Thunk Piece May 2021

Clearwater Capital is an asset management team based in Singapore operating as a Registered Fund Management Company regulated by 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.
This article is a snapshot of our thinking for clients. It is intended to show how we view the world, not as a basis of investment advice.
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MAY 2021 : REOPENING REVERSAL
At the time of writing, Covid-19 is winding up to deliver another curveball in the progression its terrible progress. Clearwater Capital has long been expecting this outcome and has made known these views to clients weeks ago. This month’s thought piece asks, what next? At the time of this newsletter, capital markets teeter on all-time highs with the present ‘reversal’ from Growth back to Value as there are expectations that such a move back towards normalization of the world.
Clearwater Capital has been tracking these matters very closely and our views for Q2 2021 remain the same for the year; disruption and debt remain key themes. But we must now brace for a very real possibility that a ‘reopening’ play will be uneven, unreliable and possibly even undone before it even begins.
In small Singapore, a cluster of cases has broken out. Whilst the mortality is low (largely owing to Singapore’s infrastructure and wealth), the most worrying is that 2/3rds of all the new infected have all received the vaccine already and are in jobs that offer nearly unlimited access to protective gear and a lot of training to protect oneself. The lapse of vigilance notwithstanding, the fundamental thought that has been in our discussion has been since the vaccine was first distributed, what happens if there’s a mutation and the vaccine is rendered useless. It does not mean that one does not go for the vaccine (PLEASE GET YOUR SHOT), but it does mean that the panacea that is anticipated is very far from delivering a normalization of activities for everyone.
And therein lies our biggest risk analysis; if the vaccine works, the way capital markets are priced right now (all time highs or decade highs for commodities), the expectation that demand will explode is extremely optimistic, even in the best case scenario there will be some lag. If the vaccine does not work as well as hoped, and key aspects of the global economy like travel, leisure and easy access to labour do not return; the potential downside risk is tremendous. And all bets are off should the Covid-19 virus mutate to be become more deadly or transmissible, a very very real prospect. As such, we call for caution amid the euphoria.
We also identify a further complication, liquidity risk. Clearwater Capital posits the rare opinion that government liquidity released globally since the start of the global pandemic is now at an inflexion point; most countries have had the biggest drop off in tax revenues since WWII, the lack of revenue and spending money twice as fast with no end in sight means that there is a chance that the cost of funding is about to get much higher.
All Governments globally must find the means to finance further spending. Since every government is simultaneously in the same scenario, the likelihood that there will be some competition for such funding. Liquidity can be fulfilled by monetary theory of course, but that is a self-fulfilling inflation cycle. We put forward the unpopular opinion that the likelihood of sustained inflation (because of liquidity), will be less likely as governments will likely also resort to taxation on the wealthy and asset owners to meet those demands.
Will anyone benefit? As written several months ago, Clearwater Capital carries the opinion that the bet should be with large countries that have large domestic markets and the nascent ability to be self-providing. Global travel is not normal, until it returns, international trade is hampered. Efficiency (lowest cost) has to give way to access and reliability. If I cannot travel around the world to get the best products at the best prices, local substitutes would have to make do. Larger countries will have the highest likelihood of having import substitutions, smaller ones will have to be price takers.
Which brings us what we think we would do in capital markets for the near term; CCPL has been taking a wait and see for an interim. We are confident to make the following assessments.

1. We believe that the general trend for capital markets will continue to move along sideways. We expect government policy to drive volatility. Whilst many companies continue to achieve (and in many instances even exceed) their targets and forecasts, we believe that this is a future deliverable has been priced in; valuations are rich and downside risk is higher than potential upside gain. This assessment is because of uncertainty in future growth. A resurgence of Covid-19 will have us all returning to ‘stay at home’ stocks.

 

1. We believe that it would be best to aim for the largest countries (US/China), largest markets and bias towards internet related businesses that help plug the gaps in normalization. The largest industries that can attract the largest amount of what was previously loosely distributed government backed liquidity, to what will be more prudently distributed liquidity.  For emerging markets, we are inclined to financial services and any technology angle that can be applied, governments are all restricted to monetary policy, if not finance companies the capital can go to very few other places reliably without Covid-19 risk.
   
   
2. We continue to believe in disruption. Fundamentally, disruption is biased on novelty (newest and best), utility (usefulness) or habit (a series of actions that were new and have now formed a habit). The longer the Covid-19 remains in place, newer actions become more commonplace and eventually become habit forming; entrenching disruptions. We believe this holds true for companies that are using alternative technologies to carry out their business including finance, insurance, real estate and retail.

 
Cryptos & Democracy
Crypto currency is presently having its time in the sun. Clearwater Capital does not have an expertise nor does it make any advice into the sector. CCPL does suggest extreme caution in this asset class. But in studying it have noted a fundamental aspect of investing in the covid era, the impact that social investing and access to leverage (credit) can have. The use of modern applications (e.g. Robinhood, Futu/Momo etc have allowed a new generation of investors into the market. Worryingly it has given them access to near unlimited credit. This investment capital is primarily being driven by celebrity and social media. This profligacy is a global phenomena and one that we are paying close attention to.
Currency
CCPL is in the midst of launching our first algo driven FX fund. We believe the timing is right and we have extremely talented PMs. We will be reaching out to existing clients and potential investors soon. Please feel free to contact myself if you have any questions at [email protected]
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