Start Investing

Novum Alpha - Daily Analysis 13 December 2021 (10-Minute Read)

The U.S. Federal Reserve meets on Wednesday and is expected to speed up stimulus withdrawal, and perhaps open the door to earlier interest-rate hikes in 2022 if price pressures stay near a four-decade peak.

 
A magnificent Monday to you as markets meander their way through a big week of macro news from policymakers.
 

In brief (TL:DR)

 
  • U.S. stocks rebounded on Friday with the Dow Jones Industrial Average (+0.61%), the S&P 500 (+0.95%) and the Nasdaq Composite (+0.73%) all higher as U.S. Consumer Price Index data charted a middle course, with prices rising within economist expectations. 
  • Asian stocks rose Monday on bets that the global economic recovery will weather the omicron virus variant even as tighter central bank policies fight elevated inflation. 
  • Benchmark U.S. 10-year Treasury yields rose about two basis points to 1.50% (yields rise when bond prices fall).
  • The dollar was little changed.  
  • Oil extended gains in the wake of its biggest weekly advance in more than three months with January 2022 contracts for WTI Crude Oil (Nymex) (+1.28%) at US$72.59.
  • Gold continued to rise with February 2022 contracts for Gold (Comex) (+0.15%) at US$1,787.40. 
  • Bitcoin (-0.68%) fell to US$48,891 as the cryptocurrency has yet to shrug off completely the ill-effects of the previous Saturday's flash crash that has left investors still somewhat jittery. 
 

In today's issue...

 
  1. What Happens When an Economy That Has Only Known Growth Shrinks?
  2. Where would an investor place bets on China next?
  3. Bitcoin Isn’t the New Gold
 

Market Overview

 
The U.S. Federal Reserve meets on Wednesday and is expected to speed up stimulus withdrawal, and perhaps open the door to earlier interest-rate hikes in 2022 if price pressures stay near a four-decade peak.
 
About 20 central banks are due to hold meetings this week, including the Fed, the European Central Bank and the Bank of England, with decisions by policymakers likely to have the potential to stir market swings.
 
Traders are also monitoring China’s outlook. Economists predict the nation will start adding fiscal stimulus in early 2022 after the country’s top officials said their key goals for the coming year include counteracting growth pressures and stabilizing the economy.
 
In Asia, markets rose Monday with Tokyo's Nikkei 225 (+0.96%), Sydney’s ASX 200 (+0.56%), Seoul's Kospi Index (+0.61%) and Hong Kong's Hang Seng (+1.29%) all higher in the morning trading session.
 
 

1. What Happens When an Economy That Has Only Known Growth Shrinks?

 
  • With the Chinese economy now on a sharp reversal, a people that have only ever known growth may soon have to contend with a shrinking economy.
  • On this trajectory, China’s economy will shrink for the first time in over three decades (it grew even in the face of the 2008 Financial Crisis).
     
Ever since the market reforms of Chinese leader Deng Xiaoping, China and the Chinese have only ever known growth.
 
Whether it’s been stocks or real estate prices, Chinese poured trillions of dollars into conspicuous consumption and investment as if the party would never end.
 
But with the Chinese economy now on a sharp reversal, a people that have only ever known growth may soon have to contend with a shrinking economy.
 
Not if the Chinese Communist Party has something to say about it.
 
Quarterly GDP growth according to China’s National Bureau of Statistics hit a “post-pandemic” (it’s not really over yet) high of 18.3% for the first three months of this year, before dropping by more than half to 7.9% at the halfway mark of 2021 and most media estimates forecast growth to halve further to 3.9% for the third quarter.
 
On this trajectory, China’s economy will shrink for the first time in over three decades (it grew even in the face of the 2008 Financial Crisis).
 
To be sure, the bulk of this turnaround has been manufactured by Beijing, intending to unwind some of what it views as the worst excesses of capitalism, including copious amounts of leverage and soaring inequality.
 
But the worsening property market slump and abandoned real estate projects are rippling through the Chinese economy, feeding weak consumption growth and fueling declining sentiment.
 
Making matters worse, fresh Covid-19 outbreaks have damaged business and consumer confidence.
 
