Eye of the Tiger

Is the “buy the dip” call fuelled by Robinhood bros over? Will China tech stocks rise like the phoenix from the ashes of 2021 after a year of catching falling knives on the charts, now that SenseTime has completed its Hong Kong listing without any help from Uncle Sam and his investors?

As we get ready to welcome the Year of the Black Water Tiger from Feb 1 (or mid-Jan, depending on your version of the almanac), and try to get a hold on CLSA’s 28th edition of the Feng Shui Guide, here’s the Rocky Balboa view of 2022. We will keep the references in this column limited only to the known universe of equities — without wading too far into the metaverse for now.

Rising up, back on the street
Did my time, took my chances
Went the distance, now I’m back on my feet
Just a man and his will to survive

After a torrid 2020, the Hang Seng Index (HSI) won the dubious honour of being the worst performing market in Asia 2021. At –14% vs Straits Times Index’s (STI) +10%, a “long Singapore, short HK” strategy would have given a nice 24% return. Or you could have just stayed long in Taiwan which returned +23.8%, or for that matter, thrown all your money into the Philadelphia Semiconductor index which returned 42% — a reflection of stable and boring, and a word we have re-learnt since Covid — essential tech.

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Like Cathy Wood’s Ark Innovation ETF’s correction of 65% from its 2021 peak, and some levelling up of bitcoin which struggled technically at US$47,000 ($64,000) — from its US$69,000 double top — alongside gold’s year-end claw back of US$1,800 per ounce (its worst performance since 2015), 2022 may signal a rediscovery of all things fundamental as we confront the increasing spectre of central banks unable to ignore inflation, a potential toxic geopolitical cocktail of Ukraine and the Taiwan Strait, and belt-tightening agri and energy price increases, which we feel as we go supermarket shopping or hit the F&B establishments.

So many times it happens too fast
You trade your passion for glory
Don’t lose your grip on the dreams of the past
You must fight just to keep them alive

With creeping inflation almost the only certainty, a small allocation to gold seems a surer bet than the yet-unproven hype that crypto does the same. It certainly has less of a rock-and-roll feeling, but will be negative carry as it yields nothing, and keep in mind the fee, albeit minimal, of holding gold via an ETF. Equities tend to play out best in an inflationary environment.

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But the question is which ones will be resurrected, assuming the macro environment is normalisation of monetary policy (interest rates rising — gradual or quicker is the debate), limited fiscal bullets from Covid spending in the last two years (US President Joe Biden’s expenditure bill is still stuck at the hinge with fellow Democrat Senator Joe Manchin’s vote, whilst conservative Singapore reckons that being able to raise GST in 2022 is a good reflection of the impending economic recovery underway — that will have to pay for rising social costs), or will they be the beneficiaries of innovation (provided they have positive cash flows and profits, now that investors appear to remember that it does matter).

If it’s back to basics, the STI’s outperformance over HSI is likely to continue in 2022 as net interest margins from banks ought to benefit from rising rates and expanding loan books. The three local banks — DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank — could see improved margins, and a credit book that improves as Covid’s economic impact eases. Collectively, they make up 40% of the STI, and these they should be seen to help carry the index further forward. The STI is also buffeted by a higher relative dividend yield than many regional indices and can continue the “carry”.

As a long call, it is also probably worth sitting at current prices on bombed-out China tech, perhaps through locally listed Hang Seng Tech ETF. After all, we are 10 months off from China’s 20th National Party Congress. What are the bets that various cures for Covid will miraculously be in place and it will become as endemic as the flu globally? With health and stability ensured for Chairman Xi Jinping and the Communist Party of China, maybe attention will go to the economy, as the immoral excesses had been squeezed out for “common prosperity”, and listings of all systemic companies protecting Chinese IP should have returned to Hong Kong, by then.

Face to face, out in the heat
Hanging tough, staying hungry
They stack the odds still we take to the street
For the kill with the skill to survive

There are more reasons to be optimistic locally. The spate of privatisations or M&A leading to “de-listings” is often pinned on “low liquidity” or valuation. Whilst the former is debatable — especially when apple-to-apple (pun intended) liquidity metrics are applied instead of comparing a $100 million Catalist companies’ liquidity to US$400 billion-sized Alibaba Group Holding, what is evident is liquidity does not, on its own, command better performance of valuation with a more-than-50% decline for Alibaba last year.

