It’s been almost two months since my last post. Apologies for the silence but we have been busy at home with a new baby girl, born in early February! I must say that, despite the massive disruption caused by covid, working mostly at home has been a blessing this last couple of months. Some things really do only happen once or twice in a lifetime and it’s important to be present for them.
So I thought I would do a general roundup on things I have been thinking about during working hours, and how I am investing in this somewhat turbulent environment.
In my 2020 Investment Outlook post in December I wrote about having a view that guides your investment plan, and being prepared to change it if necessary. My focus for the year was on inflation and how Central Bank’s efforts to fight it would affect the investment environment. This, of course, has been somewhat overshadowed by the tragic events unfolding in Ukraine. I have no experience in international conflict, so little of value to add in terms of how things may play out there, but obviously we all hope that peace is restored as soon as possible.
The war has, of course, had a huge impact on the inflation narrative, as anyone who has visited a gas station recently will know. I actually accumulated a satellite holding in energy stocks during 2021 based on 2022 being a year of re-opening / reflation, with business getting back to normal, more travel, and therefore higher consumption of energy. It actually looks like energy prices could have some way to go, but I am out of those positions now and have rotated into tech stocks, which took a pretty good hit this quarter, and Japanese dividend stocks – largely inspired by @CacheThatCheque, who I interviewed in December. (that post is here)
My core holdings are unchanged, as they only require rebalancing once a year.
So what can we expect for the rest of the year? Well, the Federal Reserve went ahead and ended bond purchases on schedule, and then proceeded with a clearly telegraphed rate hike of .25% this month, and the market has reacted surprisingly favourably. It is said that stocks climb a wall or worry, and that’s exactly what they are doing at the moment. With more rate hikes to come I still expect plenty of volatility, but I don’t see any reason for big changes in allocation. Another dip in Q2 and a strong second half of the year is my working hypothesis.
Inflation means sitting in cash is a losing trade. Your spending power is being eroded day by day. And if you hold JPY cash, but are planning on spending the money in the US, for example, you are losing almost 8% per year and taking currency risk. However, investing overseas has been somewhat complicated by exactly that risk, as we have seen a sharp weakening of the yen – the Bank of Japan is by no means ready to taper and just announced they would purchase an unlimited amount of 10 year government bonds at 0.25%. If Japan is your home for the long term, I would estimate the real inflation rate, taking into account recent energy prices, at around 2% per year. This is why I think Japan dividend stocks are interesting as there are plenty of opportunities to earn more than 2% if you are willing to take a little risk. If you don’t have the time to research individual stocks, take a look at something like this Japan high dividend ETF:
As readers know, I also invest in crypto, and things have gotten interesting there again recently. A few weeks ago, Terra founder Do Kwon announced that they would be buying some $10 billion worth of Bitcoin to back their UST stablecoin over the coming weeks. And true to his word, Terra set about buying some $125,000,000 in BTC per day last week. If you are wondering if $125 mill per day is a lot, it is. And if you are wondering how you go about buying this much BTC, the answer is TWAP, or Time-Weighted Average Price strategy.
All this twapping appears to have been the catalyst for a rally in BTC to around $47,000, which is close to the year open price. L1 alts have also picked up significantly as a result.
One thing I am watching with interest is the Grayscale Bitcoin Trust (GBTC). The trust, which simply buys and holds BTC with a 2% p.a. custody fee is still trading at almost a 28% discount to the value of the assets it holds. At $30.8 bill in assets under management it is major contender for conversion to an ETF, if it receives approval from the US Securities and Exchange Commission. So GBTC, which can be bought through US brokerage accounts and retirement plans, offers the opportunity to invest in BTC at a 28% discount to current price, with a strong possibility that it will be converted to an ETF, whereby that discount will disappear. If you believe in BTC long term, it actually looks like a better buy than the asset itself. Obviously investing in crypto is high risk, but food for thought…
Best wishes to everyone. I hope you are enjoying the warmer weather and the cherry blossom!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Smart Money Asia 