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No panic...but manic trading

Asia Analytica
Asia Analytica • 7 min read
No panic...but manic trading
As we have said before, we do see light at the end of the tunnel, but we would be remiss not to caution against being swept up by the current hysteria.
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(Apr 24): Trading on equity markets seems to have taken on a manic tone, of both euphoria and fear. We saw the Dow Jones Industrial Average falling 38% from all-time highs and then, almost in the same breath, rebounding as much as 33%. The steepness (speed and magnitude) of both the fall and subsequent recovery was unprecedented, defying all previous market cycles on record.

No doubt, the world we live in has changed significantly over the past decade, driven by rapid technological advancements and high-speed internet connections. Information is disseminated almost instantaneously and so, it seems, is investor reaction. The latter is further exaggerated by algorithm trading and the rise of passive investment instruments, which result in indiscriminate selling and buying.

Oftentimes, investors find themselves racking up losses — when investing decisions are dictated by emotions. They are carried away by euphoric buying in a rising market and succumb to fear-driven panic selling.

We have stayed positive on stocks since the beginning of the Covid-19 pandemic and through the volatility. As we have said before, we do see light at the end of the tunnel, but we would be remiss not to caution against being swept up by the current hysteria.

Life as we knew it has been upended by the sudden social distancing and lockdowns. Some of these behavioural changes will persist long after the pandemic dust has settled. Businesses and industries are permanently changed — some at the margins, others more structurally so.

Stocks playing to the “stay at home” theme such as Amazon.com, Netflix and Zoom Video Communications are rallying to record highs. Without doubt, these companies are enjoying a strong surge in captive users during the lockdown. And it is fine if you are trading on short-term momentum, but keep your eyes on the ball.

Longer-term investors should assess critically whether the increased users are merely short-term bumps or whether these new customers can be retained for the long run. For instance, is Netflix looking at high churn rates once people are no longer confined to homes? How many of Zoom’s new sign-ups — the majority of which are currently free users — will convert to revenue-generating subscribers? Has the pandemic enhanced the viability of their underlying business models, changed the competitive landscape and their market positioning? Last but not least, are their recent price gains justified by fundamentals? Valuations still matter, even if we have to ignore 2020/21 numbers. The same evaluation goes for all businesses.

Humans are, by nature, social animals. Given a choice, most of us would choose to go drinking during happy hours with colleagues, enjoy a meal in a restaurant and an outing with family, sit down for coffee and go to the movies with friends, and so on and so forth.

Shopping online may be convenient and efficient — in terms of choice and pricing — but, sometimes, we also just want to window shop and enjoy the company of others on shopping trips. Malls will survive the pandemic, owing to their recreational and experiential values, even if some retailers go out of business. Many other brickand-mortar retailers will continue to exist.

Work from home may become more prevalent, now that companies have experienced it and can actually evaluate employee productivity. As a result, demand for office space may be permanently dented, but it would not be fully replaced. Similarly, the widespread adoption of video-conferencing today could turn into a new secular trend, replacing some, though not all, business travel. Working in the office, interactions between colleagues and face-to-face customer-client relationships will still hold value.

The secular trend for digitalisation will clearly be strengthened. We would bet that Big Tech, the likes of Amazon and Microsoft Corp, will emerge with an even stronger presence across a broad swathe of the digital space — which will also have a firmer grip on our lives — after the pandemic.

These companies have a considerable advantage over smaller competitors (particularly those with a narrow product range), even if short-term profits take a hit. For instance, Facebook and Alphabet are expected to report lower ad revenue while Apple and Microsoft will suffer lower sales, owing to store closures and weaker consumer spending. Amazon may report rising costs as it struggles to fulfil demand surge amid staffing and logistics issues.

Their strong cash flows and balance sheets will, however, translate into scale and pricing power. The latter will be very relevant as businesses look to cut spending over the coming months, and especially if the downturn drags on for longer than expected. The Big Tech companies will continue to grow their ecosystems when smaller competitors falter, as funding becomes tighter and credit costs rise.

High-speed broadband connection, smartphones, cloud computing infrastructure and software application tools have proven to be more indispensable than ever before, providing us with some semblance of normalcy during this period of isolation.

The pandemic may have delayed the roll-out of 5G infrastructure — and new 5G device launches — but its adoption is inevitable. In fact, we believe countries will accelerate the roll-out of 5G networks as part of fiscal stimulus packages after the outbreak is under control. Tech companies in the 5G space are expected to benefit from global adoption of this next-generation wireless network for years to come.

Qualcomm is a market leader in 3G, 4G and 5G wireless technology. The company’s baseband modems are used in about half of smartphones globally. The expected demand boost from smartphone sales and 5G roll-out this year will fall well short because of the pandemic. This may weigh on its share price for the coming months. However, its outlook in the long run remains intact.

We expect Qualcomm, which focuses on design and licensing, to benefit on multiple fronts from 5G. First, the average selling price of a 5G baseband modem is expected to be about 1.5 times higher, owing to higher complexity. Second, 5G will be a major upgrade cycle for smartphones globally.

Third, Qualcomm’s connectivity chipset market will expand well beyond smartphones, to encompass a vast array of devices — including vehicles, machinery and equipment in smart factories, homes and cities — or, as we call it, the ecosystem of the Internet of Things. Qualcomm also owns a huge portfolio of intellectual property for wireless technology, from which it generates licensing fees.

That said, Qualcomm is not without risks, one of the biggest being the unfolding tech war between the US and China. The company has stopped selling components to Huawei Technologies, following the US’ blacklisting of the latter. It still supplies high-end mobile chips to other Chinese brands such as Oppo, Vivo and Xiaomi. This could change for the worse if the tech war deepens and China retaliates against a broader range of US companies. In the worst-case scenario, a bifurcation of technologies will lead to the development of two separate ecosystems, which will in effect reduce Qualcomm’s addressable market in the world.

On balance, we believe the current risk-return proposition for Qualcomm remains positive.

The Global Portfolio inched marginally higher, up 0.6% for the week ended April 23, pacing broader market gains. Shares in Johnson & Johnson continued to outperform, gaining 3.6% for the week, while trading in The Boeing Co remains volatile. The stock closed down 7.5%.

Total portfolio value now stands at just -0.1% since inception. By comparison, the benchmark MSCI World Net Return Index is down 2.2% over the same period.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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