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Novum Alpha - Daily Analysis 3 September 2021 (10-Minute Read)

Confidence that the U.S. economy is coming back was demonstrated as cyclicals, or stocks more heavily exposed to the economy rose yesterday.

 
A fabulous Friday to you as stocks fire up towards the weekend. 
 

In brief (TL:DR)

 
  • U.S. stocks were higher on Thursday with the Dow Jones Industrial Average (+0.37%), the S&P 500 (+0.28%) and tech-centric Nasdaq Composite (+0.14%) all seeing modest gains ahead of a U.S. jobs report that will shape sentiment.
  • Asian stocks rose Friday after cyclicals led Wall Street to a record high.
  • Benchmark U.S. 10-year Treasury yields edged up to 1.29% (yields rise when bond prices fall) as investors grew increasingly bullish.   
  • The dollar held a drop.
  • Oil was near US$70 a barrel with October 2021 contracts for WTI Crude Oil (Nymex) (-0.31%) at US$69.77 on bets that the market can absorb additional supply from OPEC+ as the U.S. Gulf grapples with Hurricane Ida’s impact.
  • Gold was higher with December 2021 contracts for Gold (Comex) (+0.14%) at US$1,814.00.
  • Bitcoin (-2.29%) fell to US$48,573 as a push towards US$50,000 also ran premature with inflows leading outflows (inflows suggest that investors are looking to sell Bitcoin in anticipation of falling prices). 

 

In today's issue...

 
  1. Guess what’s back, SPAC again?
  2. Crazy Middle Class Asians
  3. Psst, want to make 7% on your dollar deposits? You can with crypto.
 

Market Overview

 
Confidence that the U.S. economy is coming back was demonstrated as cyclicals, or stocks more heavily exposed to the economy rose yesterday. 
 
On the horizon, a crucial jobs report out of the U.S. is due later, which will help to set the narrative for continued U.S. Federal Reserve intervention in the economy. 
 
If the rate of job growth increases, hawks at the Fed may find the necessary fuel they need to push the Fed to start paring down asset purchases.
 
In all likelihood however, the deleterious effect of the delta variant on business spending and hiring will become apparent from the jobs report and investors can expect a "Goldilocks" report that shows sufficient hiring to warrant positive sentiment, but not so high as to shake off Fed intervention. 
 
Asian stocks were mostly higher on Friday's morning session, spurred on my Wall Street's resilience, with Tokyo's Nikkei 225 (+0.36%), Seoul's Kospi Index (+0.51%) and Sydney’s ASX 200 (+0.48%) up, while Hong Kong's Hang Seng (-0.89%) was down from continued concerns over China's crackdown of its various economic sectors. 
 

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1. Guess what's back, SPAC again?

 
  • Singapore Exchange (+1.49%) accepts SPACs into the fold 
  • Cynical investors will question the timing for the SPAC acceptance, especially as regulators circle around the listing vehicle elsewhere and investor appetite and interest has waned 
 
“Guess what’s back, back again. SPAC is back, tell a friend, guess what’s back, buy that SPAC, guess what’s back…”
 
– sung to the tune Eminem’s “Without Me” off the album The Eminiem Show © 2002
 
Never mind that it appears SPAC fever may have all but cooled off in the U.S., Singapore Exchange has become Asia’s first major bourse to allow blank check companies to list, even as the practice invites more intense scrutiny from regulators elsewhere.
 
Special purpose acquisition companies or SPACs are shell companies listed on a stock exchange with the purpose of acquiring a private company, thus helping that private company go public without the traditional rigmarole and cost of an IPO.
 
SPACs have a shelf life and if no acquisition is made with a certain period of time (typically 2 years), the investment monies are returned to investors, less the expenses incurred during that time.
 
The practice has come under increasing scrutiny from regulators because as SPACs boomed, many of them acquired companies on inflated valuations or shaky business cases, so as to ensure that the SPAC did not expire, while others that did expire saw their arrangers and promoters walk away with fat fees.
 
While Singapore’s initial SPAC proposal had planned to introduce more stringent rules to avoid some of the pitfalls inherent in the listing method, it’s since dialed them back somewhat with entities only requiring a minimum market cap of US$111 million, and with limits on shareholder redemption rights removed.
 
Singapore Exchange has struggled to remain relevant, with fast-growing and high profile companies turned off by its low liquidity and valuations, which prompted a string of companies to delist.
 
