Wolf Money(portfolio update for end of March 2023) part 2
Portfolio as at end of March
1.) Cash
2.) Bank of China(3988.HKG)
Commentary
Most markets had a volatile March due to SVB fallout and the blow up of Credit Suisse. SVB downfall was a classic case of mismanaging of risks. One been clients concentration risk(tech), the other been interest rate risk and liquidity risk sum up the situation.
As a broker previously, we managed all sort of risks beside market risk, the main been credit risks and concentration of clients. In our industry, it is better to have many small accounts than to have one or two large accounts that generated the most income for us. If the clients are too big to fail or exhibit tremendous leverage on your income, the broker run the risk of a sinking Titanic with the clients if the clients can’t make good of their losses or decide to go other brokering house for their trades. SVB having a high portion of their deposit contributed by big institutions run the risk of having a quick bank run if a couple of those whales decide to withdraw their money from the bank. Taking those deposit and placing it with long dated treasuries and mortgage back securities increased liquidity risk, a case of mismatching of short term funding needs with long dated investing. The losses accelerated due to Fed rising interest by 500 basis points within 1 year causing huge losses to their investment in long dated treasuries and mbs which they were forced sell to make good of the withdrawals. Going forward I wouldn’t be surprise some sort of cap been introduced to US regional banks on using depositors’ money to invest and a likely increase of tier 1 capital. Regional banks might be subjected to stress test by the Fed which previously were done only on big banks with more than 250b assets. All those new regulations could potentially slow down lending which tighten credit condition further. I like to believe SVB situation is unique but one can’t be sure what is hiding behind the financial engineering closet of the US banking institutions. Credit Suisse problems trace its roots back to GFC. A series of poor managements cause the 167 years icon to fail. Tougher regulation especially in the area of investment banking will shrink the market for all banks. Return are expected to be similar to public utilities company going forward for banking sector. Standalone bank with a big portion of their profit coming from investment banking will be a rarity in the future. Most IBs will be merge into commercial banks as I predict very tough operating environment for stand alone IBs. Tech and Crypto had a decent month clocking gains in March. The run on US regional bank helps push fund to tech and crypto which were seen as the best sector among the worst.
Asset rich companies may not be good enough for liquidity constraint market, cash and the ability to generate strong cash flow will be key for any organisation to survive in these tough market conditions. I have mostly shifted my capital to those companies that are flush with cash, Boustead Singapore with 75% of share price back by cash. Haw Par Corp, a new purchase for the month with 25% of share price back by cash and short term treasuries with highly liquid marketable securities of UOB and UOL making up the bulk of NAV. They are my flight path to safety. There are no assurance both cash rich companies wouldn’t get affected by the whim and fancy of the stock market, at least one could sleep soundly at nite. LWF was down just under 3% in March no thanks to the volatile market. Boustead Singapore was weaker, BOC managing a positive month with Haw Par just about wiping its face. LWF had a poor month. YTD gain stood at 4.5%(non leverage excluding dividend and cash yield). On the interest rate front, I do see Fed at the till end of their interest rate hiking cycle. Inflation is likely to come down much faster in the second half of 2023 due to last year high base. The recent stock market rout in bank stocks had destroyed much capital and the tightening of lending condition with the falling oil price gives the Fed plenty of covers to reconsider their previous terminal rate.
Just my pure speculation, I suspect there maybe a ceasefire deal between Russian and the Ukrainian in the next 6-12 months as I believe all parties see no meaning in continuing the war as losers of this war including Europe,US, Russia and Ukraine. China is keen to restart their economy after 3 years of below par performance, a peaceful world would be helpful to its own recovery. With US election coming in 2024, the Biden administration need to project a victory or some sort of closure to convince the voters about the American support for Ukraine as a worthy mission. Any additional financial support for Ukraine is likely to face resistance in the lower house lead by Republicans. 2c worth.
Boustead Singapore(BSL)
BSL are still in the midst of controlling the pr fire lit by the privatisation offer of Boustead Projects. I wouldn’t comment since I was an ex BPL shareholder convert. It wouldn’t be appropriate for me to sing praise on the merits of privatisation till the dust had settled. The concert parties’ shareholding in BPL had gone past the 90% requirement for a suspension. At the end of the offer, the concert parties managed to acquired 95.5% of the total outstanding shares. I had increase my holding in BSL ever so slightly over the course of March. Normal commentary of the company will resume next month.
Bank of China(BOC)3988.HKG
The Chinese economy is recovering steadily after the lifting of covid restrictions which the western media failing to give credit. In the recent CCP annual meeting, the prime minister had set GDP growth target at 5%. Last year growth was at 3%. The PBOC had cut banks reserve ratio by 25 basis points which help to ease credit condition. Another 500b yuan is free up for lending after the move. The Chinese Central Bank has policy flexibility to drum up the economy due to low inflation in China. BOC share price is firmer, a blessing given the tumultuous financial market this month. They will be reporting on 31 March, I am looking forward to my handsome dividend in August.
Haw Par Corporation(HPC)
The value proposition in HPC share was never in doubt but the timing for the extraction of value is a big unknown, it might not even happen at all !! I had written my piece on the company. The article can be found here. Special thank to Michael at asiancenturystocks.com for mention my blog in one of your morning note. The coming 1H 23 result should get a boost from the special dividend received from UOB and UOL. The rise and fall of share prices in UOB and UOL had no impact on HPC’s P&L as securities value are adjusted as a balance sheet item. Dividend received from investment are accounted for profit in P&L statement. An investment into Haw Par is as good as buying into a host of other businesses like banking, real estate and a healthcare play combine, a 3 in 1 “coffee mix” or a 4 in 1 if you add the tourism business (Underwater World Pattaya). In early days we call them conglomerate which had become an “unfashionable” word due to analyst giving a 10-20% discount on valuation due to “Jack of all trades”. In my view, conglomerate is not a bad idea going forward due to geopolitical risk, trade wars and supply chain disruption. Business cycle had shorten considerably in recent years, conglomerate might not be the best in their field but having good diversification into a few businesses does protect company from over reliance on certain market and sector. The concept works like a hot and cold drink stall. During cooler weather more people buy hot drinks and the opposite is true. Only when the tap stop running, hot and cold drinks can’t be sold (maybe plumbing business is a good diversification for the drinks stall). 🤔I am starting to see a few companies going into new businesses that are totally unrelated to their core. Good or bad? no comment. HPC is trading cum dividend with payout of 15c in May. I got low expectations for my investment, keeping it as a form of cash management. Btw Lady Gaga is a fan of Tiger Balm.
Summary
The risk of a bigger crash in the market had gone up in my view. The saving grace, the US Treasury and Central Bankers around the world have acted faster than 2008 GFC by guaranteeing deposits of any amount in the failed banks. That act alone creates a moral hazard for market participants to undertake bigger risks without due consideration. The Fed implied guarantee had effectively backstop all deposits in US. All those backstopping will effectively raise the cost for all banking institutions and consumer. Under the FDIC insurance scheme, the current 250k limit guarantee is likely to go up. In the meantime, I seek shelter in cash rich companies. The market is sending a confusing signal. It might be better to act prudently. I am looking forward to 2nd half of 2023 and early 2024. A presidential election year in 2024 is likely to usher in a stronger stock market. It will be very commonsensical for voters to vote for a president that creates a strong economy and more importantly a strong stock market. Till we meet again, Biden(bye then). God bless. 🙏
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