Tariff-iying complacency?

Summary: Markets appear complacent considering the looming tariff expiry at the end of 90 days. Though there are reasons to be both optimistic and pessimistic. But as always, you can’t predict but you can prepare.

Retail is right on the money: Tariff shocks in April have turned into an opportunity as retail bought the dip while institutional remained cautious. Looking forward 2 months, we noted that retail appears to be right on the money for now (at least).

Complacency or roaring 20s? Markets have surpassed their pre-liberation day levels and has moved on from inflation/tariff worries to big beautiful bill. It certainly looks positive for corporates with tax cuts though tariff impact is likely to lead to some slowing. Bond vigilantes may decry the expanding deficit leading to higher yields on treasuries, but unless you are further out the curve at 10Y and beyond (like TLT), you have nothing to worry about. 

Bond 101 and equities: In fact the sweet spot for bonds is probably 3-7Y. With the rest in equities. Long duration bonds really behave closer to equity but with fixed coupon, limited upside (dependent on the benchmark movements), and volatility due to long duration. Long duration bonds could make sense if you bet on a recession accompanying the declining rates environment (long rates not fed fund rates). For the average retail investor, you aren’t really compensated for taking on duration risk given the maybe 30-50bps pickup only)

Many drivers, all macro, all significant. In a nutshell, many factors ongoing but the biggest elephant is probably rates cuts which will likely still happen. And as long as the Fed remains in a cutting cycle - the market will continue to make new highs.

My Strategy:

1. Repositioning back towards bonds from equities (60-40) as I did a rebalancing and increased aggressive stance (80-20) during the dip.
2. Build up dry powder because this administration thrives on chaos, markets hate chaos so there will be opportunities ahead.
3. Exit weaker names like Alibaba which behaves more like a value stock than growth stock (not within my preferred equity stack)
4. Find an opportunity to add a new position in semiconductors with TSMC. Happy to add to existing positions on the dip like Mercadolibre and Servicenow.
5. Tracking a watchlist to understand more companies including - NU holdings, ASML, Ferrari, Datadog.

A fly in search of a windscreen - Alpha, causes of bear markets and playing defense

How do you capture alpha? 

Simply 2 ways, perform higher than the benchmark in the bull market or fall less than the benchmark in a bear market.

And perhaps variants of this - performing average in a bull market but being unaffected in a bear market and anything in between like average in bear market but super high returns in a bull market. 

Considering the double digit S&P 500 returns (2 years in a row), one must ponder what comes next - if anything 8-10% returns on average are not the norm (the swings are wider than you think)

If a bear market rare and unpredictable as it may be comes, one must be ready and watch for some signs. 

ChatGPT provided some answers below and the truth is that high valuations simply isn’t a reason not to be invested or even selling (market timing fails).

A bear market in the S&P 500 doesn't typically start solely due to high valuations, but valuations can certainly play a role in triggering or contributing to it. Bear markets usually emerge from a combination of factors, including:

1. **Economic Slowdowns**: A recession or slowdown in economic growth is one of the most common causes of a bear market. Lower corporate profits, rising unemployment, and weaker consumer demand can all erode investor confidence.

2. **Monetary Policy Tightening**: When the Federal Reserve raises interest rates or reduces liquidity, it can reduce the attractiveness of equities. Higher rates make borrowing more expensive, which can slow down economic growth and reduce corporate earnings. It also makes bonds more appealing relative to stocks.

3. **Geopolitical Events**: Wars, political instability, trade wars, or natural disasters can introduce uncertainty and cause a sell-off in stocks. These events may lead to economic disruption or heightened risk aversion among investors.

4. **Investor Sentiment**: A shift in market sentiment, often influenced by a combination of news and expectations, can also cause a bear market. If investors start to fear a downturn, they may sell off stocks, triggering further declines. Fear and panic can cause overreactions, even in the absence of a fundamental economic collapse.

5. **Overleveraging and Financial Instability**: Excessive debt in the corporate or household sectors can lead to defaults or bankruptcies. Financial crises or liquidity problems can destabilize the broader economy and lead to a sharp decline in stock prices.

While high valuations can be a contributing factor—since overly expensive stocks may eventually face a correction if earnings fail to meet expectations or if the broader economy weakens—bear markets tend to be driven by these broader economic and financial forces. 

