VI Fund - Our View of the US and China Markets.

Moving Towards a New Reality
An escape from market weakness in US & China?

Dear Valued Clients and Partners,

Blockbuster earnings. Interest rates at 0. Inflation started running higher but it was “transitionary”. COVID-19 looked to be mild enough and is being handled with vaccines. Any news was good news, and indices were hitting all-time highs (ATH) on a weekly basis.

Then it all changed when Powell spoke.

Despite the indices being near their ATHs, many investors that have stuck with the blockbuster darling companies of 2020 are hurting. Many companies retreated to way below their 52-week highs. Growth and technology companies were hit the most, as investors lost confidence in the very narratives that were driving the valuations to the highest multiples ever due to macro factors.

Inflation was no longer transitionary, news of the Federal Reserve’s tapering their bond purchases, the inevitable increase in interest rates, fears of a new strain of COVID, shook the most optimistic of investors – shining a spotlight on the elevated multiples popular companies were trading on. From the shifting goalposts of valuations of companies being invented in 2020 – from the traditional Price-to-earnings multiples to becoming Enterprise Value over Sales, and even forward EV/S, or P/E Growth becoming EV/S Growth being suggested to justify these extended multiples, these thoughts are quickly becoming outdated as everyone starts going on the defensive – selling out to wait out the volatility.

Investors may be left wondering: What is going to happen next, and how can we be best prepared for the upcoming volatility?

Be Strategic with your Asset Allocation

The recent market dips would have affected your portfolio greatly, especially if you are a growth investor, with companies coming off as much as 80% off their all-time highs. As a general rule of thumb that we practice within our company, we would ensure that there are sufficient emergency savings set aside and that we are covered with insurance, before focusing on building our investment portfolios. This is to ensure that even during market corrections like this, we will be able to remain grounded and not be forced into liquidation, at the worst possible times.

The start of the year is a great time for an investor to review their portfolio and make changes if necessary. They should make active decisions on their portfolio, including the decisions of whether to be exposed to the markets, how much of the portfolio to be exposed or perhaps to rebalance the positions in the portfolio based on the weightage.

To make such decisions, investors must be clear of their investment goals, risk tolerance, and time horizons as guiding factors to consider while deciding on the next course of action.

Broken down simply, they are:

  1. Goals – different individuals will have different aspirations for the capital that they have set aside for their portfolio, which can also be thought of as the aspired rate of return for their capital.
  2. Risk Tolerance – this refers to the amount or percentage that the individual is willing to lose in exchange for the expectation that he/she will get a higher return in the future. An individual which is more risk-averse will look for more secure assets. Someone who is willing to risk more in exchange for higher potential gains will look for riskier assets.
  3. Time Horizon – this refers to the duration in which the individual is prepared to set aside the capital

Every investor will have different risk appetites and goals, with the amount set aside for different goals – like education, retirement, or perhaps just working towards making their money work from them. At times like this, it is important to review and be reminded of the longer-term goal that you set for yourself before you make emotional decisions.

Once that is clear, we can now focus on the main issues at hand: Given the turbulence in the markets – what can we expect and how can we better prepare ourselves for it?

The Current Climate

Let us take a step back and look at the big picture and the macro factors that are currently affecting the financial markets.


2020 was the year when COVID-19 first emerged, causing nations to shut down to curb the spread of this deadly virus. In the US, Businesses closed, employers slashed millions of jobs, and economic output plunged 31% in the April-June quarter. On the back of this uncertainty, companies cut investments, restocking was delayed, and everyone could not plan with much certainty for the future.

To lessen the impact of this nationwide shutdown on the citizens and financial markets, the Fed embarked on an unprecedented level of Quantitative Easing, with the Congress passing a $2.2trillion CARES Act which included buying back Treasury Securities and agency mortgage-backed securities to push financial strength back into the markets. Interest rates were slashed, and stimulus checks were handed out to citizens to provide financial support. Leading onto that, more rescue packages were given out, and the gradual opening of the U.S economy saw jobs returning and businesses reopening.

