3rd June 2024
May Performance Review
Dear Investor,
As usual, we will start the month by looking at what the markets did in the previous month, our themes, and then the thematic portfolio performance.
It was another good month for equity markets, with most of the markets we follow moving up. With US government bonds up, and the USD down, this is usually a good environment for equity markets. This was somewhat of a reversion from the previous month where 20-year government bonds were down over 6%, and the broad US market down 4%.
While bonds did rally during the month, they have started to give back their gains.
From their bottom in December 2023 when 10-year US government bonds yielded 3.8%, and 7 interest rate cuts were priced in, we are now back to 4.5% and maybe one rate cut in September.
Barring a US recession (which the establishment is desperately trying to postpone through rampant deficit spending) or an exogenous geopolitical event, in the current economic environment where inflation is rising and the world is exiting a manufacturing recession, it is hard to see bond yields coming down.
In addition to the inflation picture, you have had a lack of demand for US bonds recently. In the three auctions this week totaling $188 Billion, primary dealers had to take an above-average share of the offerings, showing the market is unwilling to buy many bonds here.
This is one of the reasons we are positive on gold and other precious metals and the respective mining equities.
Please see the Themes section of the website for a breakdown of our current investment themes.
Our themes performed very well again this month, with the standout performers being Precious Metals, Energy and HK/China.
Starting with HK/China, we had more positive policy announcements from the Chinese government. Proposals are being discussed around removing the 20% tax on dividends for Stock Connect investors in Hong Kong which is a tactical positive but the biggest news in our opinion was related to the beleaguered property market.
At the beginning of the month, a few major cities removed home-buying restrictions. This included Chengdu and Nanjing, with the latter being close to being classified as a tier-1 city.
Chinese Property Shares Jump After Major City Removes Home-Buying Curbs
Chinese property shares surged on Monday after a major city in southwest China relaxed its curbs on home buying, raising hopes that more Tier-1 cities including Beijing and Shanghai, will soon follow suit.
Source: Morningstar April 29th
Previously, we noted that more easing on housing would be forthcoming and that, most importantly, Tier-one cities led the rest of the market.
We were pleased to see that this news was followed by the relaxation of restrictions in one of THE most important cities, Beijing.
China’s property slump: Beijing ends curbs on multiple home ownership in outer areas of city to stimulate buying
- Families that reach current ownership limits will be allowed to purchase one more home in the area outside Beijing’s fifth ring road
- Home transactions outside the fifth ring road accounted for around 80 per cent of the total in the city in 2023, according to Centaline
SCMP: May 1st
The signalling implied by this move is THE most important thing for us. This tells people that it is okay to buy property again and that we have moved a long way from “housing is for living in, not speculation.”
Now we wouldn’t rush out and buy property stocks ourselves, although they will likely run, but it adds to what we have been saying over the last few months. The government is laser-focused on the economy and the stock market. They have been relaxing curbs for the previous 6 months or more and, as is their wont, they have been doing so incrementally to avoid a “Go” signal for speculation to return. But we believe this is big news and the economy and the markets will like it.
Guangzhou was the first tier one city to relax in September 2023 with lower downpayments and mortgage rates and a relaxation of rules regarding number of homes and the ability to buy without a hukou. Still, Beijing is the big Kahuna, given it is the seat of government.
The cherry on the cake (for now) was the news that came out mid-month:
China Considers Government Buying of Unsold Homes to Save Property Market
China is considering a proposal to have local governments across the country buy millions of unsold homes, people familiar with the matter said, in what would be one of its most ambitious attempts yet to salvage the beleaguered property market.
The State Council is seeking feedback from several provinces and government entities on the preliminary plan, said the people, asking not to be identified discussing a private matter. While China has already experimented with several pilot programs to clear excess housing inventory with the help of state funding, the latest plan would be much larger in scale.
Local state-owned enterprises would be asked to help purchase unsold homes from distressed developers at steep discounts using loans provided by state banks, according to two of the people. Many of the properties would then be converted into affordable housing.
Source: Bloomberg
The fact that this is being put out there means that some form of this plan will come to fruition. Who takes the losses is the horse-trading that is going on now. Most likely a combination of banks and central government.
This clears up the biggest obstacle – unsold inventory and a lack of confidence in the market despite the relaxations on house buying curbs announced by most major cities (See #chian ups the ante). Part of this strategy has been to persuade an “old for new scheme” whereby homeowners would sell their old home for a new one with built-in incentives. But this only works if there is demand for the old house.
Shanghai launched a commercial housing trade-in activity, with more than 20 Chinese property developers and nearly 10 intermediaries being the first group of participants, involving more than 30 projects, mainly located in Jiading, Songjiang, Qingpu, Fengxian, Lingang and other areas, Chinese media reported.
Today (3rd), the Shanghai Real Estate Trade Association and the Shanghai Real Estate Broker Trade Association jointly initiated a commercial housing trade-in activity throughout Shanghai to facilitate residents to replace their housing and better support residents’ reasonable gradient home purchase needs.
Commercial housing trade-in is primarily for residents who plan to sell their second-hand housing and buy a new one. House-purchasing residents may first reach an intention to purchase a new house with a developer, and then the real estate agency will prioritize the transaction of their old house. After the old house is successfully sold, the new house transaction will be completed as agreed.
Source: Xinhua
In our minds, this is a BIG move and will underpin a continued move up in the markets.
