Q1 2022 Update – Transitions in the Markets continue Part 2

Was it only yesterday we were staying tuned to all the news surrounding Covid-19, which, so it seems, in a flash changed to the news surrounding the current war in Ukraine and its implications for globalization?

We know change is unavoidable and always constant. There is nothing we can change about that, so we continue to read a lot and try to understand what is going on. If the changes we see will impact our strategies and equity investments, we will act. We try to guestimate change outcomes in terms of probability for the long-term: it is the best we can do constantly; it is part of our investment process.

We believe globalization, as a long-term trend, remains intact. We know that trends do not move in a straight line and that there are periods where a trend goes into reverse, as a reaction to current affairs. We certainly anticipate adjustments in many supply chains, whether we talk about oil, semiconductors, or onshoring versus offshoring of labor and factories. We expect that the current reversal of offshoring and making things at “home” will further fuel inflation as the cost of production will inevitably rise despite all the new efficient technologies available to us.

The reverse trend of globalization paired with an environment where central banks will have to act with higher interest rates to fight off inflation will make it less easy for asset prices to rise for the foreseeable future. We expect the valuations of many growth companies to be volatile, changing with the short-term outlook and market fluctuations between fear and greed. We keep looking beyond the short trend cycles and maintain our view on the long-term, preferably 10-years out. We think that the high-growth potential of our “Alpha Companies” are a natural hedge against inflation: growth will allow them to outpace the dampening effects of higher interest rates. Therefore, we have been adding funds to some of our positions early this Quarter, taking advantage of lower valuations.

We also have been adding to our holdings in China on a selective basis. We think the unfavorable trend for China is mainly behind us, and many valuations have become very attractive. A company like Alibaba is now trading at very attractive valuations with forward price/earnings (P/E) of 12x compared to Amazon’s P/E of 60X. Alibaba also announced a $25bn share buyback program, equating to approximately 10% of the total current market cap. We will own 10% more of Alibaba by just sitting still.

We own mostly the US-listed ADR’s, and there is talk about delisting the ADRs forced by the SEC rule to comply with its regulations. Many people do not know that it is relatively easy to switch the ADRs to the locally traded shares in Hong Kong; they are called fully fungible. Some of our clients already own the locally traded shares in their accounts. Selling pressure comes from funds that cannot hold foreign-listed companies, creating an opportunity for us. China has been and will remain an essential part of global growth in the future, and as we have seen, market perceptions can change very quickly.

We reiterate that our Quantitative Strategy is an Artificial Intelligence (AI)-driven strategy. During the market drawdown, our Quantitative Strategy switched to 60% cash, allowing us to avert a large part of the minor correction earlier this Quarter.

Our Quantitative Strategy is agnostic to sectors, growth, or value styles. It is immune to human biases like panic-selling or fear-of-missing-out buying. When equity valuations become too high or when the perceived market risk is too significant, our model will refrain from buying and automatically increase our cash positions. Our Quantitative Strategy works very well, and it gives us comfort for the short-term fluctuations because we all know the long-term does not happen today, and today is the place where we live. Therefore, it is essential for us to be always conservative.

Believing and patiently investing will be very rewarding. Even when we must swim a bit harder to get ahead, we will.

As always, we thank you for your trust in us. It is a great responsibility, and we will try our utmost best not to disappoint you. Be safe, be patient, salute our heroes, read good books, and be optimistic: it pays!

Thank you for your trust