The “rotation to reality”, which has been postulated by this column since it started 10 months ago, has played out like a script. Rising US Federal Reserve (Fed) rates, Russian leader Vladimir Putin’s Ukraine misadventures, disrupted energy and food supply chains, plus the great crypto deleveraging amid its current winter, have all helped to dampen the spirits of all but the most bullish.
Fluff that had no intrinsic value, such as meme stocks, “growth at all costs” business models, imaginative coins and non-fungible tokens (NFTs) minted for crypto heaven, have all succumbed to Newton’s law of universal gravitation. Instead of a gentle drop, many find themselves caught in a vortex that seemingly spins more furiously as each day goes by. Many giddy market Cassandras have started drawing parallels to the 2008 global financial crisis (GFC).
Will this be the sub-prime tail that triggers the dominoes falling across the world? The current inflationary threat is coming from non-traditional quarters, such as commodities logjams, war-disrupted freight and de-globalisation. Are central banks, rusty at dealing with this traditional yet unfamiliar scourge, ill-equipped to do so beyond the blunt sledgehammer of steeper and steeper interest rate rises? Is stagflation inevitable whilst countries hoard their chickens and palm oil?
I do not have any crystal balls unlike former actress and former US first lady Nancy Reagan (and her astrologer) to answer all questions. However, one can lay out the tea leaves to portend what the second half of this year could look like.
Expected expectations
In Under pressure (May 26), I suggested that the steady year to date decline of some 10% to20% of mainstream indices in the West had actually masked the underlying greater rout of some 50% to 70% already seen in all manner of fluff that peaked between March and October 2021.
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In contrast, our homegrown safe haven Straits Times Index (STI, as flagged in Winds of change, April 7) had gained around 9% to make it the second best-performing market in the world. The leader was Saudi Arabia stock exchange Tadawul, whose 15% gain could be attributed almost entirely to Aramco.
As at the 2022 halfway mark, the STI is still treading water, albeit barely by the skin of its teeth, while Tadawul remains as the only market thus far staying in the positive with a gain of 1.7%. Even so, the bottom had not yet fallen out of the barrel. In May, plenty of investors stayed invested in real assets, with real yields and carry whether in public or private. Others selectively buy into distressed special situations or stocks that trade at discount to asset or even cash values.
Meanwhile, rotation had not fully played out and was ripe for another leg down. True, the ARK Innovation ETF and Tesla and many other pandemic favourites looked cheap from where they were. But as the tide ebbed, many such as Netflix and crypto plays ought to have put on more clothes.
See also: That's what friends are for
Unfortunately, as June sets in, many “bargain hunting” investors got slashed by more falling knives as the Nasdaq sank more than 30% — meaning it needs to recover 50% from here as a broad aggregate to recoup its 2021 high. The S&P likewise, technically, have signalled its bear market phase after dropping more than 20%. Yes, there will be bear rallies from time to time. However, for those still clinging on to hope that springs eternal, this is just the beginning. There has been no capitulation yet (unlike in digital assets potentially, see later section).
For those holding real stocks, with real assets in companies that are decently managed with tried and tested business models that evolve with the times, these counters may be temporarily underwater. Therefore, it is probably alright to go for a summer holiday paid for by the dividends. For those that still did not cut the fluffy assets, hopefully there is still some left for a trip across the Causeway — you had been warned.
Fomo, Tina and Foho
The cheap credit helped fuel the excesses in the financial markets running riot even in a pandemic. Several “friends” were in this together. First, the Fear of Missing Out (Fomo) was what drove many of us to wade into parts of the universe that in the morning after, we often regret. No one wants to be left out when everyone else “appeared” to be making money — previously in Hong Kong, then US tech, and then into the dodgiest of doge coins.
