4th February 2024
January Performance Review
Dear Investor,
As usual, we will start the month by having a quick look at what the markets did in the previous month, our themes, and then the thematic portfolio performance.
While most markets generally digested the big move-up in November and December, there were two big outliers. Hong Kong/China dropped again and Japan had a big move up in tandem with a weakening yen.
Many subsectors of the US market were actually down but the mega-cap technology stocks continued to keep the broad indices afloat.
Please see the Themes section of the website for a breakdown of our current investment themes.
The two biggest losers in our thematic portfolio were precious metals and Hong Kong/China.
While gold itself was only slightly down, the miners and higher beta silver and silver miners fared extremely poorly. We expected some downside with the overall US stock market as it had become stretched to the upside, but not quite so much. The lesson is that precious metal miners will surprise you as much to the downside as to the upside when things turn, which we believe is close.
Hong Kong/China had what we felt was a capitulation moment, which we discuss below.
The thematic portfolio performance is detailed below, and overall we lost 0.5% for the month.
The Hang Seng Index continued to get pounded in January with a big one-day loss on China’s GDP number release on January 17th, where apparently the 5.2% growth number reported missed analysts’ expectations slightly. (It should be noted that there will be difficult base effects in January and February as this time last year was the post-covid “reopening” of China and although this shouldn’t be a surprise, be prepared for weak economic growth numbers to continue to “surprise” the market nonetheless).
The market continued to slide on Monday 22nd January as interest rates were not cut as expected/hoped.
(Bloomberg) — Chinese stocks in Hong Kong slumped further Monday toward their lowest level in almost two decades, as an absence of fresh economic stimulus and market support measures deepened investor pessimism.
The Hang Seng China Enterprises Index fell as much as 2.2%, edging closer to a level unseen since 2005 and making it one of Asia’s worst-performing key indexes. Chinese tech behemoths including Meituan and Tencent Holdings Ltd. led the declines.
The absence of big bazooka-type stimulus to Pavlovian investors, as well as a seeming lack of regard from the government for domestic demand, combined with derivative products sold to retail and high-net worth investors over the last 2 years, is giving us a capitulation-type event.
From last Wednesday 24th January:
(Bloomberg) — Hong Kong’s biggest stock slide in more than a year Wednesday was probably exacerbated by the triggering of automatic sell orders on structured products, according to several traders and analysts.
The Hang Seng Index slid from Wednesday’s open following worse-than-expected Chinese economic data, before the breaching of technical levels triggered knock-outs on a number of retail structured products, they said, with some requesting anonymity to discuss sensitive market matters. The benchmark gauge at one stage tumbled 4.2%.
The HSI hit its 15+ year low in October 2022 low (after the “Hu Juntao” shock) at 14,867 and, as we are now almost back down to this point, this should provide strong support for the market going forward. The lowest risk setup would be a break below this support, followed by a move back up through it, but we can’t always get what we want. The 20-year chart of the HSI below shows how far down we have come.
In previous commentaries we have noted that over the last 6 months there has been particular emphasis on the stock market by the authorities, none of which had much lasting impact on the market. But a couple of recent announcements and news are the fuel for this particular bounce.
Post the market sell-off on January 22nd when the HSI fell below 15,000 and hit the October 2022 lows, this news was published on Bloomberg on January 23rd.
China Weighs Stock Market Rescue Package Backed by $278 Billion
China considers offshore money for stabilization fund: sources
Some policy measures could come as soon as this week
Chinese authorities are considering a package of measures to stabilize the slumping stock market, according to people familiar with the matter, after earlier attempts to restore investor confidence fell short and prompted Premier Li Qiang to call for “forceful” steps.
Policymakers are seeking to mobilize about 2 trillion yuan ($278 billion), mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link, said the people, asking not to be identified discussing a private matter. They have also earmarked at least 300 billion yuan of local funds to invest in onshore shares through China Securities Finance Corp. or Central Huijin Investment Ltd., the people said.
