8I's Investment outlook for the new Chinese New Year Zodiac year.
photo credits: Triplet Productions
Outlook, Trends, Challenges for the year of the Rooster
2016, the year of the Fire Monkey, was marked by unpredictability and dynamism, from Brexit and Trump’s election as the 45th President of the United States, to FX volatility, record capital outflow from China, unravelling of accounting frauds and escalating trade frictions. We also saw trillions of dollars in bond losses from the steepening yield curve, with the cycle of interest rate tightening pressing ahead, which is likely to serve as a headwind for stock valuations. Particularly noteworthy is the reported news that millennials who piled into high-risk, bearish-leveraged ETFs in gold and short-term futures following Trump’s win have lost over 50% since the election, highlighting that investors who scurry around for themes to trade can be right on their macroeconomic and thematic calls, and still lose money.
In 2017, the year of the Fire Rooster, we need to brace ourselves for a period of grave challenges. Fire destroys Metal, and this destructive relationship means greater political and economic challenges during the year as fragile financial foundations weaken further under the credit-fuelled fire. Yet, the Fire Rooster shines like a bright star in the gloomy sky, bringing hope and transformation to value investors who know how to make sound investment decisions no matter the prevailing circumstances.
At 8I Holdings Limited, we believe that there can always be big winners in any market as long as companies with wide-moat competitive advantages can be identified with alertness. We term such structurally-mispriced investment opportunities as “Hidden Champions”. They are successful yet relatively low-profile, underappreciated companies that have a sense of insurgent mission in serving underserved customers and tackling critical unmet needs. They are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niche services that are largely invisible to the average consumer, yet are indispensable to our well-being in daily life. At 8I, staying the course with this investment strategy of investing in Hidden Champions has enabled our portfolio to generate double-digit absolute returns in 2016, outperforming all major Asian indexes.
We remain sober, cautious and vigilant from the vantage point of a bottom-up stock picker. There is absolute value to be found in quality companies, particularly Hidden Champions, to offer de-correlated returns against market declines as they continue to consolidate, win market share and create new categories of growth based on their indestructible intangible know-how.
The typical investor often inflicts harm upon themselves – usually by selling when prices are depressed, and later buying into bull markets at high prices, as well as getting whipsawed by choppy market movements, thereby generating subdued returns. Hence, a lower volatility and high-resilience portfolio comprising Hidden Champions with strong defensive characteristics is critical in helping investors stay invested in stormy markets. This means they will be able to harness the business execution prowess and long-term growth trajectory of quality companies to generate superior investment returns. As always, it requires a willingness to stand in direct opposition to the crowd and the vision to think in years rather than days or months.
The Fire Rooster Year 2017 may be a redux of the 2011 accounting fraud wave, the year which had a concentration in Asian corporate frauds unravelling that brought fame to many short sellers including Muddy Waters. Value investors in Asia cannot look purely at quant “valuation” metrics because many of these statistically-cheap “value stocks” are fertile ground for momentum traders, syndicates and insiders (“Zhuang Jia” 庄家) who have both the incentive and power to manipulate prices and volumes. They may also inject “action” by associating themselves with sexy themes, or the prospect of attractive growth projects, luring in investors and later offloading the shares to them in a pump-and-dump scheme while the assets have already been tunnelled out, or expropriated via unusual money-go-round related party transactions. These related-party entities would disguise as “customers” who engage in fictitious sales with the listed company. Such misclassified short-term financing is disguised in cash equivalent, prepayments & advances, other receivables, and so on. Hence there is the “missing cash” implosion when the fraud unravel, by which time is usually too late with the minority shareholders bearing the painful losses. And this is just one out of the four commonly-used tunneling methods used by actual insiders, manipulators and syndicates to expropriate corporate assets in Asia. Western-based accounting fraud detection tools and techniques have not yet been adapted to the Asian context to avoid these traps.
Our favourite markets in the Asia-Pacific are Australia, New Zealand, Japan, Taiwan and India, as they are fertile habitats for many Hidden Champions that are building unique and scalable business models, all the while investing in R&D and design capabilities. Only a select group of these companies will have accumulated the intangible know-how, capability and capacity to last through the turbulence we see ahead, and we believe profits and valuation premium in the value chain will skate towards them, to paraphrase the wisdom of hockey legend Wayne Gretzsky to skate to where the puck is going to be, not where it has been.
The Fire Rooster Year 2017 is also a time for healing and gratitude. It is time for us to give thanks to the Hidden Champions that have been in the background supporting our personal well-being. These include the Crizal and Transition lenses by Essilor that provided us clear vision; the ASSA Abloy door system that ensured our security and access convenience; the Pilot pen that we used to write our innermost thoughts; the Yonex badminton and tennis racquets that gave us simple sporting joys; the Systema toothbrush and complete gum care proudcts that aided our dental health; the Hindi newspaper and radio hyper-local network for Indians to educate and connect themselves to what is happening in their neighbourhood; the healthy Mr Apple-A-Day that kept the doctor away; the unique universal tire pressure monitoring device in our cars that warned us of driving accidents; the Captain Cook Cruises that brought so many fun memories and experiences when we holidayed in Australia, and so on.
Kee Koon Boon
Chief Investment Officer
8I Holdings Limited
*NOTE: The article does not constitute any formal investment advice and reader is encouraged to consult with relevant financial professionals for any investment decision. Any action undertaken by individual as a result of the information presented here is his or her own responsibility.
photo credits: Triplet Productions
Koon Boon (KB) is the Chief Investment Officer at 8I Holdings Limited (ASX: 8IH), where he is responsible for the sustainable growth and outperformance of listed Asian equity investments in the Hidden Champions Fund. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore and, later, at Korea’s largest mutual fund company. KB was part of the core investment decision committee which achieved 700 per cent in returns (net of fees) in its flagship Asian fund during his tenure.
KB is also Managing Editor of the Moat Report Asia, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia. Subscribers to the Moat Report Asia from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, hidden billionaires and savvy private individual investors who are lifelong learners in the art of value investing. KB was also a faculty (accounting) at SMU teaching accounting courses and had pioneered the course on Accounting Fraud in Asia, an official module in the SMU undergraduate curriculum.
KB also served investors and the public in contributing his thought leadership on the topics of value investing, business model innovation and accounting fraud in local and international media, such as TEDxWallStreet, Investopia, BeyondProxy, Greatinvestors.tv, Jakarta Post, The Straits Times, TODAY, The Business Times, and in top banking, finance and investment conferences in Sydney, Cape Town, HK and Beijing, Italy, as well as in the Value Investing Seminar, Value Investing Summit, Emerging Value Summit, Wide Moat Investing Summit and Asian Investing Summit. KB is also honored to be able to have the opportunity to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community.