The shrinking wealth of China’s internet tycoons is encapsulated by Colin Huang in Pinduoduo’ jaw-dropping 68.5% plunge to US$42.9 billion, which still leaves him with a net worth of just under US$20 billion though! On valuation, however, there are reasons for it to be in the eye of a beholder — either a founder with insight, or third party with synergy, or cashed-up private equity — and presents an opportunity for the investor who does his homework.

Whilst this column had previously covered the takeover bid of Singapore Press Holdings, which is inching towards completion, a few year-end announcements encapsulate the opportunity presented. Mapletree Commercial Trust’s (MCT) offer for Mapletree North Asia Commercial Trust (MNACT) uses the (cheap) currency of MCT shares which trades at a premium to book to acquire its sister REIT which has trading persistently at below book. In combination, at a market cap of over $10 billion, “big being beautiful” has an opportunity to keep the premium, with STI and SIMSCI potential inclusion post-completion. This realises jackpot value for patient MNACT shareholders and provides growth outside of low-yielding Singapore assets. It was a nice year-end present for me, I confess.

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There are other REITs and stocks that present similar opportunities, but through M&A. If inflation leads to a rise in real asset values, is it a question of when these assets in other REITS and stocks will be realised at full value? The 7%–8% plus carry of apolitical US to European and Chinese REITs discount to book present, too, a good carry with a potential jackpot to come.

Yet there are other buyouts who could be perceived as more opportunistic. A privatisation of Koufu Group by founders executive chairman Pang Lim and his wife, executive director Ng Hoon Tien, gave shareholders a 15.8% lift. Yes, the offer was close to its alltime post-IPO highs and a nice premium for minorities, but it was also made at the cusp of a turnaround in the sector. This looks similar to Singhaiyi Group’s recent deal, which is also below its book value, albeit a richer premium for those with the patience to bet on Singapore’s power real estate couple, Gordon and Celine Tang. Instead of crying foul about these “delistings”, would one rather not be happier to be positioned to say “huat ah” when it happens?

Rising up to the challenge of our rival
And the last known survivor
Stalks his prey in the night
And he’s watching us all with the eye of the tiger

In the transition year of 2022, corporate activity is likely to pick up as companies reposition post-Covid and transform their business. These present opportunities. A number of small cap companies have reinvented themselves from real estate, mining industrial and manufacturing business to become FinTech, ESG-crypto, or metaverse businesses. More will come. Unlike the region where there have been several 100 times stock price increases from such announcements, reactions for a few of these seems to be more muted.

Sceptics remain to be convinced, and there is an increasing call from investors to “show me the money” beyond the press release. These may bear out in time, especially for those that find a successful niche in the plumbing and infrastructure of the new impending digital age.

However we imagine who wins the metaverse, some basic things do not go away. Core tech with innovation like AEM Holdings and Nanofilm Technologies International are likely to continue to lead innovative growth, along with the need for chips across all parts of our daily lives as listed manufacturers big and small see their order books rise. M&A may play out as a repeat of the early 2000s with the contract manufacturers as the shift in supply chains post-Covid re-settles.

There are opportunities in commodities like the record prices in palm oil not yet reflected perhaps in stocks like First Resources, Bumitama Agri, Kencana Agri and Golden Agri-Resources. Together with mid-and downstream, if we need to fill our bellies come what may inflation-wise, from small (Don Agro International), mid- (Del Monte, Japfa) to large (Olam International, Thai Beverage Public Co, Wilmar International), not to forget battered-down consumer F&B’s, one could expect potential corporate activity to drive revaluations this year.

It’s the eye of the tiger
It’s the thrill of the fight

Finally, we gear up for the first special purpose acquisition company (Spac) to be launched in January by Vertex Ventures — a milestone for the Singapore Exchange (SGX) akin to CapitaLand Mall Trust’s debut as the first SGX REIT listing 20 years ago. Now, given the indigestion from the US Spac bubble pop — leading to underwhelming debuts, notably Grab Holdings on Nasdaq, coupled with Hong Kong’s own Spac regime going live soon — rumour has it this deal will be too important to fail, given the attention from senior key players in our ecosystem. Following on with Spacs from Tikehau and possibly Novo Tellus, could this be another catalyst of growth and spice in this market to come as despacs take place potentially this year? This week once again, I am talking about my own book (on request) with no better insight than all the economists, analysts and think-tanks out there. But hopefully I will be more right than wrong. As Rocky Balboa says: “I am not the richest, smartest or most talented person in the world. But I succeed because I keep going and going and going.”

Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award in 2021

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