We have read various analyses trying to put figures on the amount needed. We have seen estimates of as much as US$1 trillion. This to us misses the point. Just as the government has put a floor under the stock market, it is attempting to do the same for the housing market
It is natural for there to be a correction at this stage given the fast move up and the HSI could get to the 17500 level and remain in an uptrend. In our mind, the balance of probabilities is that we are still in a bull market.
The thematic portfolio performance is detailed below, and overall, we made 2.1 % for the month.
Within the Hong Kong/China portion of the thematic portfolio, the high dividend theme stocks, banks and infrastructure plays did well based on the possible reduction in dividend withholding taxes for Mainland investors mentioned earlier and the fact that some of them have been laggards in this rally. The red chips also did well except China Resources Beer Holdings. It seems we may have been early here as China consumption as a theme remains unpopular, especially given the last few years. We will remove this from the portfolio as even though there is only a 10% downside to the January lows, it is unlikely to move up until overseas institutional interest returns to the market. On the flip side, this may happen sooner than you think given the plethora of banks going bullish AFTER the market has rallied 30%. Goldman Sachs and Morgan Stanley have both joined UBS in upgrading the Hong Kong and China markets, and this could be just the beginning of a change in sentiment.
Commodities and Tech treaded water after strong moves last month but we are comfortable with that allocation. If we hit 17.5K on the HSI, we will increase our allocation to this market.
To summarise our view:
“We continue to believe that the Hong Kong market offers an extremely good risk reward here with multiple signs that the market has bottomed, and both Hong Kong and Chinese markets will provide an uncorrelated return to US equities within a global portfolio, reducing risk AND providing absolute returns.”
Moving onto Precious Metals, they were another good performer for the thematic portfolio despite gold being up “only” 1.6%. What really boosted returns were the gold and silver miners and the catch-up moves in Silver and Platinum up 15% and 11% respectively. Silver benefits from having both monetary and industrial usage with both India
India imports more silver in 4 months of 2024 than in all of 2023
India imported a record 4,172 metric tons of silver during January to April, up from 455 tons in the same period a year ago, said a government official, who declined to be named as he was not authorised to talk to the media.
“Industrial and investment demand are driving up silver imports,” said a Mumbai-based dealer with a private bullion importing bank.
Source: Economic Times
and China currently importing massive amounts of silver.
China’s Silver Imports Set to Jump as Solar Demand Lifts Prices
- Premium in Shanghai has climbed despite surge in world prices
- Dwindling inventories make the metal even more attractive
Source: Bloomberg
Silver and Gold also had big breakout moves during the month, with gold breaking above the previous ATH and silver playing catch up and breaking through the technically important $30 level (red line on the twenty-year chart below), which many silver bugs think is key.
Just like what happened for gold last month, margin requirements were raised in silver, with the CME raising silver future margins by 10% effective May 23rd while coincidentally, in China the Shanghai Futures exchange raised the trading limits and margin required for gold and silver futures, also effective May 23rd.
Gold and silver are some of the only assets governments don’t like to see going up.
These actions may slow the journey to higher prices, but the destination remains the same.
Precious metals are a sector we believe is in a multi-year bull market and we have covered it extensively in previous commentaries. Gold will replace Western government bonds as a store of value as inflation, financial repression and negative real rates continue to be the norm.
In Energy, despite oil and uranium being down, most of the related stocks in the thematic portfolio were up. We had big move-ups in Crude/Product Carriers as well as our Offshore Oil Drilling Service Providers. Looking at that latter sector’s relative performance chart, we will swap out Tidewater with China Oilfield Services Limited. We will cover the latter in a future commentary.
We have been waiting for a correction in India to increase our allocation, but just like Godot, it never comes. While the overall market has done well, small and mid-caps have been where the action is (see the grey line below). With it looking more certain that Modi will win the election in a landslide, we believe the infrastructure spending and modernising of India will continue apace together with the ongoing speculation in the stock market. We will increase our allocation and will be looking at some additional sectors to invest in that market.
Short “US Equities” and Long “Other Commodities” contributed negatively this month.
As noted above, US bond prices increased, and the equity market followed. Our biggest worry is a Wall-Street-driven sell-off dragging global markets down in the short term and having this short position allows us to take more risk in the under-loved and under-owned sectors we like to invest in.
The breadth appears to be getting narrower and narrower with the Magnificent Seven turning into the Outstanding One, as NVIDIA has recently been the only stock rallying on down days in the overall market.
We also have non-confirmation from the small-cap end of the market, with the Russell 2000 failing to break through the April highs despite the S&P 500 doing so (blue line in the below chart).
and the economically sensitive Dow Jones Transportation Average looks extremely weak (blue line in the below chart.
In other commodities, our MSOS position, was the reason for the loss, losing 25% in the month as investors got tired of waiting for the rescheduling of cannabis to happen. We have written about the sector in previous commentaries and, although volatile, believe the ETF has an extremely good risk reward here.
On the other hand, we started seeing some life in the fertiliser stocks as Natural Gas also rallied. We believe this sector will do well over the next few months given the trends we are currently seeing in soft commodity prices.
Overall, we will keep the portfolio allocations the same for now, giving ourselves room to add exposure to sectors if we get a material correction in global markets.
The thematic portfolio for June is shown below, with changes highlighted in red as usual:
June Thematic Portfolio
Until next time,
