Emerging Market Value, Anyone?

Recently, I am thinking about buying EMVL (iShares Edge MSCI EM Value Factor UCITS ETF listed at LSE). 

The ETF tracks MSCI EM Select Value Factor Focus Index. 

Reasons:

1) Regression to the mean. 

As at Feb 2023, its 5-year and 10-year annualised return is -1% and +1%. Since Dec 29 2000, its annualised return is however 9.5%. I am guessing that emerging value will do better in next 10 years, given its abysmal return in last 10-years.

(On seperate note, I am guessing that the US market may provide lower returns in 2020s, compared to the emerging markets. Because US has stellar returns in 2010s.)

2) Its value multiples are interesting. Based on index factsheet, its dividend yield is 8%, forward P/E is 5.6 and P/BV is 0.7.

3) Surprisingly, TSMC and Tencent are in its top 10 holdings

Of note, extracted from the index factsheet: 

The MSCI Emerging Markets Select Value Factor Focus Index is rebalanced on a semiannual basis, usually as of the close of the last business day of May and November, coinciding with the May and November SemiAnnual Index Reviews (SAIRs) of the MSCI Global Investable Market Indexes.

I will wait and see for now. Given the current interest rate environment (~4% in T-bills or IBKR account), the safest is still cash and there is some opportunity cost in deploying cash to buy shares. 

Selling and Buying

Have sold 60% of my stake in Booking, as I find that the valuation is a bit expensive. After sale, Booking share price rose by 2+%. Perhaps it is not good idea to sell good companies. Well, we will know about this after a few years. 

Have bought a small position in Semb Marine using CPF OA funds two weeks ago at $0.121. The current price is lower than purchase. I am looking to purchase more if price falls to $0.10. Reason for purchase is that Semb Marine's earnings should be much higher 5 years later given the upcycle/demand in wind structures, LNG carriers etc. 

It may be good to buy stocks with a lot of pessimism, but the company will have higher earnings 5 years later. 

More pessimistic about US market

I am feeling more pessimistic about US market:

1) US interest rate can go higher. 

At best, it will remain high for quite some time to subdue the high inflation rate. Many commented that high inflation rate is persistent and need time to lower it to 2-3%.

The longer the high interest rate, the more it will feed into the economy and businesses. E.g. If Company A need to re-finance its loan in late 2024 and interest continue to be high in 2024, Company A may re-finance its loan at higher interest rate than before.

The longer the high interest rate, the more drag it has on US stock market 

2) What is the likely time that US interest rates will be cut? During recession. When the economy is going into recession, earnings will decline. The declining earnings will affect US stock market S&P negatively. 

Given the above, I should maintian my high cash position and deploy the cash into fixed deposit/t-bills for next few months.

When the market corrects later and people are feeling quite negative, it will be a good time to enter the market again.

Investment Clock Guess

 Where is the investment clock/cycle now?

China/HK -- 7-8 o'clock 

HK stocks have shot up since the low in end Oct/early Nov, after China ceased zero Covid and re-opened

US -- 4 o'clock

I am guessing that it is more likely for US stocks to fall further than to recover, given that earnings growth may be negative in 2023 and Fed may increase interest rate more than expected. 

Nonetheless, there is slight chance that US stocks may recover this year.

Singapore -- 11 o'clock ?

I do not really know where Singapore market stands currently. Anyway, my allocation to Singapore stock market is not a lot. 

SG Reits -- 3 o'clock ? 

I feel that reits have more room to fall. Currently, the high interest environment has not been fully reflected in the reits earnings, as a large portion of their debt is fixed. When their debt is renewed in future, it will incur higher interest cost and hence lower dividends. The longer the high interest environment sustain, the worse it will be for reits. 

Hence, I do not have much position in reits. Of course, I may be wrong. The above is just my guesswork. 

2022 Portfolio Review

 1) Performance of Individual Stocks Portfolio

2022 Returns was negative at -13.7%, poorer than STI returns of +7.6%. This is because my portfolio comprises mainly HK-based China Stocks and US Stocks.

