Investment Themes – Page 5 – Smart Money Asia

2022 Q1 Roundup

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.

2022 Investment Outlook

Wow, year two of the great covid saga is almost over! It may not feel like it, but from an investment perspective, we are coming to the end of one of the easiest years in recent history. How is your portfolio doing? The odds are it’s looking pretty good so far. This has been the kind of market where we all look like pros.

So can we expect more of the same in 2022? You are probably already getting the feeling that it’s not going to be that simple, and that has a lot to do with Mr. Powell, pictured above. There are a lot of tough jobs in this world, but trying to fight inflation during a pandemic, without crashing a stock market that you inflated, certainly has the difficulty level set to Precarious. Volatility is coming back and you better have a plan to deal with it.

Stocks: So how well have stocks actually done? Well if you look at the indices, everything looks fine: The S&P 500 is up some 26% year to date, with the NASDAQ up 17%. Bull market! The picture gets somewhat muddled though when you realise that 45% of the components of the S&P 500 are below their 50 day moving average, and 65% of NASDAQ components are below their 200 day moving average. What does that mean? Well a big chunk of the US stock market is actually in bear market territory. What’s holding up the average is the massive outperformance of big tech: Apple, Alphabet (Google) Amazon, Meta (Facebook), Microsoft, and Netflix literally are the bull market!

All this has happened in an environment nourished by the steady drip of liquidity in the form of zero interest rates and quantitative easing from Jerome Powell’s Federal Reserve.

This from a recent Zerohedge post: “So I submit the notion of a raging bull market is a myth. Indices propelled to constant new highs by still flowing central bank liquidity increasingly held together by a few stocks.”

No wonder things got choppy around the time of the FOMC meeting this week…

Bonds: The problem here is, of course, the emergence of inflation, which the Fed originally tried to write off as “transitory”, but have now decided they need to act on. That means no more drip drip, and interest rates must rise. Inflation is not good news for bonds, as it eats away at the purchasing power of the bond’s future cash flows. Why buy today’s issue when tomorrow’s will come with a higher yield? Bond yields go up = bond prices go down.

Commodities: Assuming inflation is here to stay for a while, what should go up is the price of “stuff”. There’s a reason for that 5% of your portfolio that’s been sitting in gold doing not very much all year. Just be aware that if there’s a panic à la March 2020, everything gets sold off initially, including the shiny metals. Oil is going to continue to be interesting next year if the scourge of Omicron doesn’t crush the reopening trade…

Crypto: It’s been one year since my Bitcoin: It’s About to get Loud post. Yes, I am now patting myself on the back for calling the most obvious bull market of all – the one that comes every four years! Crypto is never easy though, especially for newcomers. We have seen (I think) seven or maybe eight pullbacks of over 30% this year alone. We have been to an all time high of $69k and are now back at $46k with the fear and greed index indicating extreme fear. Meanwhile on Layer 1, Ethereum has outperformed Bitcoin and Avalanche and Solana have done crazy multiples. (ETH up about 420%, AVAX up 3,000%, SOL up 11,000%!) Have we seen the top of the mountain and we are already on the way down the other side, or is there one final push to the summit to come?

Dude, you mentioned having a plan?

A client of mine, who is a former economist once said to me: “Right or wrong, I always saw it as my job to have an opinion.” That comment has stuck with me, as I think it applies to all investors. You can’t always be right, but you should have a view, test it rigorously, and be prepared to change it if you find evidence you are wrong. So for what it’s worth, here’s my view for 2022:

The Fed, and other Central Banks are being forced to deal with inflation, but they have openly admitted that they are equally, if not more concerned, with not crashing the stock market. The words “rock” and “hard place” spring immediately to mind. So they taper now and plan to stop bond purchases by March. The market does not like this and corrects strongly, which basically means that those big tech stocks sell off dramatically. Then, central banks have to backtrack and slow or end the taper, and maybe rethink those rate hikes planned for later in the year. When the drip is turned back on, the market bounces back.

How you plan for this depends on your investing style:

If you have a diversified asset allocation and your plan is to do nothing at all and ride it out, maybe continue dollar cost averaging every month: Congratulations! You are dismissed from class and free to go and play!

