Novum Alpha - Daily Analysis 15 August 2022 (10-Minute Read)
A marvelous Monday to you as U.S. stocks rallied last Friday but dour data out of China weighed on markets coming into the middle of August.
In brief (TL:DR)
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In today's issue...
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Check out CRYPTO CHAT WITH PAT #2 with Jonas Thurig - Head F10 AsiaWhy are VCs betting big on Blockchain, Crypto and Web3 Startups?
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Market OverviewChina’s central bank unexpectedly cut a key policy interest rate for the first time since January. Data showed slower than expected industrial output and retail sales in the world’s second-largest economy as well as shrinking property investment.
Equity markets in recent weeks have drawn succor from signs of slowing inflation, which stirred hopes of a shift by the U.S. Federal Reserve to less aggressive monetary tightening that can contain price pressures without triggering a recession.
Asian markets paired gains on Monday with Tokyo's Nikkei 225 (+1.14%) and Sydney’s ASX 200 (+0.45%) up, while Hong Kong's Hang Seng Index (-0.61%) was down and Seoul's Kospi Index is closed for a holiday.
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1. Betting on Chinese Stocks - Will Pragmatism trump Politics?
When it comes to cross-border business, it’s almost always personal. Imaging that politics is far removed from the public markets is naïve to say the least, especially when it comes to the world’s two largest economies.
The deadline for Chinese stocks listed on American exchanges is drawing nearer and Chinese state-owned enterprises listed in the U.S. sank in Hong Kong on Monday on dour sentiment.
Not helping matters, another U.S. congressional delegation has visited Taiwan, following in the wake of House of Representatives Speaker Nancy Pelosi’s visit to the island that Beijing considers a renegade province.
China Life Insurance, Aluminum Corp of China (-1.07%) and China Petroleum & Chemical (-0.24%) lost over 2% respectively in early trading, mirroring a decline in their American Depositary Receipts on Friday in U.S. trading.
At the center of the delisting remains an ongoing accounting spat between Beijing and Washington, that would provide American regulators with greater access to the financial data of Chinese firms listed on American exchanges and which the U.S. insists is a necessary prerequisite for maintaining their listed status.
U.S.-listed Chinese firms have already started their exodus from American bourses, heading to exchanges in places like Hong Kong, but finding themselves less than welcome and hoping that Washington and Beijing will find a middle ground.
Some of China’s biggest state-owned airlines could join the exodus as well, denying the capital-intensive business from one the deepest and most liquid capital markets in the world.
Make no mistake about it, neither Washington nor Beijing will benefit from the exodus of Chinese companies listed on American exchanges, yet at the same time, the audit requests are not unreasonable as these firms ought not be allowed to operate to a different standard than the rest of corporate America.
Given that both China and the U.S. have much to lose, it’s entirely possible that an 11th hour deal is reached, with concessions on both sides, that could fuel a rebound in these companies both in Hong Kong and their depository receipts in the U.S. but that would be a highly risk-fueled trade, especially given the state of relations between the two capitals at the moment.
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2. The 60/40 Portfolio Allocation May Not Be Entirely Dead
A portfolio strategy that has survived over three decades can’t really be dead can it? At least not according to a recent MLIV Pulse survey which found that on average, 2 out of every 3 investors still believe a standard 60/40 stock-bond portfolio allocation will beat inflation in the long run.
Investors hewing to a standard 60% equities and 40% bond portfolio have been hammered since last November, as the prospect of rising interest rates and soaring inflation dealt a double-whammy to portfolios structured in that most traditional manner.
Far from diversifying their portfolios and reducing volatility, bonds and stocks moved in virtual lockstep as soaring inflation and rising interest rates have caused traditionally negative correlations to break down.
Typically, stocks move opposite to bonds, but the past several years has upended such long held assumptions.
When central banks cut borrowing costs and flooded markets with liquidity, stocks moved upwards along with bonds, as yields became depressed.
And when the U.S. Federal Reserve reversed policies and raised interest rates, both stocks and bonds were hammered.
On average, investors holding on to a standard 60/40 portfolio mix are down about 10% this year alone, putting such portfolios on track for their steepest losses since the 2008 Financial Crisis.
If it’s any comfort, soaring inflation and central bank policy uncertainty has made losers of practically every investment and portfolio allocation strategy, from Bitcoin, once touted as an inflation hedge, to once high-flying tech stocks.
As a result, investors are more or less doubling down on their existing investment strategies, riding out the volatility and waiting out a better time.
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3. Bitcoin Tests US$25,000 Before Retracing
Bitcoin bulls were given a brief reprieve as the benchmark cryptocurrency topped US$25,000 in thin trading over the weekend before retracing and testing the support at US$24,000 again on Monday in Asian trading (at the time of writing).
The bellwether cryptocurrency, which is seen as a proxy for overall risk appetite in the nascent asset class rose over 2% on Sunday to briefly shoot past US$25,000, while Ether shot past US$2,000 on optimism over an upcoming software upgrade known as the Merge.
Concerns over the global economy have taken center stage this week as China’s surprise factory orders drop has become interpreted as an ominous sign for markets.
Although there remain some investors who are cautiously optimistic that the U.S. Federal Reserve can avoid a recession despite its fight against inflation, there is growing concern that a global downturn could be sparked off by the world’s second largest economy.
Cryptocurrencies have struggled for the most part of this year, after hitting all-time-highs last November and against a backdrop of inflation and tightening monetary policy weighing on risk appetite.
Bitcoin, Ether, and other cryptocurrencies have now all fallen by over 50% this year alone and even though weaker U.S. inflation data this month has helped spark a rebound, many investors remain skeptical about the durability of the reversal.
The Fed has repeatedly said it wants to see a noticeable slowdown in price pressures before it begins to commit to considering pivoting its current policy stance and that will make it unlikely that fresh inflows of money into the cryptocurrency sector can be expected in the immediate term.
Nevertheless, Bitcoin bulls have appreciated the asset’s more recent decline in correlation with risk assets such as the tech-centered Nasdaq 100 Index.
It’s probably still too early to call a bottom on cryptocurrencies, although a lot of leverage has already been washed out of markets and if and when conditions do turn, there could be plenty of room for a credit-fueled rebound.
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Aug 15, 2022