Year	% Returns	STI (incl Dividends)
2020	3.6%	-7.5%
2021	14.7%	12.5%
2022	-13.7%	7.6%

I raised my cash position in 1Q 2022 to have a more prudent allocation and increase the cash available to take advantage of price declines. In 2Q-3Q 2022, I had used some cash to buy US stocks such as Alpabet, Booking, and HK stocks such as CNOOC and CSPC Pharma. In Oct, I bought HK stocks such as HK Tracker Fund (2800), Fu Shou Yuan and added more to Ping An.

There were also stocks bought and sold in same year, mostly at loss or breakdown e.g. Meta, WBD, OXY, CMGE

2) Position Sizing

In 2021 year-end review, I aimed to have fewer positions this year. But it seems that the no. of positions remain similar.

	Number of Stocks	Top 10 position size
At end 2016	21
At end 2020	39	46%
At end 2021	19	71%
At end 2022	18	72%

 In 2Q 2022, I felt that it is risky to have position that are too large. As such, I strived to cap new positions small

3) 10-year IRR

I look at my 10-year IRR across time. My IRR is lower compared to earlier years, where I run more concentrated and risky positions (i.e less than 10 positions in 2004-11) and had smaller portfolio. In 2012, I changed strategy to be more diversified. In addition, the low returns of SG stocks from mid 2010s onwards probably lead to lower returns in late 2010s

4) Stock – Non-stock Allocation

The above are on my cash equity portfolio.

 I have other stuff such as SRS, ETFs, Bonds, Cash and CPFB accounts.

 Looking at total allocation, I have around 55% stock – 45 non-stock allocation. The bonds allocation rose this year, as I allocated more cash to buy SSB and T-bill when the interest is higher in 3Q 2022 onwards. 

5) Net Asset Growth

I started keeping track on my net asset since 2014. This year’s return is -1%, mainly due to stock losses.

2022 Review - Lessons

 This will be on lessons learnt in 2022

1) Do not buy quality without concern for valuation

2) Do not buying too large position at one go

I bought Tencent and Prosus to around 18/% of portfolio in late 2021, thinking that Tencent is a high quality stock despite that Tencent is quite expensive. My average price on Tencent is around $450-$460. 

However, Tencent fell by a lot in 2022. During the fall, I did not average down since it was a large position in my portfolio. 

So the lesson is that buy quality at reasonable price and buy slowly. Reasonable price can be cheaper at times.

3) Don't follow superinvestor's purchases - you do not have their conviction / they may sell their stake later.  

In 2021, I follow Mr Charlie Munger and Mr Monish Prabrai's purchases to load up on Alibaba and suffer losses. In late 2021, Mr Prabrai sold  Alibaba. 

I sold Baba in early 2022, as I conclude that Baba's moat is affected by JD, Pinduoduo and in southeast asia -- Shopee. The sale was done at a loss. Nonetheless, it taught me a lessson of not following uperinvestor's purchases. I do not have their conviction and they may sell their stake later.  

4) Do not sell put option

This year, I sold put option around 2-3 times. The money earn is not a lot. But the last put option sold -- selling put option for Google @87 -- caused me to not buy Google at $87. 

5) How does it matter to you if you know A or B?

6) Aggressiveness -- when I should get more aggressive

Howard Marks' memo "What Really Matters" provided two insights to me. 

First, does it matter to me if I know when Fed will reduce interest rates? Probaby not.

Second, how aggressive should I be in my positioning or asset allocation? When should I get more aggressive and when less? This is a question which I will focus more time to study next year.

Buying Meta

 I bought a small stake in Meta recently at $118. 

The thesis is that 

1) Meta has stable ad business from Facebook and Instragram that are cash-cows

2) In medium term, there are more monetisation avenues from Reels and Whatsapp biz messaging

3) Meta is a cheap way to gain exposure to Metaverse. If Metaverse fails, sure you lose out on the cashflow invested in Metaverse but Meta's existing business Facebook/Instragram/Whatsapp will still be around

I missed buying at the lows of $90+, as I am not sure of my thoughts on Meta then. By the time I concluded (3), Meta is around $110-$120+ level.