Novum Alpha - Daily Analysis 29 June 2022 (10-Minute Read)
A wonderful Wednesday to you as stocks wind lower amidst continued growth fears and increased volatility in the bond markets.
In brief (TL:DR)
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In today's issue...
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Market OverviewGlobal stocks are being whipsawed on an almost daily basis, with investors swinging from optimism to pessimism, from concerns over growth to worries about recession, all against a backdrop of inflation.
Over the long-term, stocks have performed admirably against inflation, but investors are understandably sticking to cash for now, until things become more certain.
There are signs that China may be loosening up its Covid-19 protocols in an effort to reintegrate with the global economy, but investors are not holding their breath as measures instituted are also just as quickly rolled back only to be replaced by harsh lockdowns and fresh quarantine requirements.
Asian markets went into Wednesday in the red with Tokyo's Nikkei 225 (-1.13%), Seoul's Kospi Index (-1.58%), Hong Kong's Hang Seng Index (-1.63%) and Sydney’s ASX 200 (-1.11%) all down in the morning trading session.
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Backtest returns are derived from live-traded proprietary capital but must be interpreted purely as a backtest and not inclusive of fees. The Novum Alpha All Weather Crypto Fund (“the Fund”) will be administered using investment policies, objectives, guidelines and restrictions that are in all material respects equivalent to those used when proprietary capital had been traded. However, because the trading using the proprietary capital was not via a registered mutual fund, such trading was thus not subject to the same investment restrictions as may be applicable to the Fund. If it had been, the performance may have been lower. Past performance is not indicative of future returns. Backtest performance is not indicative of future returns. Please see the Offering Documents for risk disclosures.
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1. Finding Yield in the Frontier Markets
Given how sovereign debt yields have been soaring of late, it would come as a surprise that some investors are still yield-starved and willing to stomach higher levels of risk in the pursuit of profit.
With indicators of duress emerging in bond markets suggesting that poorer nations will soon face a slew of restructuring, plucky investors are picking through the rubble and looking for gems. In the wake of Sri Lanka’s economic collapse, panic selling was rampant, sending the average yield in junk-rated emerging economies close to 900 basis points north of U.S. Treasuries, which is the highest risk premium seen in 13 years (except Covid’s hit in 2020), according to JPMorgan Chase data. However, early fears of widespread contagion in emerging market debt may have been overplayed and fund managers are looking for bargains in emerging market debt that may be more resilient to default or restructuring. There is a growing sense amongst managers that frontier markets have been excessively penalized in the recent selloff and some currently offer very attractive yields. And even if debt restructuring were to occur, bonds of frontier markets stand to offer greater recovery values compared to current bond prices, at least according to Barclays and Bluebay Asset Management. The selloff in frontier markets started last year, caused by investors de-risking the riskiest parts of their portfolios in light of the U.S. Federal Reserve’s tightening policy, which also sent Treasury yields soaring. Yields in frontier market bonds soared, compared with the safest Treasuries, to compensate investors for the additional risk of holding these securities. But the possibility of more sanguine Fed policy in the later part of this year, could put some investors in a good position to capture the high yields in frontier assets at the moment, especially given that the short-term default risk appears to have abated. |
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2. Asian Central Banks Buffet Currencies Against Dollar's Rally
Central banks in Asia have been saving for a rainy day for decades and now that day has come.
