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Novum Alpha - Daily Analysis 16 February 2021 (10-Minute Read)

Confidence in the U.S. vaccine rollout under the Biden administration saw markets more bullish, while a cold snap across the United States sent oil higher. 

Turning into Tuesday and I hope you're having a terrific one! 
In brief (TL:DR)
  • U.S. stocks kicked off the week higher with the S&P 500 (+0.47%), tech-centric Nasdaq Composite (+0.50%) and blue-chip Dow Jones Industrial Average (+0.09%) up as the Biden administration digs in to ensure that fiscal stimulus gets passed.  
  • Asian markets continued to perform, with further gains in the Tuesday morning session. 
  • The benchmark U.S. 10-year Treasury yield rose to 1.240% (yields rise when bond prices fall) as investors sold bonds to embrace greater risk. 
  • The dollar was flat. 
  • Oil held gains overnight as a cold snap across much of the U.S. saw large scale blackouts and roiled energy markets with March 2021 contracts for WTI Crude Oil (Nymex) (+1.16%) at US$60.16.
  • Gold edged up with April 2021 contracts for Gold (Comex) (+0.10%) at US$1,825.00 as existing risk-based themes continued to pervade the market consciousness. 
  • Bitcoin (+0.26%) was more or less flat at US$48,478 with outflows from exchanges leading inflows (inflows typically suggest that traders are looking to sell Bitcoin in anticipation of lower prices). 
In today's issue...
  1. American Stocks too Pricey? How about Europe? 
  2. Selling Singapore
  3. Bitcoin Used to be Volatile 


