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Novum Alpha - Daily Analysis 2 March 2021 (10-Minute Read)

It may or may not be over but investors don't seem to care anymore - the carnage in the U.S. sovereign debt market that is.

 
Terrific Tuesday to you as markets have taken a turn for the better! 
 

In brief (TL:DR)

 
  • U.S. stocks finished strongly on Monday with the S&P 500 (+2.38%) and blue-chip Dow Jones Industrial Average (+1.95%) down, while the tech-centric Nasdaq Composite (+3.01%) as the carnage in U.S. Treasury yields subsides. 
  • Asian stocks extended a global equity rally Tuesday as investors shook off concerns about the impact of higher bond yields.  
  • The benchmark U.S. 10-year Treasury yield held at 1.420% as investors priced in a normalization of yields. 
  • The dollar was steady against most major peers. 
  • Oil slipped back with April 2021 contracts for WTI Crude Oil (Nymex) (-1.35%) at US$59.82 ahead of a key OPEC+ meeting this week that may return more supply back to the market as cash-strapped oil producers need money to keep their economies running. 
  • Gold edged lower with April 2021 contracts for Gold (Comex) (-0.48%) at US$1,714.70 as investors rotated into risk instead. 
  • Bitcoin (+6.52%) rallied after a volatile weekend session to US$49,421 on the back of a potential crackdown on Bitcoin mining in Inner Mongolia and with outflows from exchanges racing ahead of inflows (outflows suggest that traders are looking to hold Bitcoin in anticipation of higher prices). 
 

In today's issue...

 
  1. Asian Opportunities Aplenty in a Sea of Liquidity 
  2. Should You Take Money Off the Table? 
  3. China Clamps Down on Cryptocurrency Miners 

Market Overview

 
It may or may not be over but investors don't seem to care anymore - the carnage in the U.S. sovereign debt market that is. 
 
Because even as yields edged up yesterday, those gains were capped, and investors shrugged off Treasury yields to pour back into equity markets in search of bargains.  
 
In Asia, markets opened Tuesday higher with Tokyo's Nikkei 225 (+0.32%), Sydney’s ASX 200 (+0.38%), Hong Kong's Hang Seng Index (+0.28%) and Seoul's Kospi Index (+1.71%) all up.
 
 
1. Asian Opportunities Aplenty in a Sea of Liquidity
 
  • Goldman Sachs is recommending short term bets on Asian stocks more exposed to economic recovery 
  • Cyclical Asian stocks likely to fair better than Southeast Asian sectors which are more sensitive to U.S. Treasury yields
 
Just like how a broken clock tells the time correctly twice a day, investors who were looking for guidance from U.S. Treasury yields as to where the market was headed too next, may have missed the buying opportunities that presented themselves.
 
In a note to investors on Monday, investment bank Goldman Sachs (+3.67%) wrote that Asian growth can offset the risks surrounding rates, but prefers Asian cyclicals and short versus long duration ideas – translated that means look for stocks that are more exposed to the economy and take short term profit.
 
Sound advice given the current state of the markets.
 
With tech increasingly frothy and the potential downside from premium valuations high, Goldman Sachs is suggesting Asian cyclical stocks as providing a potential opportunity for returns.
 
Asian equities were not spared the buffeting from bond yields last week, but despite the 3.7% plunge of the MSCI Asia Pacific Index last Friday, it continues to outperform the S&P 500’s advance this year by 3%.
 
Given that Asia has managed the coronavirus pandemic relatively better than the U.S. and Europe, many analysts are betting that Asia’s economic revival will outdo the U.S. and Europe, positioning the region for more than 8% growth this year, according to International Monetary Fund projections.
 
And even if U.S. Treasury yields should spike again, some are suggesting that could support a rotation to Asian value stocks.
 
Yields on government debt have risen on the risk of faster inflation as economies rebound.
 
And while higher borrowing costs can dull the appeal of stocks, some strategists point out that the U.S. is more exposed to yields than Asia, simply because America’s tech sector and growth shares constitute a greater proportion of its market and indices.
 
Asian chipmakers look particularly attractive, especially TSMC (+1.49%) and Samsung Electronics (+2.06%) – the recent shortage of chips for the automotive industry, backlogged order books and some exposure to growth sectors all bode well for these Asian giants.
 
Chinese firms especially HaiDiLao Hotpot (+0.07%), a chain of hotpot restaurants and Chinese fashion brand Meters / Bonwe (+3.70%) look particularly attractive as the Chinese economy opens up and returns to normalcy.
 
Part of the focus on North Asian equities is also because, as noted by Goldman Sachs, North Asia is the most sensitive to economic growth, while Southeast Asia, where the majority of debt is denominated in dollars, is most sensitive to interest rates. 
 