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From my sense of the markets - the main risks are likely 1 worldwide (but not in the US) and 3 (which is probably related to risks in Ukraine, China and Middle East) - but some of those are not new, and not really expected to escalate…but still something that could start the next bear.

My approach therefore remains the same (cautious optimism) - buy when entry is right, otherwise build up your war chest.

The alpha in the year ahead is likely in staying defensive. This includes I) Buying well at cheap valuations with potential catalysts, II) Selling or shorting if overvalued and III) Storing up a war chest in cash or short term bonds (<2Y) to prepare for deployment if and when Mr Market sours.

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Thoughts of this article is partially inspired from Carson group. See original article here (https://www.carsongroup.com/insights/blog/seven-important-things-to-remember-in-2025/)

Musings on investing - Omission or Commission

Things can be simplified into frameworks. Investing is no different.

Sins of Omission

While the S&P returned in excess of 20% this year and Nasdaq above 30%, there were some standout performers that were on my radar but I did not pull the trigger - omission. These names are (w YTD% returns)

1. Palantir +380%

2. Spotify +146%

3. Bitcoin +133%

One may ask why didn’t I hop on some of these bandwagons if I were monitoring them, I have a few reasons including but not limited to the following - I) Inability to understand the business model (palantir), II) Not tracking the changing environment where the cash flows have turned positive, III) Not willing to partake in speculative assets (crypto) though that narrative has since changed as bitcoin became digital gold (and an arguably better store of wealth) in the institutional mind. And IV) Simply limited capital as my positions have largely been laid out or well deployed since 2021, taking on new positions would necessitate selling some old positions.

Sins of Commission

In contrast, as I think about my portfolio positions with losers - perhaps it comes a time to trim or say goodbye given the 3 year holding period and no growth in some of them. These losers (Alibaba, C3AI, Elastic and Unity) being 11% of my total portfolio have lagged the market proving to be a bit of heartache. Imagine that 11% in palantir and what a game changer that would be.

A quick review of the investment framework for total returns

1) Earnings growth/flat/decline

2) Multiple Expansion/flat/decline

3) Capital return (dividends or share buybacks)

Simple outlook for the 4 names over next 3 years

Alibaba - 2 and 3 as 1 is largely flat. Company cash position is 25% of market cap so plenty of capital returns could happen. If #1 happen we could see a sudden outperformance in the share price.

C3AI - Growth is returning with 29% in recent quarter (1), given palantir 69x enterprise value/sales vs C3 11x, seems like plenty of room for number 2. No capital returns expected here but if growth remains consistent, it could move the needle here.

Elastic - growth pretty decent at 17% (consistent across 5 quarters), EV/sales of 7x could see number 2 happening. No capital returns. 

Unity - Weak growth, flat multiple of 5x EV/sales and no capital returns. This company is the weakest of all 4 and the share price is showing it.

Conclusion

What would I do - Potential divestments could be on the cards for Alibaba, Unity and Elastic. I think C3 has a good AI story ahead so would be hanging around for that story. But the sale of any name would only happen under two circumstances 

1. Better opportunities spotted (dependent on Mr Market serving up bargains)

2. Fundamentals turn south

Otherwise, I remain ok to hold. The first mistake for most of these names was buying at too high (not the peak) but at princely prices over the last 4 years. Considering all these names are cash flow positive with reasonably health balance sheet and market leader status….I will hold for now in the midst of patiently waiting for their story to turn (or bargains to emerge)

2024 year end reflection

A phenomenal year in reflection. Everything rallied mostly. Below is a list of some stuff I owned. Superbly happy with how the growth portfolio did this year (top performers Tesla, Amazon, Shopify), worst performers there are (Unity, C3AI and Alibaba)

Even traditional value / dividend stocks did well with my diversified endowus portfolio up 20% since inception. DBS rose +42% as well.

The biggest drag for my portfolio is United Hampshire US REIT -6%ytd, but I am confident that this thesis will work out considering that Blackstone buyout of ROIC for USD4b valued a larger business at 1.73x P/BV, 3.5% dividend yield, though UH reit is about 1/3 the size of ROIC. ROIC being East Coast assets, UH REIT being West Coast assets. 