If you are not one of these people then please take note – staying sane is actually an option here. However, if you insist on trying to trade this, it is probably past time to start getting a little more defensive and raise some cash to deploy when things get rough. I would, however, be tempted to entertain the possibility that Omicron is also a little roller coaster like by nature, and the initial whoosh into the sky will return to earth equally quickly. This could precede the discovery in late Q1 that inflation actually was somewhat transitory, and caused mainly by supply chain disruption, and therefore the need to deal with it falls away. So be cautious, but it’s perhaps not time to lock yourself in the bunker.

Is the crypto bull market over? Crypto is more correlated to stocks than many crypto people like to think, so if anything is going to slay the bull it could be a dramatic stock market correction. That said, the level of adoption, or network effect, has increased significantly this year, and includes a good deal of institutional money. If your plan, like mine, was to sell the cycle top at $100k+ and then buy back in the bear market, it may be time for re-evaluation. I’m slowly becoming more open to the idea that the four year cycle could be smoothing out and, despite frequent mini crashes, we may not see a 2017 style blow off top followed by a grinding two year bear market. Don’t hold me to that, but a simple way to play it is to have a cold storage allocation that you hold longer term, and a tradable allocation that you look to sell at Extreme Greed and buy back at Extreme Fear, rinse and repeat.

However things play out, it is unlikely to be smooth sailing. So I wish you a peaceful holiday season. Here’s hoping Japan does a better job of holding off Omicron than my home country is doing so far…

There Goes The Metaverse!

The above tweet comes from a remarkable thread by a market veteran who is trying to get his head around what happened in financial markets in the month of October 2021. Amid fears of inflation and a flurry of tech earnings reports, Tesla stock went off to the races, whilst Mark Zuckerberg renamed Facebook and launched his foray into the metaverse. Meanwhile in crypto, meme-based dog coins were off the leash and a virtual world currency suddenly woke up and went parabolic. All while the VIX, the US stock market’s “fear index” languished by the pool sipping cocktails.

It’s enough to make anybody’s head spin, but it’s particularly confusing for serious traders and investors who dare to try and apply fundamental research to markets gone wild. In another fascinating thread, Zhu Su of Three Arrows Capital attempts to explain why traditional Discounted Cash Flow valuation method no longer applies in a market driven by network effects.

It always amazes me how many Tesla haters are out there, continually predicting the company’s downfall, whilst missing out on the asymmetric returns it provides. Some masochists even short the stock, enduring months and years of pain in the hope of the big payoff. The same thing happens with crypto. These people will forgo incredible returns so they can one day turn around and say “I told you so” when the asset comes crashing back to earth.

Don’t get me wrong. There is nothing misguided in buying good quality companies when they are on sale and holding them for the long term. This strategy has made Warren Buffet a fortune, but he is very, very good at it and has massive capital to invest when he identifies his target.

Sorry to drop yet another thread on you, but this one from Raoul Pal also caught my eye over the weekend. His take is that the market is now being driven by millennial investors, who have not been blessed by the benign conditions their parents came of age in, and are throwing caution to the wind because it’s the only way they are ever going to make it. They are not interested in diversification and modern portfolio theory as they know they will never be able to retire with a sensible investment strategy. The only way they are going to get rich is if they concentrate their bets in trades with the biggest possible payoff. They are going all in on meme stocks, crypto, NFTs, and soon the metaverse, and, to their parent’s disbelief, they might just make it!

Now this is a financial planning blog, or at least it started off as one. I’m not going to tell you to sell off your diversified portfolio and your blue chip dividend stocks and bet it all on electric cars and dog coins, but it’s hard to deny that a shift is in progress and we won’t be able to navigate it with old thinking. Yes, you need to have an emergency cash reserve and an appropriate amount of insurance. You need to have a pension or long term savings vehicle that averages into stocks in the early years and then diversifies over time as the numbers grow bigger. Yes, you need a core investment portfolio of cash, bonds, equities, property, commodities and alternatives that is rebalanced annually. And yes, you need to keep some powder dry for when it all comes crashing down, because it will do that once in a while. But it would be a mistake to ignore the Exponential Age that is upon us, even if you have no intention of ever setting foot (metaphorically) in a virtual world.

I have talked about core / satellite investing previously and I believe it still applies. It’s just that the satellite part of the allocation suddenly got very interesting. Here are some things you might want to read up on:

The Metaverse – first coined in Neal Stephenson’s novel “Snow Crash”, and confirmed last week as the big thing on Mr. Zuckerberg’s mind, the metaverse will be more than just a virtual reality space where people interact via dorky avatars. As they develop, virtual worlds will intersect work, socialising, gaming, entertainment, commerce, and all manner of human interaction. You can already own land in the Metaverse and set up shop there. These virtual worlds are likely to be split between those run by big corporations, such as Meta (Facebook), and decentralised versions run democratically as a community. For a glimpse at where we are heading, take a look at Decentraland.