CEOs of Singapore-listed companies cite the high compliance costs coupled with low liquidity as two major reasons for not pursuing listings in Singapore.
 
Even some of Singapore’s most high profile companies like Razer (-0.52%), Sea (-0.26%) and Grab have all opted to list overseas.
 
SPACs have raised some US$79.4 billion globally last year and Singapore Exchange is hoping the vehicle could change the bourse’s fortunes, but comes at a time when global SPAC interest is waning, both because of increasing regulatory pressures and rich valuations.
 

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2. Crazy Middle Class Asians

 
  • Asian middle class set to boom over the next decade 
  • Trend augers well for some of Asia's tech unicorns, especially those catering to Southeast Asia
 
Contrary to the hit Hollywood movie Crazy Rich Asians, the vast majority of Asians are not rich, but they could be middle class very soon which could have a significant impact on the region’s companies and prospects.
 
According to analysis from the World Data Lab, more than 1 billion Asians are set to join the global middle class by 2030, less than one decade from now.
 
The World Data Lab study noted that the pandemic will prove just a temporary pause in the world economy’s great demographic shift, with per capita spending by households in Asia moving from US$11 a day to US$110.
 
Powering this shift are the two most populous nations of China and India, making up over three quarters of the rising middle class, but countries like Indonesia are adding to the count as well.
 
While Asian countries already make up over half of the world’s middle class, they only account for 41% of that group’s consumer spending, a share which is expected to exceed 50% by 2032.
 
And that could have a tremendous impact on some of the region’s tech firms that serve them, including Grab, Sea and Tokopedia.  
 
The success of Sea’s Shopee e-commerce app has already helped founder Forrest Li become the richest person in Singapore.
 
And with the rising middle class, super apps like Grab, Shopee, Tokopedia are all at the early stages on their growth trajectory.
 
The rising middle class would also see themselves re-investing their newfound wealth back into the very companies which they use the services of, powering a virtuous cycle of growth.
 
In terms of sectors, some of the hottest ones to look out for in the coming years are payment services, in particular digital, given how disparate and diverse Asia is, as well as e-commerce and logistics.
 
Logistics in Asia is particularly tricky, given how road conditions vary and street signs and house numbers are not always obvious.
 
In that respect, local knowledge is key to deliver last leg logistics and those firms that specialize in the service may help power their own rise as they contribute to that of the e-commerce giants in Asia. 
 

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3. Psst, want to make 7% on your dollar deposits? You can with crypto

 
  • Regulators are scrutinizing high-yielding cryptocurrency deposits more closely 
  • Lack of investor protection and deposit insurance just some of the many risks faced by depositors using cryptocurrencies to generate higher yields on their monies 
 
With the average interest rate for savings account in the U.S. at 0.06%, it’s no wonder that scores of depositors are looking at cryptocurrency firms offering a whopping 7% per annum yield on their accounts.
 
One small catch though, those yields are delivered on dollar-based stablecoins, pegged at US$1 to the actual dollar.
 
But for investors who can take that leap of faith into a cryptocurrency equivalent of the dollar, that’s just the starting point, with annual yields as high as five-digits for other cryptocurrencies available depending on one’s appetite for risk. 
 
As liquidity has flooded the financial markets, investors are looking everywhere for yield and are increasingly finding it in the most unlikely places like interest-bearing cryptocurrency accounts.
 
Billions of dollars in deposits in these high-yielding cryptocurrency accounts are attracting regulatory scrutiny as authorities liken them to unregistered securities that aren’t properly disclosing their risks to investors.
 
In the U.S., firms that offer such cryptocurrency accounts include Gemini, Celsisus Network and BlockFi, but exchanges like Binance and FTX also offer something akin to these services through their lending accounts, where depositors “lend” cryptocurrencies and receive interest.
 
Because these cryptocurrency accounts look, act, and feel like regular deposit or savings accounts, some regulators are concerned that depositors may be lulled into a false sense that they are as good as the FDIC-backed accounts which yield 0.06%.
 
But without federal insurance, investors could lose their money if the crypto firms can’t make good on these deposits.
 
Worse, the lack of transparency as to how these returns are derived also mean that these “guaranteed” yields could encourage the ascent of Ponzi schemes (where new deposits are used to pay off the old ones).
 
Given the speed at which the cryptocurrency space is developing, regulators are having to play catch up, with scant resources to police all the various areas of innovation, from decentralized finance or DeFi, to crypto lending.
 
For investors though, the yields may be too tempting to pass up.
 
 

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Sep 03, 2021

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