 
2. Should You Take Money Off the Table?
 
  • Conventional financial wisdom suggests taking profits regularly - but that's because managers are often judged by the profits they make and not the ones they miss 
  • Individual investors can consider reducing the number of bets, but putting plenty of work into each bet and sticking with them 
 
So, you took a timely bet on Tesla (+6.36%) and now you’re sitting on some fine paper profits – should you be taking some of the money off the table and bringing the family to the Poconos?
 
Conventional wisdom in the financial industry says that it’s never wrong to take a profit – in fact a client is unlikely to be unhappy or indeed even notice if you sell an asset that has subsequently gone up significantly (except maybe for Bitcoin), because the loss of foregone upside is not captured in performance data, but downside is.
 
The temptation therefore for managers is to lock in results, especially if they have beat projections, rather than to keep chasing upside, but is this sound advice for individual investors as well?
 
Maybe not.
 
For clients, investing is asymmetric – the upside of not selling is nearly unlimited (theoretically) while the downside is naturally capped – for the client, it can be wrong to take profit and to do so often, because the data shows that when individual investors increase their velocity of trading, they tend to underperform investors who did very little.
 
Research by Hendrik Bessembinder, a professor at Arizona State University has found that nearly 60% of global stocks over the past 28 years did not outperform the U.S. one-month Treasury Bill.
 
But Bessmbinder’s research also revealed that about 1% of companies accounted for all the global net wealth creation – it’s why company founders very seldom relinquish their shares.
 
With as much as 99% of companies just a distraction from making the serious money, investors need a vastly different mentality when it comes to investing – focusing on the possibility of extreme upside, and not the crippling fear of a somewhat capped downside.
 
Bessembinder made it clear that it was the long term compounding of superstar companies’ share prices that mattered most, with investing requiring patience to deal with the inevitable ups and downs that such companies experience as well as the ability to delay significant gratification.
 
But what about GameStop (+18.34%) then?
 
Had an investor bought at a high, they’d now be sitting on a pile of paper losses.
 
Therein lies the difference, GameStop was not an example of a company that Bessembinder’s research was considering, instead it advocates a more Warren Buffett-esque approach to investing – mountains of copious study, few investments, and sticking with them.
 
In the case of GameStop – speculators should absolutely have taken money off the table, otherwise they would have found no money (and possibly no table) when they went back to it. 
 
 
3. China Clamps Down on Cryptocurrency Miners
 
  • Inner Mongolia, which is estimated to be responsible for around 8% of the Bitcoin mining activity, is set to ban cryptocurrency mining
  • Move by Inner Mongolia regional authorities has sent the price of Bitcoin spiking, but most cryptocurrency activities for the Chinese tend to be located offshore anyway, with the exception of mining
 
First they came for the ICOs, and I did not speak out –
Because I never launched an ICO 
 
Then they came for the exchanges, and I did not speak out –
Because I was trading on decentralized exchanges
 
Then they came for the miners, and I did not speak out –
Because I was not a miner
 
Given that China is estimated to be responsible for around 65% of the world’s Bitcoin mining capability, the ban by China’s Inner Mongolia region, which is home to substantial Bitcoin mining facilities, immediately sent Bitcoin’s price higher.
 
The ban is expected to kick in next month, with Inner Mongolia looking to ban cryptocurrency mining by the end of April.
 
Inner Mongolia is particularly favored by cryptocurrency miners because of its abundance of cheap power, with the stated aim of the ban on cryptocurrency mining to constrain growth in energy consumption to about 1.9% this year.
 
China has always been the elephant in the room when it’s come to cryptocurrencies, with Beijing vacillating from looking the other way on the industry, to harsh crack downs, amid concerns over speculative bubbles, fraud and energy waste.
 
Inner Mongolia’s draft policy banning cryptocurrency mining comes just weeks after the province was blasted for being the only region to fail to control energy consumption in 2019.
 
Beijing has made the management of climate change a key development priority and unfortunately for cryptocurrency miners in Inner Mongolia, the bulk of its power is generated by highly pollutive coal-fired power stations.  
 
But it’s hardly just cryptocurrency mining that has contributed to power consumption in Inner Mongolia – the region is famous for cheap energy and has attracted investment from a plethora of power-hungry industries, including aluminum and fero-alloy smelting.
 
Inner Mongolia also accounts for some 8% of global Bitcoin mining computing power, according to the Bitcoin Electricity Consumption Index, compiled by Cambridge University.
 
The local crackdown on cryptocurrency mining is reviving old fears that Beijing may pick up the gauntlet and go on another purge of the industry.
 
Beijing banned initial coin offerings in 2017 and banned cryptocurrency exchanges within its borders shortly thereafter.
 
Once home to as much as 90% of cryptocurrency trading, the bulk of mining, including the likes of Bitmain Technologies, one of the biggest makers of cards specifically for the cryptocurrency mining business, have since fled offshore.
 
Even today, the biggest cryptocurrency exchanges globally by volume are all owned and run by Chinese citizens, albeit offshore. 
 

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Mar 02, 2021

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