In the aftermath of the 1997 Asian Financial Crisis, reforms and risk management saw Asian central banks beef up dollar reserves and other reserve assets, to respond appropriately should their currencies come under pressure once again. Now as the U.S. Federal Reserve embarks on its most aggressive series of interest rate hikes in decades, years of accumulating foreign-exchange reserves has enabled central banks in Asia to ante up and shore up their rapidly weakening currencies against a strengthening dollar. But that’s not to say that Asian central banks aren’t taking body blows. As of June 17, Thailand’s reserves have fallen to US$221.4 billion, their lowest level in over two years, while Indonesia’s reserves are sitting at their lowest level since November 2020. Meanwhile, South Korean and Indian reserves have fallen to their lowest in over a year. While Asian central banks recognize that fighting the Fed is an exercise in futility, at the very minimum central bankers have helped to stabilize their domestic currencies, to prevent a repeat of 1997. According to strategists at Goldman, high-yielding emerging Asian currencies may not expect to see any respite soon as they are likely to be continuously pressured by declining external finances and the ongoing risk-off sentiment sparked by the Fed’s tightening policies. With another large Fed rate hike due later next month, Asian central bankers are bracing themselves for another bout of currency volatility at the worst possible time with high inflation and commodity prices roiling their already pandemic-ravaged economies. Against this backdrop, investors can expect to see some opportunists bet against emerging market currencies. Whereas bets against the Bank of Japan have thus far tested, but not broken its resolve, given that Japan is the world’s second largest holder of U.S. Treasuries, the same can’t be said for other Asian countries. At some point, bets against the Bank of Japan may lose steam and other emerging market currencies, particularly non-commodity exporting nations, could draw a new bout of predatory currency attacks. |
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3. Goldman Sachs downgrades Coinbase Global to "SELL"
Cryptocurrency exchange Coinbase Global has been downgraded to a ‘sell’ rating by Goldman Sachs analysts amid the bearish sentiment pervading the digital asset markets.
Shares of Coinbase Global have largely tracked the decline in cryptocurrency prices, with a 75% slump this year in line with the biggest cryptocurrency by market cap, Bitcoin, which now trades at less than half of what it was worth six months ago. Goldman Sachs analyst William Nance, suggested in a note to clients that Coinbase Global must make “substantial reductions in its cost base” so that it can dampen the deleterious effect of cash burns as “retail trading activity dries up.” To that end, Coinbase Global has been cutting jobs while at the same time rescinding offers to new hires as the so-called Crypto Winter sets in. But while cutting costs is one part of the equation, the exchange also needs to find ways to drum up more revenue in order to make it through the Crypto Winter and on that front, Coinbase Global’s recent discontinuation of Coinbase Pro could be a step in the right direction. Coinbase Pro was intended to be a platform for institutional investors to access cryptocurrencies, but running two separate platforms, one for retail and one for institutional, would be counterintuitive at a time when volumes are starting to fall given the duplication of cost. But could Coinbase Global represent a contrarian bet, one for the future? As of Monday’s close, data compiled by Bloomberg suggests that Coinbase Global has 20 buy ratings, 6 holds, and 5 sell recommendations and the average analyst targets a share price of US$117, well over a 100% from where the exchange currently trades. Coinbase Global remains well-capitalized, and as long as it can keep expenditure in check, has the potential to last out the Crypto Winter, rewarding shareholders who believe in its potential. But the exchange also faces stiff competition from Binance.US, a rival cryptocurrency exchange which has the backing of the world’s largest cryptocurrency exchange by trading volume Binance.com. To that end, Coinbase Global may have its work cut out for it, as Binance.US cutting its trading fees saw an immediate decline in Coinbase Global’s stock price and Binance.US can be a loss-leader for Binance.com, using the ample revenues of its parent to help it weather body blows in a race to the bottom. Investors looking to pick up Coinbase Global on the cheap need to be cognizant of competition from Binance.US, especially if the latter deploys zero-fee cryptocurrency trading, something which will affect Coinbase Global immensely. For Coinbase Global to round the corner, innovation is key and it needs to work well with regulators to find new opportunities in new products such as tokenized securities or other nascent asset classes like NFTs. But the odds of that happening in a hurry are slim to none, especially given that rival offshore exchange FTX’s Sam Bankman-Fried has cozied up with Washington and is now making overtures to acquire retail brokerage app Robinhood Markets (-2.80%). |
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Jun 29, 2022