These actions worked a little too well, with the markets reflecting a V-shaped recovery from the sharpest, shortest recession on record. Technology and Software-as-a-Service (SaaS) companies thrived in the pandemic climate, especially with the SAAS companies thrust into the spotlight with their sticky revenue models and high margins, together with the high growth of sales that can be translated to earnings at a moment’s notice, saw them become the darling stocks of 2020.

Fast forward to 2021 – the economy reopened with COVID in the rearview mirror, with everyone accepting that it will be endemic and might never go away. Businesses resumed operations, and they could not hire fast enough, dropping unemployment levels to pre-pandemic levels. Consumers emerged with the pent-up demand from the lack of physical vacations and leisure activities and were willing to spend. As demand came roaring back, ports and freight yards could not handle the traffic and costs rocketed. As costs increased, companies found that they were able to pass the bill to the consumers, which led to higher consumer prices.

This leads to where we are now – to curb inflation, the Federal Reserve made the decision to taper their bond-buying stimulus, with the target of ending the program by March 2022. This will allow them to raise interest rates to directly combat inflation, especially with the supply chain issues showing no signs of easing.


We previously covered the issues in China in our previous newsletter, but a quick recap is in order.

2021 was the year where the world saw how China was able to exert its government powers against the large corporations in China.

It possibly started from Jack Ma’s now-infamous “old man’s club” comment about the Basel Accords and his blunt public comments about the Chinese banks, which may have eventually led to the suspension of Ant Group’s IPO in November 2020.

Since then, the casualties of the crackdowns have been wide-ranging, from the leading tech companies like Tencent (music and gaming), Meituan (retail), Didi (ride-hailing), Baidu (search), ByteDance (social media), JD (eCommerce), to private tutoring companies like New Oriental Education and TAL Education. New regulations targeting various sectors continued to spook the capital markets, and there were massive fund outflows from investors who were spooked and did not want to sit there and be the next to get hit.

However, the “tech crackdown” is likely different factors bundled up together and executed at the same time, with three main underlying themes: the regulation of the large technology companies to address their antitrust practices, the data security of the Chinese people, and the “Common Prosperity” rhetoric driven by President Xi Jinping. By understanding this, there are opportunities that lie ahead in these beaten markets.

Bringing us to more recent events, China is facing a crisis of having their economy falter as the country’s second-largest property developer, Evergrande, faces failure to pay their bondholders, before lapsing into an automatic default. China recently cut its loan prime rate from 3.85 percent to 3.8 percent, despite concerns about inflation. This indicates how the real estate industry is now a real cause of concern for the government, with several large companies including Evergrande defaulting on bond repayments.

So.. What’s Next?

After understanding the macro factors influencing the two major markets in the world, we might be able to better position ourselves for the upcoming year.

What We Think:


  • There will be increased volatility in the year ahead, with the uncertainty of COVID variants and the impending rate hikes on investor’s minds affecting market sentiment.
  • If indices carry on hitting all-time highs, there will be a larger correction due to the high valuations the companies are at.
  • Fundamentally strong companies with healthy balance sheets without leverage, offering mission critical products, great business models will have no trouble riding through such times.
  • Higher long-term interest rates tend to favor cyclical and value stocks over technology and growth stocks.
  • Tapers are the precursor of the Fed increasing rates and will likely end by March 2022. This opens the way up potential rate hikes if inflation persists. Should inflation persist strongly, the Feds may raise the interest rates quicker, which will affect market sentiment.


  • There are uncertainties on the extent and duration of the property slump in China, as it remains to be seen how effective the stimulus measures are. We are encouraged that at least China’s government is not turning a blind eye towards them.
  • Should this market slowdown persist, it is likely that they will have some spillover effects to the emerging markets.
  • Should the stimulus be effective, the markets have a higher chance of performing, as Chinese stocks, especially the technology companies, have already fallen significantly.

Global Risks

  • COVID still remains a global threat, with variants popping up in all places with increased transmissibility. Should another variant, which can evade vaccines, emerge and be deadlier than the original strain, we might need to go back to square one. The upcoming dominant strain Omicron’s early indications are that it is more infectious but likely less deadly, which will set the stage for a post-pandemic world.

However, this is not a recommendation to chase the trends, nor to flee your preferred industries. If you are confident with the companies in your portfolio to be able to carry on performing in spite of the rising inflation or interest rates, this is the opportunity to test your conviction.

