Novum Alpha - Daily Analysis 22 July 2022 (10-Minute Read)
A fantastic Friday to you as Chinese tech firms helps sentiment after setback from social media app Snap's dismal quarterly results.
In brief (TL:DR)
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In today's issue...
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Market OverviewA dip in the dollar in recent days suggests that less fear in markets has helped to put global stocks on course for their best week in a month, paring this year’s equity market rout to about 18%.
But angst about the looming damage from high inflation and rapidly rising interest rates is proving hard to shake despite a tempering in expectations of just how aggressive the U.S Federal Reserve will be.
Traders are also monitoring U.S. President Joe Biden’s condition after he tested positive for Covid-19 and showed mild symptoms.
Asian markets were mixed on Friday with Tokyo's Nikkei 225 (+0.42%) and Hong Kong's Hang Seng Index (+0.15%) up, while Seoul's Kospi Index (-0.51%) and Sydney’s ASX 200 (-0.02%) were down.
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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. Keep the Stock, I'll Take Cash Thank You
One of the biggest challenges for a prospective employee is trying to figure out if they should accept a more modest package at their next jump to receive more stock.
In the over a decade since the U.S. Federal Reserve started implementing its loose monetary policies in the wake of the 2008 Financial Crisis, stocks have been on a tear and few employees balked at the idea of taking more stock for less upfront salary.
But a compensation strategy that has worked for so many years has now left many employees falling behind as tighter monetary conditions see stocks fall.
According to a Credit Suisse study conducted by Patrick Palfrey, a senior equity strategist at the bank, companies that have outsized stock-based compensation programs have trailed the broader market by 9.2% this year alone.
Tech companies and newly public firms expected to deliver outsized returns have underperformed as the Fed pulls back on years of excess liquidity and seen stocks of these companies fall out of favor with investors who rotated into value stocks as the central bank is in the fight of its life against inflation.
Palfrey’s notes that although the benefits of equity compensation are clear, they also increase a company’s risk profile and add stress in a down market.
In the fiscal and monetary surge during the pandemic, companies that used stock-based pay to lure and retain talent at the promise of substantial upside in their stock prices have now seen many of their lofty valuations fall back down to earth.
With U.S. inflation running white hot, bets on future growth have been scaled back as the Fed increases interest rates,
But prospective and existing employees negotiating packages and promotions should do well to note that even if the current market slump turns into a recession, historically growth companies with high-flying stocks have outperformed the benchmark by around 1.8% on average over the past 17 years.
To that end, employees and prospective hires are taking a bet on the long-term growth prospects of their employers and the ability to convert growth into earnings.
Lower stock prices now also mean that more generous stock packages can be negotiated, given the depressed equity prices, on the assumption that the Fed won’t raise rates indefinitely.
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2. European Central Bank Hikes Rates
For the first time in over a decade, the European Central Bank (ECB) has raised interest rates by a staggering 0.50%, bringing deposit rates to 0%, in an effort to rein in soaring eurozone inflation.
With eurozone inflation hitting a record high of 8.6% in the year to June, over four times the ECB’s target of 2%, ECB President Christine Lagarde acknowledged that it was “time to deliver.”
The ECB’s rate increase comes in the wake of Italian Prime Minister Mario Draghi’s dramatic resignation as Italy descends into turmoil amid soaring prices of food and fuel, which sparked a selloff in Italian bonds and stocks.
Although the ECB has raised borrowing costs, it’s also pledged to embark on a fresh bond-buying program aimed at countering the surge in interest rates for the eurozone’s most vulnerable governments.
Speaking at a press conference after raising interest rates, Lagarde noted,
“We would rather not use (the new program), but if we have to use it, we will not hesitate.”
Given the soaring yields on the bonds of the eurozone’s weakest economies, Lagarde will likely have to implement the bond-buying program sooner rather than later, to stave off a sovereign debt crisis similar to what happened in 2008.
Lagarde’s pledge to help its weaker neighbors has so far put a lid on rapidly rising yields in Greek, Portuguese, Spanish and Italian bonds, but rhetoric can only go so far.
The ECB’s rate hike helped to lift the euro before paring gains to trade at US$1.019, a historically depressed level against the dollar.
When the ECB last raised rates in June 2000, over a year after the launch of the euro, it was forced to reverse the moves just a few months later as the eurozone became embroiled in a sovereign debt crisis.
The ECB is facing its biggest challenge in decades and having to manage soaring eurozone inflation caused by surging energy and food prices because of Russia’s invasion of Ukraine, without dragging the region into a recession even as business activity and consumer confidence has fallen to record lows.
It’s not clear if the ECB can stave off another sovereign debt crisis, given the complexities of managing the economic diversity of the eurozone which operates under a single currency, but where each country issues its own sovereign debt, of varying quality and demand.
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3. Forget Cash, Workers Still Accept Crypto
While the cryptocurrency markets remain in a bear market, there are still plenty of workers who have not given up on the nascent asset class and even more who are willing to receive payment in digital assets.
According to a survey of 100,000 workers by Deel, which helps companies hire and pay people in over 150 countries, around 5% of all payments accepted by remote workers was taken in crypto in the first six months of this year, up from 2% in the last six months of 2021.
Unsurprisingly, over two-thirds of crypto-accepting workers hailed from Latin America, which has experienced years of high inflation, well before price pressures became a developed world problem.
Although the recent crypto crash this year, amidst tighter monetary policy has wiped out over US$2 trillion in market cap and obliterated some of the industry’s biggest names, exposing hundreds of thousands of individual investors to steep losses, cryptocurrencies have nonetheless proved to be a lifeline in the far more volatile economies of Latin America.
Latin America already has some of the highest interest rates in the world, but heightened borrowing costs have done little to alleviate runaway inflation.
Aggressive monetary tightening in Latin America which is a key global supplier of copper, corn, wheat, oil and soy, has done little to rein in price pressures.
The Bank of Mexico recently implemented record rate hikes with annual inflation at a 21-year high, while Brazil raised rates to combat double-digit inflation.
Argentina, which has long suffered high levels of inflation, raised rates by 3% to a whopping 52% earlier last month.
Yet none of these measures has held back inflation, which is why many remote Latin American workers are more than happy to receive crypto.
Argentina is one of the most popular locations for remote workers to receive their salaries in crypto, to circumvent exchange controls and as a hedge against soaring inflation, with a higher proportion of Argentinian workers getting paid in crypto than anywhere else in the world, according to Deel.
To be sure, Argentina regularly lapses into currency crises and inflation runs at around 60% annually, which could explain why as many as two-thirds of Argentinians invest in crypto, to protect their savings, according to a study by Wunderman Thompson.
Deel’s study also found that a quarter of all workers paid in crypto came from Europe, the Middle East and Africa combined.
Globally, Bitcoin accounted for almost half of all crypto payments, down from two-thirds in the latter half of last year and in line with the benchmark cryptocurrency’s precipitous decline.
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Jul 22, 2022