Which is why expectations are rising that the Beijing will start unveiling a list of stimulus measures to ensure the economy doesn’t completely tank ahead of a key leadership conclave next year, which is widely expected to cement Chinese President Xi Jinping’s rule for life.
 
Language emanating from recent key policy meetings have been a lot more dovish, with an annual Central Economic Work Conference concluded last Friday noting that the top priority for next year is “ensuring stability” and to “front load” policies that will keep the monetary stance flexible and appropriate.
 
While curbs on the property industry are widely expected to remain for this year, most China watchers expect fewer regulatory surprises for next year, compared with the crackdowns on technology, education and entertainment this year.
 
Beijing may also eventually be forced to roll back some of the worst excesses of the property market crackdown.
 
With 70% of the Chinese economy and some 29% of GDP deriving from the real estate sector, measures like reducing the reserve requirement ratio for banks may improve liquidity conditions, but as the number of real estate projects start to go unfinished or fail, there will be rising pressure to do more.
 
 

2. Where would an investor place bets on China next?

 
  • Ensuring a robust economy is part of the social compact the Chinese Communist Party has with its people – trade off some freedoms for all the comforts that money can buy.
  • For investors concerned that valuations elsewhere have overreached, China may present interesting opportunities.
     
Opportunity is often created in adversity and nowhere is this more apparent than in China right now.
 
To be sure, the Chinese Communist Party has no intention to tank the economy, even though on the surface it may appear that way.
 
Ensuring a robust economy is part of the social compact the Chinese Communist Party has with its people – trade off some freedoms for all the comforts that money can buy.
 
But global investors spooked by Beijing’s crackdown in technology, real estate, gaming and education will be wary of looking for the next big hit out of the Middle Kingdom, spooked that they could get smoked the same way other investors did this year.
 
Before the pandemic, investing in stocks in the luxury sector and Chinese internet giants like Alibaba Group Holdings (+3.14%) and Tencent Holdings (+2.68%) was virtually a license to print money.
 
But since August last year a shift towards so-called “common prosperity” meant that there were no more sacred cows in China’s economy, even its crown jewel, the property sector, wasn’t spared.
 
Since then, a clutch of sectors that narrow the wealth divide rather than perpetuate it have found favor with some investors and Chinese President Xi Jinping’s vision for China also looks poised to favor certain industries over others, which could allow investors to profit from that shift.
 
In a year that has seen global stock indices rise, Hong Kong’s Hang Seng Index is down 11.32% while its Shanghai counterpart, the CSI 300, is down 2.41%, versus the MSCI All Country World Index, which is up 17.08%.
 
For investors concerned that valuations elsewhere have overreached, China may present interesting opportunities.
 
Instead of luxury products and flashy brands, a return to staples and durable goods that cater to the budget-conscious may do well in the coming years in China and riding atop a wave of increasing nationalism, Chinese sportswear brands like Li Ning (-1.39%) and Anta Sports Products (-1.01%) may do well.
 
As are restaurant chains like Haidilao International Holding (+0.11%) and Chinese homegrown cosmetics companies SYoung Group (+1.07%) and Yatsen Holding (-2.34%).
 
With Beijing attempting to attain self-sufficiency in chip manufacture, prospects look good for companies like GigaDevice Semiconductor Beijing (+0.17%), Hangzhou Lion Electronics (-0.29%), Iflytek (+0.43%) and Nari Technology (+8.68%).
 
As rising healthcare costs become a bugbear for ordinary Chinese, generic drug makers, especially those that license from foreign companies are likely to do less well than homegrown pharmaceutical firms at the bleeding edge of innovation.
 
Companies like Beijing Tongrentang (+2.36%) which are at the forefront of the traditional Chinese medicine space are expected to punch above their weight as the industry is a source of national pride and has the explicit support of Chinese President Xi Jinping.
 
Others like Walvax Biotechnology (+0.34%), Wuxi Apptec (-2.36%) and Lepu Medical Technology Beijing (+0.23%) are also worth watching.
 
Finally, China’s attempt to wean itself off highly pollutive coal power generation mean that wind and solar technology firms will dovetail nicely with Xi’s desire for high-level development and a cleaner environment.
 
Electrification of vehicles and renewable energy generation are expected to feature well and companies worth monitoring include Contemporary Amperex Technology (+2.45%), Shanghai Putailai New Energy Technology (-8.94%), BYD (+0.027%) and Sungrow Power Supply (-0.45%).
 

Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...

 

 

 

3. Bitcoin Isn't the New Gold

 
  • While bitcoin has been subject to the same criticisms that gold has endured – that it doesn’t do anything, pays no interest or dividends and doesn’t reflect the performance of the economy, it has been feted as a store of value.
  • Both gold and bitcoin are also seen as protection against the systematic debasement of fiat currencies by governments and central banks, which tend to create progressively more supply.
 
Bitcoin maximalists are quick to point out how the cryptocurrency’s deflationary nature, make it akin to the role of gold in a portfolio, as store of value and as a hedge against inflation.
 
Consider that 2,000 years ago, the financial system consisted almost exclusively of gold – there were no stocks, no bonds or anything else by way of financialization outside of informal loans.
 
Raising armies and plundering neighboring countries revolved exclusively around gold and the ability to obtain it, secure it and better yet, coin it.
 
And for the next 2,000 years or so, finance was relatively straightforward, with the joint-stock company (a Dutch invention) coming around the 1600s.
 
Finance has only fairly recently become complex, with “simple” derivatives like futures and options morphing into things like credit-default swaps and collateralized debt obligations only crystalizing in the last two decades.
 
Dubbed “financialization,” these shifts underscore how paper wealth has played an increasingly larger role while hard assets such as gold, have taken a backseat.
 
While bitcoin has been subject to the same criticisms that gold has endured – that it doesn’t do anything, pays no interest or dividends and doesn’t reflect the performance of the economy, it has been feted as a store of value.
 
Just like gold, there’s a finite amount of bitcoin and it becomes progressively more difficult to mine over time.
 
Both gold and bitcoin are also seen as protection against the systematic debasement of fiat currencies by governments and central banks, which tend to create progressively more supply.
 
But it’s financialization where cryptocurrencies really stand out.
 
With cryptocurrencies just over a decade old, and whereas in the beginning there was only bitcoin, there are more cryptocurrencies doing different things today.
 
Some like ether, have cash flows and can potentially be valued on that basis and just like gold has in the past, the dominance of bitcoin relative to other cryptocurrencies will decline over time, the same way that gold has in the context of the broader financial market.
 
While this doesn’t mean that the price of bitcoin necessarily goes down, it does mean that the altcoins with utility, especially those that power smart contracts or are used in gaming, will increase in value over time, relative to bitcoin.
 
 

What can Digital Assets do for you?

 
The flagship Novum Alpha Global Opportunity Digital Asset Fund ("the Fund"), a capital growth fund that offers a regulated and familiar investment vehicle for accredited and institutional investors to participate in the digital asset universe is pleased to announce its third month of trading has seen consistent performance, with a return of +4.19% in November, adding to the +13.22% for October 2021 and marking three straight months of gains with +2.19% recorded in September. 
 
With almost a decade trading both digital assets and financial instruments, the Fund represents a blend of our best quantitative strategies melded with a discretionary overlay that provides investors with the most comprehensive and holistic approach to digital assets on the market today. 
 
If this is something of interest to you, or if you'd like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.  

Dec 13, 2021

Get the Novum Alpha newsletter delivered to your inbox daily


Important Risk Information



The information provided on this site is for informational purposes only. It is not to be construed as investment advice or a recommendation or offer to buy or sell any security. Prospective clients should always obtain and read an up-to-date product and/or services description or prospectus before deciding whether to invest. Any views expressed herein are those of Novum Alpha SPC (“the Company”) are based on available information, and are subject to change without notice. There are no guarantees regarding the achievement of investment objectives, target returns, or measurements such as alpha, tracking error, asset weightings and other information ratios. The views and strategies described may not be suitable for all clients. The Company does not provide tax or legal advice. Prospective subscribers should consult with a tax or legal advisor before making any investment decision. Investing in any investment product entails risks and there can be no assurance that the Company avoid incurring losses or achieve any of a prospective subscriber’s investment goals.


Performance quoted represents past performance, which is no guarantee of future results. Investment and principal value will fluctuate, so you may have a gain or loss when assets are sold. Current performance may be higher or lower than that quoted product’s expenses and other liabilities, and such product may be unable to meet its investment objective