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Novum Alpha - Daily Analysis 22 February 2021 (10-Minute Read)

The risk trade is in vogue. Almost as if investors have thrown caution to the wind, bond yields have been surging as traders have been dumping the "safe" assets and embracing risk in cyclical sectors of the stock market, even as bubble warnings are flashing.

 
Welcome back to the start of a brand new week and the last week of February! And how time flies! 
 

In brief (TL:DR)

 
  • U.S. stocks ended last week mostly flat with the S&P 500 (-0.19%), tech-centric Nasdaq Composite (+0.07%) and blue-chip Dow Jones Industrial Average (+0.00%) more or less unchanged but futures activity suggests that markets look set to hit new highs again this week. 
  • Asian markets were mostly up in the Monday morning session as investors continued to sell off bonds, with yields soaring. 
  • The benchmark U.S. 10-year Treasury yield ended last week at an eye-watering 1.340% and may be set to rise even higher without intervention by the U.S. Federal Reserve as investors dumped "safe" bonds to bet on risk assets (yields rise when bond prices fall). 
  • The dollar continued its slide in Asian trading. 
  • Oil was flat on Friday with March 2021 contracts for WTI Crude Oil  (Nymex) (-2.12%) at US$59.24 as investors tried to weigh a combination of conflicting factors, including a declining dollar, concerns over an economic recovery as well as inflation. 
  • Gold was firmer with April 2021 contracts for Gold (Comex) (+0.14%) at US$1,777.40 last week, mainly on the back of a weaker dollar. 
  • Bitcoin (+0.09%) soared to US$57,000 over the weekend, but has since pulled back to trade around US$56,700 as it continues to consolidate at this level and with outflows from exchanges slowing against inflows (outflows typically suggest that traders are looking to hold Bitcoin in anticipation of higher prices). 
 

In today's issue...

 
  1. Everyone's Betting on a Bubble That Can't Burst
  2. Asian Healthcare Stocks Could Use a Doctor 
  3. Costly Cryptocurrency? 

Market Overview

 
The risk trade is in vogue. Almost as if investors have thrown caution to the wind, bond yields have been surging as traders have been dumping the "safe" assets and embracing risk in cyclical sectors of the stock market, even as bubble warnings are flashing. 
 
Betting on a swift economic recovery, investors are increasingly turning to those sectors of the economy where valuations are somewhat reasonable, and whose stocks had otherwise been forgotten thanks to the pandemic.  
 
In Asia, markets were mostly up on a perceptible shift towards economically more exposed sectors with Tokyo's Nikkei 225 (+0.78%) and Hong Kong's Hang Seng Index (+0.33%)  higher, while Sydney’s ASX 200 (-0.02%) and Seoul's Kospi Index (-0.08%) were down, but not significantly. 
 
 
1. Everyone's Betting on a Bubble That Can't Burst
 
  • Unlike previous asset bubbles, the unrelenting flood of liquidity, as well as fiscal and monetary stimulus are fueling the rise of risk assets 
  • Governments and central banks will be hard pressed to withdraw measures, especially as markets will punish them for it, inflation remains the key risk of the bubble bursting
 
The global love affair with stocks and risk assets shows no signs of abating with day traders sitting in their basements to suit-wearing institutions (whose staff are also now working in their basements thanks to the pandemic) dive deeper into the market.
 
Despite multiple warnings of frothiness in stocks, equity funds are drawing fresh monies at an unprecedented pace and hedge funds are boosting their stock exposures to set new records.
 
Companies themselves, taking advantage of favorable bond markets, are becoming the biggest buyers of their own shares as well, with share buybacks, double the pace of a year ago – announced buybacks have averaged US$6.9 billion a day this earnings season, the most since at least 2006 according to data compiled by EPFR.
 
Several macro factors are of course driving this push to stocks – with growing confidence in an economic recovery buttressed by fiscal support and effective coronavirus vaccines.
 
But to understand the magnitude of the markets we’re living in, data from Bloomberg suggests that with the S&P 500 up some 75% from March last year, gains from the benchmark index dwarf all previous bull markets at this stage of the cycle since the 1930s.
 
That said, the boom cycle is relatively juvenile – just 11 months from the last bear-market bottom in March, but the velocity of the recovery has more than made up for its lack of vintage.
 
By one historical measure, it’s likely this bull market cycle is only halfway through, as the median return of the 13 previous U.S. stock market bull cycles was 126%.
 
And bears are increasingly an endangered species, with short sales dwindling to fresh lows and hedge fund managers scared into submission by the Reddit brigade that has resulted in billions of dollars’ worth of losses from the GameStop (-0.25%) saga.
 
A survey by the National Association of Active Investment Managers has interestingly determined that even the most bearish group that typically has a net-short position, was 80% long in stocks earlier this month, before turning neutral.
 
So, should investors be worried? Yes and no.
 
One oft heard adage is that markets generally crash after the last bear becomes a bull.
 
And right now, there are scarcely any bears to be found.
 
Like the coronavirus pandemic, if or when a market correction occurs, it will likely take the market by surprise, yet all of the clues would already have been there but only with the benefit of hindsight.
 
A German proverb notes that trees do not grow to the skies – but that’s also because they can only absorb a finite amount of nutrients, water and sunlight, beyond which any additional feeding of the tree does not result in any further growth.
 
Markets on the other hand are not so restricted by such natural limitations – because as long as central banks continue to print money, there is theoretically no limit to how much earnings can be disassociated with the price of assets.
 
It stopped mattering some time ago, valuations are now more of a footnote than a key determinant of a stock’s price.
 
