Novum Alpha - Daily Analysis 21 January 2021 (10-Minute Read)
A terrific Thursday to you as America turns the page on the Trump administration and ushers in a new era of politics (or more of the "old same" depending on your perspective) with Joseph R. Biden Junior sworn in as President of the United States of America.
In brief (TL:DR)
In today's issue...
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Market OverviewA new dawn is breaking as America wakes to a brand new President, Joseph R. Biden Junior, on the promise of a return to more normal politics and competence.
That promise has been fueling a recovery in stocks on expectation that Biden will manage a more resilient and cohesive vaccination plan, while providing for ample fiscal stimulus now that the Democrats hold both houses of Congress and the White House.
In Asia, stocks rallied in the morning session with Tokyo's Nikkei 225 (+0.75%), Seoul’s KOSPI (+0.60%), Sydney’s ASX 200 (+0.69%) and Hong Kong's Hang Seng Index (+0.51%) all higher.
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1. Why Are Hong Kong Stocks So Hot?
Neither a pandemic nor politics seems to be able to stop the relentless march of stocks on the Hong Kong Stock Exchange and it’s because of Chinese investors.
As China has brought the coronavirus pandemic under control, mainland Chinese investors have bought over US$27 billion worth of shares on the Hong Kong Stock Exchange powering its fastest rally for a new year, in over three decades.
Earlier this month, foreign investors dumped Chinese companies after a U.S. ban on investment in some Chinese securities saw a sharp pullback.
But bargain hunting by Chinese investors led to a resurgence in those stocks, sending them higher and leading to spillover interest in Chinese firms listed in Hong Kong which looked cheaper by comparison.
And that’s resulted in a booming Hong Kong stock market, at odds with the Hong Kong economy, which is still reeling from the pandemic and protests.
The Hang Seng Index, a key benchmark for the territory has gained over 10% this year, nearly four times the MSCI All-Country World Index.
Key to mainland Chinese investor interest for stocks has been a high savings rate, but other factors such as steep valuations of mainland Chinese stocks, and heightened geopolitical tensions between China and the U.S. have also helped.
Mainland Chinese investors have limited options when it comes to asset allocation, with strict capital controls restricting access to overseas stocks.
Rock-bottom interest rates and a purge of peer-to-peer lending platforms as well as stagnant property prices in large cities, have also slashed returns for Chinese investors.
And that has made Hong Kong look increasingly attractive, especially as Beijing has been keen to push the city as an alternative fundraising center to New York.
Last year, a record US$50 billion was raised in Hong Kong from initial public offerings, the bulk from Chinese companies.
Given the Beijing’s goal of reducing reliance on America’s capital markets, there may be the political will to help Hong Kong stocks higher, but a sustained rally is less certain.
There is concentration risk with the bulk of professional investors pouring into a handful of large Chinese firms listed in Hong Kong and even the evergreen consumer staples sector is looking to be its priciest since 2008.
And as demonstrated within China’s own capital markets, a politically-charged and propagandized rally in stocks is often short-lived, as evidenced in 2015, which warrants discipline in profit-taking if plying the Hong Kong market.
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2. Airlines Are Burning More Cash Than Fuel
The last quarter of 2020 saw a rise in optimism that fueled a rally in languishing airline stocks, with coronavirus vaccines and Joe Biden winning the U.S. presidential election playing into a rotation into so-called value stocks.
But there’s a reason that airline stocks are cheap and ought to remain so for some time to come – their massive debt burdens.
Even as more Americans have taken to the skies during the Thanksgiving and Christmas holiday periods, despite a raging pandemic, iconic airlines such as United Airlines (+0.96%) are struggling to stem the bleed from their debt overhangs.
In the last quarter of 2020, United Airlines burned through US$33 million a day, compared with US$25 million in the third quarter, the bulk of which came from servicing debt repayments and paying severance to employees, which more than doubled from US$4 million to US$10 million a day.
And while U.S. lawmakers approved a further US$15 billion in aid for the battered airline industry, that must be shared amongst all the U.S. airlines and will likely not be enough.
United Airlines lost US$7.1 billion for the whole of last year, with US$1.9 billion or 26.8% of those losses in the last quarter, despite a spike in holiday travel and on revenue of US$3.4 billion.
To be sure, airlines, not just in the U.S., but across the globe, are cutting costs, with the issue right now revenue, or the lack of it, the main drag on prospects.
United Airlines CEO Scott Kirby has conceded that the coronavirus pandemic “has changed United Airlines forever” and pledged to make “structural reductions” that would make it “more profitable than ever.”
And that may be the case as well for airlines across the globe.
With work-from-home and video conferencing proving to be durable pandemic-induced work practices, companies are looking at making some of these changes permanent.
Employees are growing accustomed to working remotely and the cost and carbon footprint of business travel has become increasingly hard to justify.
While a return of leisure travel can be expected when the pandemic gets under control, the size of the business-related travel market, the most lucrative sector for full-service airlines, may have shrunk permanently.
And while interest rates are still near zero at the moment, signs of an economic recovery and rising bond yields will mean that airlines will have to service larger debt repayments, even as revenue is squeezed.
As the pandemic rages in many parts of the world, people are not taking flight any time soon, nor are airline stocks.
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3. So you want to become a Bitcoin Day Trader?
Buy when Bitcoin keeps going up, and sell when it keeps going down.
As ludicrously simple as that may sound, that’s the simple recipe which has powered profits for Bitcoin day traders as increased retail and institutional interest in cryptocurrencies has generated substantial volatility for the world’s favorite cryptocurrency.
Although many analysts criticize Bitcoin’s volatility as making it unsuitable for a portfolio allocation, others are using that volatility for profit, and lots of it.
So-called “momentum trading,” the premise of these Bitcoin day traders is rooted in decades of behavioral analysis, backtesting and academic rigor.
Trying to time Bitcoin’s top or bottom is like trying to read tea leaves or tarot cards – you’ll find whatever it is you’re looking for.
But “momentum” buying of Bitcoin just looks to keep buying until there is a reversal and then start selling until that trend reverses as well.
Although this trading strategy is subject to crashes, as when Bitcoin corrected sharply when it neared US$42,000, it’s perhaps no more risky than a simple buy-and-hold strategy, given the inherent volatility of Bitcoin anyway.
As fiscal stimulus feeds a new retail-trading mania in cryptocurrencies, risk assets, especially cryptocurrencies, have continued to gain.
Ether, the world’s second largest cryptocurrency by market cap, is up some 90% in the first three weeks of this year, while Bitcoin is up just under 30%.
But quantitative and systematic traders, who rely on powerful algorithms and automated bots, have an edge over retail investors, when it comes to momentum trading strategies, especially for Bitcoin, where the bulk of trading remains automated.
That doesn’t mean that retail investors are completely feckless though when it comes to momentum trading.
Bitcoin’s price right now is feeding into an “inflation narrative” that suggests more profligate fiscal policy as well as loose monetary policy, have the potential to debase fiat currencies, bolstering Bitcoin’s deflationary appeal as a store of value.
And a structural empirical model developed by Bloomberg Economics highlights that as much as 60% of the latest Bitcoin rally cycle, starting from October 2020, can be attributed to momentum trading.
Day traders are also increasingly influential when it comes to Bitcoin’s wild price gyrations, with the number of dedicated-Bitcoin Twitter (+3.64%) feeds, Reddit threads and TikTok videos exploding since the last quarter of 2020.
As an unconstrained asset, Bitcoin is particularly susceptible to narrative and by extension, momentum trading, Bitcoin day traders will however still need a relatively strong constitution and discipline to swim with the Bitcoin price currents.
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Jan 21, 2021