Thunk Piece Feb 2020

Author's Note: The below think piece is from our Feb 2020 publication for clients. Hope that you enjoyed reading it as much as they did (probably not!). Feel free to comment below! 


Clearwater Capital is an asset management team based in Singapore that is Registered Fund Management Company regulated under the Monetary Authority of Singapore. Clearwater specializes in creating External Asset Management solutions for clients as well as developing our own Funds for external investors. Our investment philosophy is based on independent thinking, seeking profit through active management. We are presently launching our Creedence 1 Fund which targets to close in Q2 2020.
This is an abridged version of Thesis Thinking piece that we have done for H1 2020.
All enquiries can be directed to alexanderphua@clearwatercapital.com.sg

 

Feb 2020: PANDEMIC AND PANDEMONIUM
At the time of writing, the COVID-19 virus has now blown out globally. More than 38 countries have reported the sickness and excess of 2,800 deaths attributed. Global economies are bracing for a reckoning not seen since the 2008 Great Financial Crisis. Serious concerns about supply chains, tourism economies, and global trade and loan obligations are being considered as the policy makers try to fight these multiple fires concurrently. But before this outbreak, there were already deep concerns about the Trade War, Hong Kong and slow down of business conditions in China and of course Brexit.
Our most common questions from clients are, what next and what should we do? We shall confine our analysis to North Asia, particularly China.
 At Clearwater, we carry these deep concerns. The global economy will be in peril. No question about it. This illness has already hammered China and at the writing, is blooming uncontrolled in Japan and Korea. The North Asian theatre accounts for about 40% of the global economy. SARS in 2003 was calculated to cost China $40billion, we estimate this hit to be within $500billion to $600billion. That figure has no projections yet for Korea and Japan. This will impact global demand for goods & services, global production from cars to hairdryers; even services will take an unprecedented hit, tourism and air travel are fully exposed (almost every country relies on tourists from North Asia).
But our analysis asks, what will happen after that? We believe that it will end where it began. We believe 100%, the Government of China will beat this challenge. They have the political will and the ability to do so. They appear very cognizant that this is a problem akin to war and are taking the same approach. We believe that when this challenge enters its late stage and the government can turn its attention back the business of running the country, the PBOC will resort to a method that has worked for the same last economic crisis in the USA, Quantitative Easing.
We believe that they will inject more capital into their economy than has ever been done to kick start their economy after this crisis, we estimate that PBOC will unleash at the first round no less than $800billion in near direct cash injections into Financial Institutions and direct their State Apparatus into putting efforts to ensure that should the next crisis like this unfurl, they will be better prepared and even more capable to handle it. It would be logical that the areas that would see the first rounds of this state backed investment would be in

• Medical protective equipment manufacturers like gloves, biohazard suits, masks, goggles etc.
• Medical equipment manufacturers that do diagnosis systems, computing and AI, pharmaceuticals.

But we also have some alternative viewpoints of where else this might go and are building our investment thesis based on some of these considerations:

• Insurance companies: “If you didn't have insurance before, at the end of this crisis, you’re gonna be buying it immediately!” For insurance companies that can make it past this crisis (we do anticipate some aren’t gonna make it out), they’re gonna be taking money hand over fist from anyone who did not have a policy before. In China, money from PBOC will end up here to make it cheaper than ever for private individuals to buy insurance.
• Internet/Social Media companies: If they were frequent users of the web before, 1 month in confinement will pretty much turn you into an addict. We are enjoying the videos and stories that are being broadcast by citizens in China and Korea as they endure their confinements but we’re also witnessing an uptake in customer base on a variety of internet social media and gaming platforms. Governments will be using these platforms to spread message; so these guys are growing user base at the costs to the Government.
• Car companies: “You cant get sick from a train,…if you didn't need to take a train.” We believe that in a bid to support industries, direct financing will be cheaper than ever; whilst a good amount of that might end up in real estate, personal consumable items that are debt financed will also become cheaper. A car is aspirational and now a viable consideration as a necessity; if I’m in my own car, I can’t get the sickness from the subway or the bus.

We however believe that some sectors will be laggards for a long time:

• Airlines: Airlines were already not doing well before this crisis, this crisis will push whoever was in life support over the edge. Most of the state run airlines in South East Asia and North Asia were already poorly performing, fighting a very competitive marketspace in a margin competitive segment. Most were almost entirely dependent on North Asia for passenger demand. This will curb demand and in any case, it is doubtful that immediately after a crisis of this magnitude leisure travelers are gonna be queuing up, a mourning period of anywhere of up to a year is sometimes observed.

We call the same view for casinos and other hospitality businesses.

• Luxury Consumables: If it was not obvious before that you can’t eat your luxury timepiece, it will be now. The crisis will dampen demand globally for luxury items. Whilst typically we believe these tend to endure downturns (the rich really do live different lives from the rest of us), we believe that there will be an endured slowdown in demand owing to a changing of priorities.
• Asian Currencies: We anticipate all Asian currencies to devalue. It is the easiest path for all countries to lend monetary support to their export businesses and to ease the burden on supply chains. The PBOC has already adjusted the band and it will be a matter of time before the JCB and BOK will do the same. The lead from those major economies will trickle through South East Asia with the Baht, Ringgit, Rupiah and SGD in close pursuit.