Wake me up when september ends

 


 
Office setup of the Best Performing Fund Manager

Wake me up when September ends
September saw a flurry of market volatility as market participants discovered new reasons to worry about the stock market and economy. The September and October effect discussed in academic finance, whereby these are traditionally worst months for stock markets, seems like an interesting area to explore. Whether this market anomaly is a consequence of market structure, timing of earnings report release, or self-fulfilling philosophy by market participants, is unknown to me at this moment. 

On the lighter side of things, news of hamsters and government officials beating the top fund managers become the meme of the month on reddit forums like WSB, and a nightmare for active fund managers. As the saying goes, if you can't beat them. join them. 



China Market
At China front, the tech crackdown is ongoing and expected to be continual until next year Feb 2022.  The speed and severity of the restructuring and tightened regulatory standards spooked market participants that are not used to the quirks in China market, which followed an unconventional philosophy of direct intervention, Socialism with Chinese Characteristics and common prosperity.

For the recent hot potato issue for the highly indebted Evergrande, the current actions taken by the PBOC is to prioritise the protection of the vulnerable retail investors and homeowners, prioritise the repayment of onshore RMB debt holders, and encourage SOE investors to assist Evergrande in its liquidity issues, and not a direct bailout of the company (privatizing the profits and socialising the costs). 

The protection of offshore USD bondholders also does not seem to be a priority, despite the western hire-achy of ranking of the chain of repayments, by prioritizing employees/suppliers higher, followed by bank debt, bondholders, and lastly quasi-equity and equity investors. Although there were some SOE investors <ShenYang Shengjing Finance Investment Group> whom tried to assist Evergrande on its liquidity issues, it is still far from a full-fledged rescue and I expect tighter regulations on the Chinese Banks and real estate developers following this news. I do not have any insight on the eventual outcome of Evergrande although there are a lot of self professed market gurus whom claim they are able to mind read the PBOC in advance. I will monitor the situation for opportunities to deploy capital in HK/China market.


US Market
The new worry of the month is the <annual congress debate> of the raising of the US Debt ceiling. The current meta propagated by market participants is that the debt ceiling is simply a <Dog and Pony show> whereby Republicans and Democrats will put on their usual display of drama and theatrics to attack each other, with the worst case scenario of a temporary government shutdown followed by reconciliation. Nonetheless, there are real business owners like Jamie Dimon from JPM whom are preparing their balance sheets for market volatility should the talks not conclude as what has recurred for the past decade.  

Personally, I am uncomfortable that such dramatic showdowns are almost an annual expected <National Day Event> in the US market. The direction is less about the repayment of government debt and more about using QE as a magic potion to cure all ailments and diseases, and printing their way out of trouble since it has worked so well in the past.

Another controversial point brought up is the fact that the highest hire-achy members of the Federal Reserve and the Congress have been market timing their trades prior to market announcement of government and Fed Reserve policy, making them the <best performing star fund managers> of the year. Why invest in active managed funds when you can simply track the trades of these prominent experts? On the taxation front, there are also <revolving door> corporate practice of tax professionals getting their careers into government to shape taxation policy (and installing tacit loopholes), then returning to corporate world to exploit the loopholes to bring value to their clients. There are extremely warped incentive structure that is poorly regulated in the US market. 

Much as I believe US market is a great market to invest in for the long run, the quirky elements of the market and heightened valuations  did not inspire much confidence in me.



Portfolio decisions for the month of September
I passed on the Mastercard Slight Dip after considering the valuation and competitive landscape. MasterCard is a quality company per past numbers and track record, and the valuation is still very high despite the minor correction from the India ban on Mastercard payment licenses. Personally, I see the payments landscape getting heavily contested from disruptors such as FavePay/GPay/Grab, Shoppeepay, Paypal/Square, emerging cryptocurrency networks with competitive specs HBAR Hedera. Even merchants are pushing back against the incumbents on their proposal to raise interchange fees, and diversifying to other payment networks, suggesting there is no brand loyalty in this space, and Mastercard should face challenges to improve or sustain the margins in the future. As I am still focused on buying quality companies at a reasonable price, the current valuation does not fit the bill especially if there is potential multiples contraction going forward.

I sold Hong Kong Land upon the sharp spike upon the initial declaration of share buyback. I initially averaged down on 30 Aug 2019 at the price of USD 5.45 and 20 Aug 2020 at the price of USD 3.76,and liquidated on 7 Sept at the price of USD 4.73, locking in a return of 17.76% including dividends. It is sheer luck that HKL announced a share buyback in a bid to shore up the share price before the full maelstrom of the Ever-grande issue hit the western media. 

Based on my analysis, the initial thesis of an owner operator company with the capacity to reinvest in China market, lightly leveraged balance sheet, and severe undervaluation is impaired by recent changes. The theme of common prosperity and crackdown on monopolies and closely-knitted organizations is a direct threat to the reinvestment potential on the ROI of the development projects in HK and China, and may force a revaluation of the property prices and land bank if there is regulatory intervention in this area. I am also not as certain on the owner operator thesis as I originally was, as certain seasoned investors I talked to have mentioned HKL being a value trap throughout their holding period and the share buyback <instead of spinoff of property assets to a REIT structure> suggests the Jardine family is not going to change. HKL is simply a holding company for the managers to hold on their prime assets instead of compensating minority shareholders fairly, and there is still no significant catalyst at the moment to unlock the asset value. Although my returns are decent compared to the STI ETF, it is one of my poorest performing USD investments compared to the other companies in US market.


I sold CSI 300 upon the declaration of QE from the PBOC in preparation for the China Golden week. I initially bought on 2 Apr 2020 at HKD 25.95, did the portfolio switch from SCB to Maybank while averaging up, and sold on 27 Sep 2021 at HKD 38.66, with an average return of 18.02% including dividends. Although the returns seem reasonable, I believe this is a sell trade-execution mistake as I was thumb-sucking and delayed the selling of the CSI300ETF although the evergrande news has been made known to me since August. There will be no winners among the old economy ETF China Banks, Investment company SOEs, Real estate companies from the fallout of Evergrande. I expect further tightened regulations on these sectors and decide to unlock the HKD to allocate capital to other higher potential companies that have a superior business model and should beat the market returns over time.

Summary
On my personal front, I had a salary promotion which accelerated my goal towards financial freedom and monthly inflow of investment capital. On the other hand, my responsibilities has sharply increased and I find it difficult to maintain this blog apart from a monthly summary of the crucial developments. As my current wealth building inflow is still from my day job and I am gainfully employed at the moment, I will focus on stabilizing my career and gun for the higher remuneration areas, and blog updates will take a step back at a monthly hobby.

Although I am reasonably satisfied that my portfolio returns are decent compared to the STI ETF, they are still heavily battered due to my averaging down on china throughout the period, and I will most likely under-perform the SandP500 for this year barring a severe recovery in the China market / severe crash in US. This is considering the salary cash buildup and liquidations I just executed, as I had not found good opportunities to deploy them yet. I am just glad that I am not beholden to the <benchmark problem> that plagues professional fund managers, to stay fully vested or risk underperforming the index. I shall strive to stay opportunistic until interesting opportunities emerge!

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