The currency of the metaverse is going to be crypto and participation will happen through social tokens and NFTs. It’s no coincidence that Decentraland’s Mana token went vertical right after the Facebook announcement. Sh*t just got meta!

Want to show off your wealth in the metaverse? NFTs are how you flex. Read this post (and every other post) by Arthur Hayes for more on that. Also check out this next-level NFT art gallery.

Metcalfe’s Law, or what is a network effect and why should I care? Wikipedia does a pretty good job of explaining how the value of a network is proportional to the square of the number of connected users of the system. This no longer only applies to telecom or computer systems. The internet is a network, social media is a network. Visa and Matercard are networks and so are Bitcoin and Ethereum. If the user base grows, the value increases. You don’t have to like it, but good luck shorting it!

So this is all great, but what do you do with it? Well, unless you are planning on betting the ranch on the metaverse, you play it as a satellite holding. If you prefer hiking outdoors to virtual worlds I’m with you, but you don’t have to ignore what is going on. Crypto and social tokens are the obvious entry point, as is owning stock in the corporate metaverse companies. If you want to be more involved then other places you can start are: The Sandbox Game, Cryptovoxels, and Wilder World.

There will be many more investment opportunities if you keep your eye on the space. Maybe mad October isn’t the beginning of the end, but just an extension of the new normal. The metaverse is coming – be there or be square!

Investing in Innovation

I hope everyone has had a good start to 2021. That’s one month gone already! I have been thinking about writing a 2021 investment outlook for weeks, but given the start to the year we’ve had it hardly seems worth it. In one short month we have seen the storming of the US Capitol, a new state of emergency declared in Japan, Olympics uncertainty, vaccine uncertainty, a short squeeze on a down and out game retailer, and possibly a new one on silver. Not to mention a surge in the Bitcoin price to $40k followed by a drop back down to $30k, and a pump and dump on the one and only DOGE coin. Who knows what’s in store for February!

Given that last year I wrote an investment outlook less than 2 weeks before the corona virus went from “something happening in China / on a cruise ship” to “global pandemic”, I think I will pass on making short term predictions this year, but I will say this: expect some volatility! Last week saw the largest hedge fund de-grossing since February 2019, so take care out there. (remember what happened in March)

Given all that, I thought it would be much more productive to zoom out and look at some long term themes. Instead of trying to figure out how various asset classes will fare over the next 12 months, let’s consider what is going to be big over the next 10-20 years.

Luckily this doesn’t require weeks of research, because Ark Invest have already done it for us. Click here to access their 2021 Big Ideas report. You need to register your email address in order to view it, but I can promise you it is worth getting a few emails for. At 112 pages it is quite hefty but a quick skim through will give you the idea. Ark have done their homework on companies at the cutting edge of fields such as Deep Learning, Digital Wallets, Automation, Delivery Drones, 3D Printing and Gene Therapy, to name but a few.

Even better, if you think these are areas you should have some exposure to, Ark Invest have a range of ETFs which make it simple to get involved. You can pick and choose the particular field you like, or just get a bit of everything with their Ark Disruptive Innovation ETF. They even have a Space Exploration ETF on the way.

The only tricky thing with Ark is you will need a US / International Brokerage account in order to access their ETFs. But never fear – a search through the US Market ETFs available in my Japan SBI account turned up a number of Global X Innovation ETFs that are available and cover similar themes. They have even released two new tech focussed thematic ETFs in Japan – see the story here, and more at the Global X Japan website.

As exciting as innovation strategies are, I’m not suggesting you abandon your asset allocation and put everything into them right away. However, they are an excellent place to be averaging in a little money every month and leaving it invested for the long term. Personally I know I don’t have the skill or the time to do the level of research where I can identify the winners of the future at an early stage, so I’m happy to drip money into a broad innovation strategy like Ark’s and let them do the work. And yes, I’m going to buy a bit of the Space Exploration ETF when it’s available, just because it’s cool!

Here’s wishing you all the best for 2021 and beyond!

I don’t have any affiliation with any of the fund managers mentioned in this post.