Here is a friend of Fomo who goes almost hand in hand: Tina — There Is No Alternative. Having Tina was what sent investment bankers, fund managers and private bankers to inflate their models, chase yields in riskier asset classes and offer clients sexier ideas. Often, they congregate into increasingly crowded sectors and trades, mouthing increasingly lame self-validating excuses: “We were forced to buy”, miffs the buy side fund manager; “we were forced to include in our products”, pleads the private banker.
A third “friend” rounds up this trio: Foho. Head of macro strategy at Academy Securities Peter Tchir, in describing Bitcoin, wrote: “We went from fear of missing out to fear of holding on (Foho).” Whilst that seems to have taken root in the digital assets and crypto world more recently, the only asset class that suffered Foho earlier this year in March was China and the Chinese tech stocks which were labelled by JP Morgan as “uninvestable”. For the wider market, Foho has not shown up in droves yet. Many investors, both professional and retail, continue to hold their pandemic favourites in hope and a prayer. Until that sets in, we have not seen the bottom for those stocks.
Wither the silver linings
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In Its all relative (Feb 10), we pointed out that the STI, from being unfavoured for the longest time, was undergoing a post-pandemic revival as a better store of value. Indeed, its then relative outperformance of some 37% versus the Hang Seng Index since March 2020 (the beginning of Covid-19), was a surprise to many. That it had continued its relative outperformance is perhaps a reflection of longer-term structural changes in Singapore’s international neutral hub role, versus Hong Kong, where national security as part of China takes priority — just look at the relentlessly tough quarantine rules.
Of course, the STI is not invincible but as a safe harbour in a storm, it could bolt up like a trampoline should news flow and macro clouds lift progressively through 2H. Geopolitical risk continues to weigh on China, but this column has suggested that with October fast approaching, Chinese stocks and Chinese tech which had been battered by self-inflicted common prosperity policies in 2021 may have hit a cathartic Foho bottom in March.
True, each rally (of up to 10% in tech on some days after Chinese Premier Li Keqiang periodically jawbones up the market) is often followed by pull backs in the next three days. However, we have seen a series of higher lows and not lower lows. The market appears to be climbing on a wall of worry, and relatively gaining strength as Nasdaq levels down. They started this year on different ends, and will likely finish in opposite directions.
What about Bitcoin at US$100,000 ($138,547), which was the level predicted by many “experts” earlier this year? Well, it is finally generally agreed that the second crypto winter has taken hold. Retail consumers enamoured by celebrities such as Matt Damon endorsing Crypto.com now realise they have simply enriched them whilst their crypto wallets have halved (for the fortunate). Those more adventurous who have waded into the Dark Side of the (Terra Luna) Moon (May 9) or found Celsius, Three Arrows Hedge Fund, Babel Finance Too hot to handle (June 16) may have lost both shirts and pants.
Bitcoin is now holding precariously on to the US$20,000 handle — that is a 50% plunge from US$30,000 in early June — just as the Terra Luna debacle explodes. This US$20,000- mark is significant as it was the 2018 peak before the first winter, and the start of 2021’s January breakout that took it to November’s US$70,000 high.
Now, US$20,000 is also the estimated break even zone of Bitcoin miners. With energy prices staying elevated, new Bitcoin supply will be sold potentially below cost which could act like an automatic stabiliser to take out production. Another data point suggests that surviving crypto traders in the run have their inventory carried there. The others, hit with margin calls, and deleverage out as a notional US$3 trillion market has sunk to below US$900 billion.
Recent price action has almost been cathartic, as we hear of news and rumours of insolvency, liquidity crisis, and backstops and bailouts, for example, of BlockFi and Voyager by the stronger credible players like FTX. Some Foho had indeed set in, and while it is not the end of volatility, it is getting closer to 2008’s GFC and commodity busts cycles.
Do note that this is not a call to buy, and it is certainly not an asset class for the faint hearted, unlike the first two examples where you can ascribe valuation metrics more objectively. As the world rotates to our new reality — remember that there are always alternatives, and friends you nurture, you will always have.
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