The Future Industry to look out for? Web 3.0

Although our team is specialized in the financial markets involving securities, we keep ourselves updated with the current trends in the markets. This will allow us to be able to consider current positions and if it is compelling enough after taking the risks into consideration, to position ourselves to benefit from future trends. With that being said, there is something interesting that the markets are picking up on.

You might have heard the latest hype phrases bandied around in the internet, and Web 3.0, the third generation of the internet keeps popping up. It represents the next iteration of the internet, and could potentially be as disruptive and as big a paradigm shift as Web 2.0.

Web 2.0 was a paradigm shift to how the Internet was used. In Web 1.0, static web pages were on put up on the internet, and users were only able to access what was on the internet. Usage was limited to email and real-time news retrieval. Web 2.0 completely changed this experience, and users could now generate their own content to be viewed by millions of people around the world in an instant, with the main difference being the explosion of user-generated content. This was boosted by innovations like mobile internet access and social media, as well as portable but powerful mobile devices. Users were able to earn a living from here, and the gig economy emerged. Old forms of doing businesses were disrupted, to the point of existential threat (Blockbuster vs Netflix – rent DVDs to streaming online).

However, this also led to dominant platforms – Apple, Amazon, Google, Meta, and Netflix (known as the FAANG) to be able to control the internet and be amongst the largest companies in the world.

The original Web 3.0 was first suggested by Berners-Lee back in the 1990s, or “Semantic Web” with key characteristics such as

  1. Decentralization (where there is no central authority to govern any posts, no point of failure, no ‘kill switch’, essentially no censorship nor discrimination),
  2. Bottom-Up Design (code is developed with the public view, and not written by a select few).

However, it has evolved since then together with the technology that made it possible to form the current Web 3.0. There is no standard definition yet, but the main features are likely to be Decentralization, Trustless, and Permissionless, all supported by Artificial Intelligence and machine learning.

With the excitement of being the early adopters of such a disruptive future, many corporations are jumping into adopting the Metaverse, setting up their own blockchain technology that is for them. Companies are offering their very own Cryptocurrencies – currencies built on blockchain that can be used with their own companies, or even Non-Fungible Tokens – proof of ownership of anything. The sky is the limit to what companies can explore with Web 3.0, and with even Facebook changing its name to Meta, it is a sign that Web 3.0 is picking up steam. This is an industry worth investigating, but as it is new, there are high risks involved as different currencies, companies are still attempting to build their reputation, and investors are still very new to these markets. With great uncertainty comes higher risks, but also higher potential rewards if you choose the right ones.


We have adopted growth-oriented strategies for our portfolios, and we are seeing a significant correction in our portfolios in these recent times.

If you have a growth portfolio, you will similarly find your otherwise passive portfolio being put to the test in these volatile times. You will be tempted to not stand by the sidelines while your portfolio is being battered – thinking how we can make active decisions to save or perform better with our current portfolio.

More conservative investors might suggest that it is better to throw in the towel, exit the market and wait for a better time to enter, while other investors who understand their strategy will tend to hold their positions and ride through the declines. Whatever actions you may decide to do, we hope that the decisions are being guided by valid reasons rather than emotions.

As long-term investors, we know that great companies will bounce back. We find that in the current algorithm-driven markets, stock prices changes are greatly exaggerated and more pronounced than before, and this can have a big impact on people especially if they are new. When bad news comes, it arrives almost immediately and crashes without warning. An example would be the shortest recession that happened right after the crash of 2020, where the markets ended the recession after 2 months.

In times of rising interest rates, increased volatility, and increasing uncertainty in the markets, it is important to remain grounded and go back to the foundations of portfolio strategy. This is the time to review the risks and rewards rationally and observe the impact on the portfolio tested in reality. If necessary, this will be a good time to refine the portfolio strategy and review the portfolio allocation.

We believe that high-quality companies can generate good returns in any market environment, especially on those that have been unjustifiably oversold.

Clive Tan | CEO
Tho Jinliang | Investment Analyst

VI Fund Management

The above references an opinion and is for information purposes only. It is not intended to be investment advice.

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