First and foremost, our thoughts are going out to all of you affected by Covid-19. It has been a difficult second year with this virus around us and some of us are back into lockdown. We will only know the full psychological, biological, and economic effects of the virus years from now. Nonetheless, one thing is for sure in our minds: we will get past this epic period, adapt if necessary, and the sun will shine bright for many days to come. We wish you and your close ones a Happy New Year!
Transitions in the markets continue
Currently, we face profound transitions in the financial markets. Meager interest rates set in place after the global financial meltdown of 2008-2009 have been stimulating all assets for almost 12 years. It has been relatively easy swimming with the current. Still, as we indicated in earlier updates, that helpful current will slow down eventually and even turn against us at one point. Change is unavoidable and always constant.
At i-Cthru, we think the short-term tide has turned against us, fueled by the inflationary forces and the mandate of the central bank to keep inflation at bay. The Fed and other main central banks are pressed to stop accommodating and stimulating policies to fight inflation. This, in turn, will have a dampening effect on valuations, especially those in the high-growth technology sectors of the equity markets.
i-Cthru's Qualitative Strategy
More important to us is the long-term transition in the equity markets. We continue to believe technology-driven companies will emerge as the new behemoths of the equity markets. These companies employ relatively few people, use intelligent technology, and use the WorldWide Web to scale their businesses globally at a growth pace not seen before. Due to the nature of their businesses, these companies mainly deploy asset-light business models, which are expected to have extremely high profitability for years to come. In an earlier blog, we dubbed them Alpha Companies. At i-Cthru, we continue to believe in Alpha Companies. With our Qualitative Strategy, we will stay committed to them unless there is a material change in their businesses or markets.
We continue to expect the valuations of these companies to be volatile, changing with the short-term outlook and market fluctuations between fear and greed. We keep looking beyond the cycles and maintain our gaze firmly on the long-term, preferably a 10-year frame of mind. The high-growth potential of these Alpha Companies is a natural hedge against inflation: it will allow them to outpace the dampening effects of higher interest rates. You will be amazed what some of them will become given the patience and time.
i-Cthru's Quantitative Strategy
We reiterate our Quantitative Strategy is an Artificial Intelligence (AI) driven strategy. Our algorithms select companies based on fundamental factors. They primarily invest in companies generating a net Return On Invested Capital after taxes of 15% or more. A strategy dubbed "quality at a reasonable price." We combine every position with protection against capital destruction or severe drawdown.
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.
We can sleep soundly knowing that we are protected. Our strategy largely shields our capital from permanent destruction, which we try to avoid at all costs. It is much more important than maximizing our gains.
We also reiterate that the trends in China are here to stay regardless of current political changes. "The transformation of China" from an export-driven economy to a consumer-driven one is ongoing. The number of affluent households in China continues to grow rapidly. China counts 400 million households (1.4 billion people) against 122 million households in the USA (328 million people) and 167 million households in the EU (380 million people). We concentrate on households because these are the units that buy cars, houses, phones, etc. China's transformation was set in motion by Deng Xiao Ping more than 40 years ago, and its progress has been stunning. No other country comes close to its economic and technical progress in such a short time, and none have such a sizable homogenous consumer market.
We assess political risks but admit that they are everywhere we invest. We strongly believe China's growth, and many of its most promising companies have a long crest to surf despite recent regulatory risks.
From now on
We are very optimistic about the future. We know it does not always feel that way reading the news or listening to your inner voice. 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, and we wish you a super healthy and happy New Year!
The i-Cthru Team