+170% upside sounds exciting? (I added to my position recently and MCB real estate recently emerged with a 5% stake…activist activity incoming?). Who knows but as a decent yielding company about 8%, you get paid while you wait.

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Market discipline is needed today, today we are somewhere in the middle of the cycle with the equity markets having run ahead before the Fed cuts even begun. Optimism and animal spirits are strong for a Trump administration and I think it’s wise to turn slightly defensive.

So for 2025, going beyond the general rebalancing for equity, bonds and cash position…one may consider  raising your cash or short duration bond position to at least 20-30%. Prudence and defensiveness is needed to survive and thrive but there should not be a major recession around the corner (though inflation may return and cause a selloff fear again - potentially a buy the dip opportunity as seen on 18-20 Dec)

Fresh funds and potential reallocation going forward will largely be in things I own or am looking at below including:

1. US bond funds yielding 6-8% (PIMCO GIS Income)

2. Selective growth shares (Mercadolibre, Airbnb)

3. Spinoffs (FedEx, DuPont and Unilever ice cream anyone?)

4. Turnarounds (LVMH, Alibaba, United Hampshire US REIT)

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US stocks 

Tesla +206%

Amazon +155%

Shopify +141%

OTIS +111%

Brookfield asset management +81%

Hims and Hers +79%

Adyen +52%

Airbnb +40%

Paycom +14%

Snowflake +2%

Mercadolibre -3%

Elastic -21%

Alibaba -48%

C3.AI -56%

Unity Software -71%

Endowus portfolio +20% 

(34% S&P500, 31% US bonds, 25% msci world, 10% Msci EM index)

YTD returns

DBS +42%

United Hampshire US reit -6%

What stays the same

After reading 3/4 through of Morgan housel’s new book. It tells of many things that have not changed since the start of time. In a similar vein, we observe it all today in financial markets.

Boom and bust of crypto

- Crypto being the poster boy, saw multiple boom and busts. With euphoria creeping in as btc ETFs get approved, one truly wonders what an interesting experiment it turns out to be.

- With the halving event in Apr 2024. Would it continue to climb? Or has market priced in everything.

The only thing more certain than knowing something is not knowing what will happen.

After all, with market timing - you need to guess what will happen, when it will happen and how the markets will react. Good luck - Terry Smith.

How little we know

- Anyone who bashes any subject without at least trying to understand runs the risk of “missing out”.

- In the next vein, can you afford to “miss out”?

- Knowledge gathering is critical, often we do not fully understand anything entirely. So there lies the limits of our competency. 

- Then we put it in the Yes, No or Too hard buckets.

Certainty 

- Nobody can time the market. But in certain aspects, you get a sense of the market top and bottoms through

1. Experience and valuations 

2. Observation of credit and lending cycles

3. Sentiments (Bullish or bearish)

And then you have to be practical to understand if the model and framework works when you bring it from one place to another.

So the craziest example would be a bet on China right now.

1. Valuations at a 4 year low (lower than Covid)

2. Revenue and earnings largely flat, ready to pick up (improving earnings outlook)

3. Lenders are easing on liquidity, lending to property companies tepidly but surely.

4. Sentiments are bad (FDI outflows, locals not buying)

So certainly no case right now. But recovery will come fast and swift, so a certain small allocation would work out. 5-10% is prudent.

Sure thing or risky thing

Would you rather earn 

3% from FD

3.8% from T bills

4.5% from corporate bonds

5 - 15% from REITs 

10 - 20% from growth stocks

100% from crypto

The risk spectrum and probabilities of returns differ for each of the above from a sure thing (FD & t bills) to a gamble (crypto). Prudent investors know that each have to find their own sleep number, this adjust with family circumstances, age, careers, networth etc.

And that’s it. Some things never change.

2024 outlook

 What a wild ride 2023 has been.

With inflation in retreat and interest rates projected to decline (both on FED and market watch), the following are what I think should be playing out.

1. Sovereign bonds - decent yield, reasonable real returns above long trend inflation even at todays 4%. The higher interest rate goes, the higher your duration should be. So for US treasury investors, plenty should have bought in the 10Y to 30Y treasuries given the 5 - 5.2% yield in October.