The deliberations underscore the elevated sense of urgency among Chinese authorities to stem a selloff that sent the benchmark CSI 300 Index to a five-year low this week. Calming the nation’s retail investors, many of whom have been bruised by the protracted property downturn, is also seen as key to maintaining social stability.
That same night, the NY Times reported that both founder Jack Ma and CEO Joe Tsai had been buying shares in Alibaba. Now whether they were “asked” to buy shares or did so on their own, the signalling from the timing is clear.
Jack Ma bought Alibaba shares worth $50 mln in fourth quarter – NYT
Jan 23 (Reuters) – Alibaba (9988.HK), co-founder Jack Ma and Chairman Joe Tsai bought millions worth of shares in the Chinese e-commerce giant in the fourth quarter, the New York Times reported on Tuesday, sending the company’s U.S.-listed shares up around 7%.
Ma bought $50 million worth of Hong Kong-traded stock, the report said, citing a person with knowledge of the matter.
It added Tsai purchased about $151 million worth of Alibaba’s U.S.-traded shares in the quarter through his Blue Pool Management family investment.
This was followed by this announcement on January 24th signalling more liquidity was being put into the system.
China cuts bank reserves to defend markets, spur growth
BEIJING, Jan 24 (Reuters) – China’s central bank announced a deep cut to bank reserves on Wednesday, in a move that will inject about $140 billion of cash into the banking system and send a strong signal of support for a fragile economy and plunging stock markets.
The central bank’s announcement, coming just as stock markets were closing for the day, led to a bounce in benchmark stock indexes and the yuan, even as analysts said more policy measures were needed.
Now the question is whether this is another in a long line of failed initiatives to restore trust in the nation’s markets and economy. Is this rally just short-covering from late entrants to the party, or will this bounce last and and put in a sustainable bottom to the HSI after years of down and sideways movement ?
Usually, the sequence of events is that shorts get covered, then some faster money enters long and then institutions re-enter the market later after performance is already good, especially after the type of bear market China has endured. The article below outlines the fact that money is starting to return to Chinese markets.
LONDON, Jan 26 (Reuters) – Investors poured almost $12 billion into Chinese equity funds in the week to Wednesday in the largest inflow since 2015 and the second largest ever, a BofA Global Research report showed on Friday – a positive sign for battered Chinese stocks.
That collapse in shares merits a wager on an eventual rebound and perhaps a new approach to investing in the market, some investors say.
A sharp fall in Chinese property stocks made China “the world’s most enticing contrarian long ‘trade'”, BofA analysts said, noting: “No one believes it’s an ‘investment'”.
I have a slight worry here, given that that at the October 2022 low, there were very few, if any banks calling for investors to enter China. This was when the word “uninvestable” was being thrown around.
Nevertheless, we do like the risk-reward here. That said, we also believe it is more of a trade than a long-term investment because as we have noted previously, the confidence of consumers is key. Investors want to see a change in rhetoric where the consumer is put at the top of the priority list and the authorities take proactive rather than reactive measures. Investors need to be surprised and the best way to do this is to continue to make policy announcements with concrete actions over the coming weeks in quick succession. We will increase the weighting in Hong Kong this month and include some SOEs and Red chips.
We will also increase our positioning in precious metals given the shellacking that the stocks took and our belief that the US recession is closer than currently anticipated by the market. As we have noted previously, the consensus is for a soft landing where receding inflation allows the Federal Reserve to cut rates aggressively all while corporate earnings will grow 10-15% in 2024. We think rates will be cut but due to economic weakness and the recognition of this will push up the price of gold to new highs and that will speak a major rally in the mining sector. Until that time, gold will continue to consolidate around $2000.
We will remove the position in the cannabis sector after a 30% + move this month and a 50% move over the last 3 months. We will look to re-enter if there is any material weakness.
Uranium has continued to move higher and the stocks rallied another 15% this month. While we have liked the theme for a while, we sense some exuberance in the sector so we will remove those also. We will keep the weightings the same in the themes so the other stocks/ETFS will increase relatively
The thematic portfolio for February is shown below, with changes highlighted in red as usual:
Until next time,