Market Overview
Confidence in the U.S. vaccine rollout under the Biden administration saw markets more bullish, while a cold snap across the United States sent oil higher. 
The Biden administration is also fueling markets higher as it digs in, determined to pass its fiscal stimulus package and the U.S. President leaves Washington for the first time to gain broader support. 
In Asia, markets were higher in the Tuesday morning session with Tokyo's Nikkei 225 (+1.17%), Sydney’s ASX 200 (+0.34%), Seoul's Kospi Index (+0.48%) and Hong Kong's Hang Seng Index (+1.22%) all up. 
1. American Stocks too Pricey? How about Europe?
  • European stocks trade more cheaply to their American counterparts and could provide sources of value even as U.S. stocks start looking more expensive 
  • Indices in U.S. tend to be tech-heavy, while financials look to do well in the event of a recovery and yield curves steepen 
America has always been seen as the defiant younger upstart to Europe – full of brim and vigor and with the gumption to change the world, something that has also been reflected in its stock market, which regularly trades at higher multiples than Europe.
Because if Europe represented the “Old World” then surely the “New World” would have more promise.
But just as a Louis Vuitton T-shirt doesn’t perform any better than one from Hanes, investors are increasingly paying a premium for U.S. stocks.
With the S&P 500 at around 23 times forward earnings versus the 18 times for the MSCI Europe (excluding United Kingdom), investors continue to be overweight American outperformance.
And that leaves some upside potential for European equities because where expectations are lowest, is where opportunity is greatest.
There are several macro factors which could potentially favor a more robust European recovery, as global vaccinations get under way and export-oriented economies are likely to be the main beneficiaries, with consumer demand likely to soar.
And this global demand recovery is likely to benefit Europe disproportionately, since it is expected to be dominated by spending on luxury items and capital goods – two sectors that are well represented in European indices.
Tepid growth in the Eurozone is likely to also make a comeback from both public and private investment, and the pandemic has forced plenty of Europe’s companies to digitalize, after decades of resistance, creating new markets and opportunities.
Then there’s the inevitability of the U.S. Federal Reserve eventually tapering its asset purchases, which will steepen the yield curve.
Negative rates and flat curves are not good for the financial sector because banks pay short interest rates on deposits and receive long rates on the loans they extend – so flat curves depress net interest margins, making bank stocks less attractive.
But those negative rates and flat curves are great for the tech sector and other growth stocks, given the reduction in the rate at which future earnings are discounted – when global yield curves steepen and rates head up, financial stocks are likely to make a comeback again, outperforming tech.
Again, that turnaround would help Europe’s prospects, where financials feature larger and tech has a much smaller turnout on the continent’s benchmarks – MSCI Europe has a much higher weight in financials at 15% compared to the S&P 500's 11%.
Conversely, the MSCI Europe also has a much lower weightage in tech, at just 10% versus the S&P 500 which is at 28%.
Finally, one of the biggest concerns with respect to Europe has always been a monetary union without a fiscal union.
The pandemic has changed that – with the E.U.’s recovery fund going a long way to strengthening Europe’s institutional architecture and strengthening integration.
At a time when other markets, particularly the U.S. seem frothy, Europe may be offering some decent value.
After all, you may drink a New World wine daily, but for a celebration, there’s nothing like a vino from the old country. 
2. Selling Singapore
  • Singapore property prices rise at fastest pace in two years 
  • Property investors for Singapore are looking to close deals soon as the threat of further government cooling measures to curb property prices rising ahead of economic fundamentals 
The pandemic it appears, hasn’t dampened demand for property in the island nation of Singapore.
Expectations that a global pandemic, an export-oriented economy and restrictions on viewing property (particularly for overseas buyers) would hit Singapore’s property market have proved unfounded.
With over 80% of all Singaporeans living in government-subsidized housing, property in Singapore is a very emotionally charged aspect of life on the island and one that the government monitors closely.
And as Singapore home sales rose to their highest in over two years last month, buyers are continuing to rush into the Singapore property market on speculation that the government may be taking steps to cool the market.
Singapore government ministers warned last month that they don’t want the property market to run ahead of economic fundamentals.
Whether it’s record low interest rates, Singapore’s impeccable response to the coronavirus pandemic, or its ability to show the world what a safe, stable and secure democracy looks like – property investors could do worse than bet on Singapore.
According to local bank DBS Group Holdings (+0.62%), home prices rose 2.2% last year, despite the Singapore economy going into recession and analysts at the bank warned that any further rises in excess of 5% could tip the market into “bubble territory.”
But concern that the government may intervene in the property market has prompted previously on-the-fence investors to take the plunge, worried that their eligibility or borrowing limits could be affected if new measures are introduced.
Just three years ago, government curbs on property purchases in Singapore included raising duties on the acquisition of additional properties by locals and tightening limits on home loans.
Nonetheless, foreign investor demand for Singapore property isn’t likely to be dampened by government measures as many bring their own funding and it’s not uncommon for investors (particularly for mainland Chinese) to make those investments in cash.
Singapore’s economy is projected to bounce back sharply from the coronavirus crisis with government projections in a range of between 4% to 6%. 
3. Bitcoin Used to be Volatile
  • Bitcoin's most recent rally less volatile than in 2017
  • Broader institutional acceptance of cryptocurrencies is helping to shape stability in the world's favorite digital asset, but volatility is relative and investors need to temper expectations versus other asset classes 
For every new record that Bitcoin sets, there are just as many naysayers predicting its eminent demise and just as many suggesting that it is due for a correction similar to the spectacular fall witnessed circa 2017.
But while Bitcoin’s most recent rally has been nothing short of dramatic, in terms of volatility and chaos, it’s a far cry from 2017.
On a rolling 60-day basis, the swings in Bitcoin have generally been much shallower now than was the case when Bitcoin was peaking in 2017.
One reason of course is that the price of Bitcoin has steadily climbed over the past year, over 300%, and the January selloff was orderly by cryptocurrency standards.
There are also broader expectations that Bitcoin will develop into a mainstream asset class, especially with the widely publicized backing of some of the biggest names in the investment landscape, including hedge fund billionaires Paul Tudor Jones and Stanley Druckenmiller.
Some are even suggesting that Bitcoin volatility will reduce as demand for the cryptocurrency broadens from speculators to long-term buyers, citing Tesla’s (+0.55%) US$1.5 billion purchase as one example and pointing to similar, albeit smaller Bitcoin buys from the likes of Square (+2.56%) and MicroStrategy (+2.41%).
Bitcoin has more than quadrupled in the year to date and is close to breaching US$50,000 for the first time, with the focus increasingly on the fixed supply of 21 million Bitcoins and its allegedly superior deflationary properties at a time when inflation concerns are rising.
The prospect of more regulation and the institutional participation that that usually attracts, helps legitimize Bitcoin as an investable asset class, which may reduce volatility, but to a degree.
Investors looking to add Bitcoin to their portfolios need to do one of two things to maintain their sanity – either don’t check the price of Bitcoin on a daily basis, or recognize that this continues to remain a highly speculative asset akin to stocks like GameStop (+2.54%).
To be sure, fortunes will be minted with Bitcoin, but that will also require a strong constitution and acceptance that volatility is as much a function of perspective as it is of timeframe. 
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Feb 16, 2021

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