2. Equities. Not all equities are born the same. The S&P 500 is not even the same as the magnificent 7. Nevertheless, here is what I am observing:

- With the broadening of the markets from 7 to 500, we expect the index to rise another 10-12% to around 5200. Likely to stay in that range for a bit till any next catalyst or crash.

- China did not play out as expected. With 30% of its gdp tied to real estate, the struggle remains as the industry drags down another 500-800 industries with it. Nevertheless, the green shoots lie in EV, solar, retail and domestic tourism. While the Chinese stock market remains horrible for investors, the worse is likely behind. Any investor in Alibaba - including myself can expect some moderate returns (share buybacks, dividends, spinoffs)…I think 7-9% p.a. would be decent and an acceptable rate to hold for next 5-7 years. Emerging market ETFs could also be worth a look with 10% portfolio allocation.

- Singapore. Not a terribly exciting arena but opportunities definitely exist. US reits based in SG structurally enjoy withholding tax exemptions while giving 12-16% returns. Local REITs are also strong holds with monopolistic like positions (CICT, AREIT) enjoying strong rental reversions and occupancy although lower returns at 5%. Financing rates for residential property at 3% is also relatively low considering global conditions, overall this remains healthy for low to moderate wealth growth.

3. Crypto sees its recovery with FTX sorting out its bankruptcy while Binance ceo resigns. Activity in the space sees its spike - higher price attracts higher attention….eyeball attention on a “gambling” sector. Nevertheless, Bitcoin etf and coinbase collaborations with BlackRock could see a further broadening of investor base. The best use cases I see so far are a. Reduction of fees (FX transfers), b. Speculative and volatile asset to boost overall portfolio returns (commodity play like gold), c. blockchain as a ledger record example university degrees (although more from a business angle)

Best ideas for 2024

1. US reits based in SG - United hampshire Reit should see another 20-30% upside (compare to slate us reit in USA). Kep oak reit could also see another 20% upside from here given its business park and generally healthy occupancy as rates come down to 3-3.5%.

2. Emerging market ETF. 10-15% return? After going nowhere for 3 years, EM time to shine could be here as China structurally supports their businesses with low interest rates, liquidity and their people innovate to get out of a sticky situation. Just as you should never “bet against America”, likewise never bet against the Chinese. The strongest catalyst will be when Chinese themselves begin investing in China. India also remains on a strong industrialisation path.

3. Travel and hospitality remains strong. 10-15% return. Wanderlust - is a structural thing. Booking.com and Airbnb are seeing strong numbers for a reason. Certainly money is being spent in this arena and will likely stay that way for many years to come.

7 bold bets for the next 7 years

Predictions are guesstimate to happen by 2030

Ladies and gentlemen, gather 'round and lend an ear, For I shall weave a tale, both witty and clear. With words of Macbeth's poetry and Twain's wit, Let me present these bold bets, where futures are lit.

First on the list, a vision of great might, DBS, a titan, soaring to a hundred billion's height. In India, China, and Indonesia, opportunities do bloom, And DBS, with prowess, shall rise above the gloom.

Next, a prophecy of grandeur, beyond what we know, Thirty companies, once humble, in the trillion-dollar show. From six to thirty, they shall climb the lofty peak, A testament to ambition, the future they shall seek.

Now, brace yourselves, for a realm yet unseen, The metaverse, birthed by Apple, will emerge from the screen. A generation of entrepreneurs shall arise, In this digital realm, where innovation never dies.

Electric currents, a transformative tide, As ICE's hold falters, and EVs swiftly ride. Fifty percent each, the market they'll divide, With Tesla leading the charge, their dominance won't hide.

China's leadership, behold a turning tide, A shift, a change, as Deng's ideals reside. Pro-business, pro-democracy, a radical decree, China's GDP overtaking, surpassing the Land of the Free.

Now, let us delve into the realm of finance, Where interest rates dance, taking chances. Two and ten-year highs, exceeding five percent, Yet growth shall not wither, nor shall it lament.

AI, the great disruptor, a double-edged sword, Creating and displacing jobs, a future untoward. Society inching closer to a work-less state, With robot employees, handouts may await.

So there you have it, these bold predictions unfold, A tapestry of visions, both daring and bold. With Macbeth's poetry and Twain's wit, I present these futures, where possibilities are lit.