And because there isn’t a clear exit path for central banks and governments to withdraw stimulus – markets will punish them at any attempt to do so – it remains to be seen if markets can grow towards the sky, right now at least, more investors than ever before are betting on it. 
 
 
2. Asian Healthcare Stocks Could Use a Doctor
 
  • Asian healthcare sector was the chosen defensive play in the midst of the pandemic but has since lagged behind the broader Asian market
  • Longer term prospects for Asian healthcare sector are still rosy, thanks to favorable demographic changes and a burgeoning middle class from the growing Southeast Asian region
 
One would think that in the midst of a pandemic, the healthcare sector would be booming, particularly in Asia.
 
Demand for healthcare services ought to never have been greater, especially in Asia, with an ageing population, but a measure of Asian healthcare stocks seems to contradict what would have been an obvious expectation.
 
While tech firms continue to front Asia’s equity rally, much as they have for the rest of the world, one hot sector from 202 has fallen – healthcare.
 
Essentially flat year-to-date, healthcare stocks have been the worst performing sector in Asia, and on track to underperform the MSCI Asia Pacific Index for a third straight month, the longest losing streak in over three years.
 
Seen initially as a defensive bet (because who wouldn’t need healthcare in the midst of one of the biggest healthcare crises this century), a growing expectation of a return to normal for the global economy has caused investors to dump these defensive pandemic bets.
 
Ironically, Asia’s relatively adept handling of the pandemic, with a broad return to normalcy in many parts of the region, have hurt stocks in its healthcare sector the most, with energy and financial sector stocks strengthening in recent weeks thanks to the rise in bond yields.
 
Just as in Europe and America, a view that the global economy is on the mend, has seen economically cyclical stocks make a comeback, rather than healthcare, and it doesn’t help that thanks to the pandemic healthcare stocks are also trading at much higher valuations than other sectors.
 
The Asian healthcare industry is trading just a hair below 30 times forward earnings, the highest among all sectors, according to Bloomberg data, with a benchmark at just 18 times.
 
Effective coronavirus vaccines out of the U.S. have also dampened demand for Asian firms which were racing to develop their own as well, including Shinpoong Pharmaceutical (+10.00%), which slid by 36% and Celltrion Pharm (-0.78%), which lost 32% year-to-date – both firms had risen 1,600% and 500% respectively last year.
 
Asian healthcare stocks continue to trade at hefty valuations, but as those start to come down, do provide long term value, especially as macro trends favor strong, consistent earnings in the sector.
 
An aging Asian population in North Asia as well as a growing middle class from Southeast Asia, will provide a broad-based and strong revenue core for the healthcare sector.
 
Before the pandemic, the growth of medical tourism was keeping hospitals from Bangkok to Busan filled with patients from other parts of the region and presumably, that pent-up demand will return once border controls are lifted. 
 
 
3. Costly Cryptocurrency?
 
  • Elon Musk's suggestion that Bitcoin's prices "seem high" fails to dampen demand for the bellwether cryptocurrency which surged to US$57,000 over the weekend and reached a record US$1 trillion in market cap for the first time
  • Tide of institutional interest in Bitcoin will be hard to unravel this time with more CFOs facing growing pressure from their boards to at the very minimum, consider an allocation into the asset 
 
In a bizarre twist of events, one of the alleged reasons for Bitcoin’s most recent rally, Elon Musk’s revelation that electric vehicle maker Tesla (-0.77%) had purchased some US$1.5 billion of Bitcoin, has also now come out to state in a tweet that Bitcoin prices “seem high.”
 
But if investors were bugged out by Musk’s tweet, that wasn’t apparent as over the weekend, Bitcoin surged to another record, hitting US$1 trillion in market value for the first time ever and leaving both backers and detractors in a state of bewilderment.
 
Musk had earlier tweeted,
 
“Money is just data that allows us to avoid the inconvenience of barter.”
 
“That data, like all data, is subject to latency and error.”
 
Bitcoin has rallied some 56% this month alone, surging to US$57,000 where it currently sits after some brief pullbacks, heading into a fresh week.
 
Cryptocurrency stalwarts are wrestling with detractors for control over the Bitcoin narrative, with proponents arguing that Bitcoin is a worthy hedge against inflation risks, while critics suggest that it is just another manifestation of a misguided market, grossly distorted by waves of monetary and fiscal stimulus.
 
In many ways, Tesla’s bet on Bitcoin is a win-win scenario.
 
If Bitcoin booms, which it has, adding an estimated US$1 billion to the electric vehicle maker this past month, Tesla gains, and if Bitcoin crashes, Tesla can always use the losses from its bet on Bitcoin as a tax break against any profits it generates from its core business.
 
Regardless, some traditional finance executives still see Bitcoin and its ilk as nothing more than a larger speculative bubble, driven by retail investors in much the same way that shares of companies like GameStop and AMC Entertainment (+3.45%) were.
 
But it’s hard to ignore Bitcoin’s towering performance over the returns of stocks, gold, commodities and bonds this year.
 
To quote former Chinese leader Deng Xiaoping,
 
“It doesn’t matter if a cat is black or white, as long as it catches mice.”
 
And considering that catch mice it did, some 5% of finance executives and CFOs in a recent Gartner Survey, reported that they intended to add Bitcoin to their balance sheets before the end of the year.
 
According to one senior finance executive,
 
“The costs of being wrong about Bitcoin are a lot lower than the costs of not participating. Imagine if we put Bitcoin on the books and we lose it all, ok too bad.”
 
“But imagine if we didn’t (allocate to Bitcoin) and a year from now the CEO looks and sees that we had that opportunity and didn’t do it, suddenly you have your CFO looking for a new job as someone more ‘dynamic and forward-looking’ replaces them.”  
 

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Feb 22, 2021

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