Aftermath of the onslaught

Aftermath of the onslaught

The stock markets have noticeably stabilized after the calamitous collapse for the past 2 months. After 2 months of furious buying into the negative momentum, it is time to reassess the portfolio changes and how I should position myself for the next 5-10 years ahead. Personally, I am wary of believing in the forecasts of self professed market gurus, as I might form a biased view that I will be irrationally anchored to, and cloud my judgement when the facts change.  After attending webinars by various trainers as well as podcasts by fund managers that I think are credible, my conclusion is that the market is still undecided whether it should move up or down, and I am better served on buying companies with strong fundamentals and weed out the ones that are deteriorating.

They are significant interesting investment ideas being pitched by certain smart investors and I am looking into them as I patiently wait for any <durians> to drop. To keep myself focused, I shall limit my active portfolio (excluding write-offs and ETFs) to 10-15 stocks so that I will remained focused on the economics of the company, and try to reduce trading decisions unless I am very certain of its future prospects.

The tricky part is to figure out the below factors
1) Is there are existential threats to certain businesses / industries that may be rendered obsolete as consumer behavior changes?
(Restaurants cafes and tourism replaced by processed foods and online entertainment? Or is this temporary? What is the downstream impact on the REITS)

2) Does the decrease in purchasing power / wealth effect of consumers affect the demand of the goods and services?

(Spiking unemployment rate cushioned by expansionary fiscal and monetary policy?)

3)  Is the company highly leveraged with poor cash flow and unable to meet loan covenants?
(Will the company be forced to do a fire sale of assets or declared bankruptcy, or can it be on life support fueled by lowered interest rates?)

4) Are there salient risks on existing industries that has generally been largely ignored, and may emerge as another <Black swan> result in additional market corrections?
(Leveraged Wework on the office REITs space, Leveraged PE funds and Softbank offloading / IPO assets to build up cash, Red flags on companies/REITS that is ignored by bullish investors cruising on the rally <Eagle Hospitality trust, SIA>)

5) Am I doing a uni-directional bet? What happens if my beliefs are contradicted by changes in business conditions?

Recent Buy and Sell Decision

I have offloaded my legacy dollar cost average STI ETF position in my POEMS account to build up my cash position. Although I have incurred a loss of SGD 997.19 while selling 2000 shares at SGD 2.58 and 5 shares at SGD 2.15, I believe in the importance of cash as the <ultimate call option on every asset class>.

To the untrained eye, STI ETF is representative of the Singapore market as it shows a pronounced bias towards assigning portfolio weights to the largest capitalization companies. From a capital allocation perspective, STI ETF is simply a ETF that is skewed towards financials that are getting cheaper (DBS OCBC UOB making larger loan loss reserves) and Singtel (poorly managed financials pursuing diwosification and 'strategic loss making acquisitions', and holding other stalwarts / REITS that is unlikely to do well in the immediate term or present a strong recovery. The opportunity cost of retaining the STI ETF is simply dwarfed by the other opportunities that recently emerged, which has much higher growth / recovery prospects.

Best to worst Performers

Software and Intellectual Property

I am hit noticeably hard on my Silverlake Axis position as there is significant offloading by the investors. Personally, I am still bullish on the digital banking and insurance processing software suite presented by SLA to its potential market and has no desire to sell any position. As a sticky software business, new client sales and on-boarding will certainly be lumpy and be infrequent evidenced by its order book, but the operating cash flow and revenue will be steady as their software is a critical part to ensure banking operations can be continued. With a weakening market, Banking and insurance companies may be hesitant on upgrading their software suite and the revenue / sales may be stagnant for some period until the murky outlook is clear. Its cash position is still strong and there is still considerably ranks high in the leader-board in terms of share buybacks, to the point that it might actually become a privatization candidate. I am hesitant to buying more as it is dangerously high on my portfolio allocation rules I set. I look forward to its next half-yearly earnings to reassess the corona impact on its financials

Tencent, Google and Blizzard noticeably has positively benefited as people are forced to WFH and pursue online entertainment options. Blizzard noticeably has glitches in its game development of (Warcraft 3 Reforged) which serves a small player base, but the backlash from the player base is severely exaggerated. Industries involving creative arts (Disney, Netflix, Video Games, Movie production, Music Production) is simply not an easy industry to be in. Even among experienced industry leaders, it could be largely HUGE Hit and miss, as evidenced by Square Enix <Final Fantasy: The Spirits Within>as well beloved franchises such as Age Of Empire online and Disney Flops.

Exchanges and Financials
HKEX and SGX noticeably has large profits from the heightened transaction volumes. SGX has noticeably benefited due to the spike in demand from derivatives markets, while HKEX has some investment income losses. Even among the local banks  like OCBC and MNC banks like BAML, there is significant drops / loan loss adjustments from the commercial banking / loans end which is offset by the increased profitability from the investment banking and trading departments. Regardless of avid speculators and market timers commenting on whether it is a V shaped or U shaped recovery, as long as they are enthusiastic punters willing to allocate capital in and out off the markets, their transaction costs will be my gain.

Healthcare and Death-care

My thesis in Raffles Medical have not aged well. I misjudged the economics of the hospitalization sector, whereby the main revenue comes from surgery and hospitalization and treatment visits. Despite the conora epidemic throughout the globe, the cases in China and SG among the local population is simply well controlled (which is generally a good thing), and my <hedge> against worsening community infections did not come true. Raffles Medical is currently supporting the care of the foreign dormitory workers, which I do not know what to make of it as of yet. Nonetheless, the aging population and demographics as well as general increasing in affluence of the population over the long run is significant tailwinds to FSY and RM.

REITS and infrastructure
Ascendas REIT and Ascendas India Trust
I did not catch any of the REITS while they bottomed out last month, despite hitting my price targets continually as I revised them downwards. REITS have significant tailwinds supporting its price appreciation, noticeable due to MAS relaxation of the gearing ratios and lowered interest rates, greatly decreasing the risk (discount rate) of highly geared REITS. However, the growth in potential rental income as well as certainty of cash flows is severely impacted as the front line businesses got shut down. Nonetheless, I have expanded my watch-list and will be looking into them once the aftermath of circuit breaker is clearer or prices fall further.

For cyclical Office REITS, there might be changing rental behavior among companies. Once companies discovered the cost savings from WFH, they may downsize their rental requirements once the longer termed tenure is up, and there is potential supply glut once Wework unravels its office portfolio assets under distress. For retail REITS in Singapore specifically, I am not sure how onerous the after-lockdown effects will be and whether tenants will be renewing contracts upon expiry of the short term tenures.

Hong Kong Land, Stamford Land
Buying distressed assets in dire market sentiment sounds intellectually elegant especially when they are trading below their book value. Holding them for considerably long periods as they continue to go lower is not. Deep Value investing holding distressed assets below its liquidation value (cash and buildings valuation) requires a strong stomach. Nonetheless, there are significant opportunities that are emerging and I might want to re-look.

Conclusion
Portfolio allocation rules still remain intact as I shall stick to disciplined Buying / Selling as the epidemic plays out. Although the situation is relatively controlled in developed countries apart from the US, the economic indicators is deteriorating at an unprecedented level. Considering that I am already highly vested in the market, I shall stick to my 0-1 buy trade per month rule until they are certain breakthroughs / recovery on the corona situation supported by economic fundamentals.