19 infections forced the government to reinstate partial lockdown measures (‘PSBB’) in both Java and Bali. Indonesia’s Financial System Stability Committee – which comprises the finance ministry, central bank, financial services regulator and the state deposit insurer – are crafting a joint policy package to provide more financing for businesses and hasten economic recovery.
In the Philippines, the PSEi contracted by a significant -7.38% in January, with the bulk of its underperformance occurring towards the end of the month – when the government revealed that FY20 GDP had declined by -9.5% YoY. Capital formation and elevated unemployment were the hallmarks of the contraction, with a lone bright spot for the economy being increased government spending. All three major sectors of the Philippines recorded declines, including agriculture (-2.5%), industrial (-9.9%) and services (-8.4%)
Vietnam’s VN-Index was down -4.28% m.o.m. The Communist Party of Vietnam (CPV) government held its 13th National Congress in January, revealing ambitious 10-year and 25-year targets in its economic blueprint for the first time. The sharp deceleration of the index towards the end of the month came as a surprise to markets, as the frontier market had just posted one of the best FY20 GDP growth rates in the world (2.9%) – on the back of trade surpluses as the manufacturing shift from China to Vietnam persisted.
Crude oil prices (WTI) rose +7.58% to USD52.20 per barrel in January, while Brent crude climbed 7.88% to USD55.88 per barrel. The rise in prices reflected improving market optimism on the vaccine front, with most developed nations having already started distribution of coronavirus vaccines within their respective borders. In contrast, CPO prices were relatively flat with prices rising +1.13% to RM 3,935.00 for the month of January, largely owing to dampened demand due to the pessimistic seasonal outlook.
Our market outlook remains largely unchanged compared to our view at the beginning of the year. We find that market risks remain overstretched, with new developments in January only serving to accentuate our cautiousness – e.g. Biden’s USD1.9 tril American Rescue Plan stimulus package in the US, commitments by policymakers of developed nations to accelerate the pace of both monetary and fiscal stimulus, and surprising levels of volatility in markets owing to retail mania in story stocks such as GameStop and AMC. In terms of the US’ trade and political relations with China, although one may see more diplomacy in the style of communication and engagement, the underlying tension and adversarial tone can be expected to remain.
In our home base of Malaysia particularly, we are seeing the number of new daily COVID-19 cases pick up exponentially – registering in excess of 5,000 new daily cases as of last count. The government has responded swiftly with a nationwide lockdown and declared a State of Emergency to ensure that political uncertainty does not affect the implementation of effective pandemic control measures. However, political uncertainty still hangs over the market like a dark cloud, with expectations of snap elections being called in 2H21 potentially leading to further market volatility.
Given the heightened level of risk in today’s markets, our current strategy is to prioritize the preservation of client capital; even at the expense of potential short-term gains. We have begun reducing exposure to certain sectors that we view as risky (e.g. overvalued sectors like technology), and are currently considering other pre-emptive measures to address the same objective. We remain steadfast in seeking low valuations, low leverage, high growth, robust management and a strong track record in our investee companies. Our rationale is that these companies may not perform as admirably as those occupying the popular narrative if markets continue to climb; but should still perform reasonably given their currently low valuations. Conversely, should markets begin to correct meaningfully, these stocks should also possess much lower downside than the overvalued story stocks.
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