Insights

VI Fund - Risk-Off Approach


“History doesn’t repeat itself, but it often rhymes” – Mark Twain

The current volatility in the world continues to persist throughout the year – with the main themes revolving around the world’s Superpowers: China, the USA, and Russia.

China continues to face woes;

  • Despite local governments issuing measures to boost housing demand, home prices fell for the 12th consecutive month. As a result, mortgage boycotts are on the rise, with homebuyers refusing to pay for up to 342 projects in 110 cities.
  • The Yuan broke through 7 per dollar during the US Dollar rally, indicating growing bearish sentiment toward the yuan. However, the relative strength of regional currencies remained strong, even increasing.
  • China's stance on Taiwan has hardened, with the Foreign Minister comparing Taiwan's independence movement to a charging rhinoceros that must be stopped.
  • Estimates for China's growth outlook are being revised as the country's stubborn adherence to its Covid Zero policy continues to stymie the economy and the property-related crisis.

Not everything is rosy in the United States as well;

  • Inflation is currently near a four-decade high at 8.26% year on year.
  • Fed Chair Jerome Powell reaffirmed his commitment to focusing on reducing inflation by pushing policy rates.
  • US treasury yields surged amidst poor demand, with 10-year yield rates breaking 2010’s high at 4%.
  • Wall Street prepares for an imminent recession as interest rates skyrocket.

Regarding the conflict between Russia and Ukraine;

  • Ukraine appears to be making progress against Russian forces and driving them back thanks to the high-tech armaments supplied by Western allies.
  • Ukraine claims it reclaimed 6,000 square kilometers of Russian territory earlier this month when it forced Russian units back into the Kharkiv region.
  • In response, Mr. Putin ordered the partial mobilization of approximately 300,000 Russian reservists, emphasizing that the call-up would only apply to those with prior military training.




“I cannot always control what goes on outside. But I can always control what goes on inside.”
– Wayne Dyer


We attempted to form our portfolio around the strongest companies that showed strength amidst these current volatile times with strong fundamentals to be able to weather the storm.

In the memo we wrote in January, Our View of the US and China Markets, we discussed the issues in the US and China. We were rightly cautious about the US but were too positive about the situation in China/Asia. I’ll insert what we wrote below:

US

  • 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.

China

  • 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.

The increased volatility we expected in the US due to the impending hikes and COVID variants will result in a much heavier correction, due to the all-time highs that the indices were in, contributed by the inflated valuations the companies were trading at. We would never have imagined inflation to persist as it did so far as it did, but being cautious in our portfolio allocation was one of the better things that we have done so far.

In China, we failed to place greater emphasis on the stubbornness of the Chinese government about their COVID Zero policy – which shut down entire cities and brought a stop to manufacturing activities – which affected the world’s economies. The property slump was more persistent than we thought: which led to increased distrust in the Chinese government’s policies and social unrest – mass protests against banks, refusal to pay mortgages on properties that paused development, protests against the lockdowns, etc.

In these environments, everything moves and changes very quickly especially when it comes to market sentiments or new developments. When it became apparent that these issues were here for the short to medium term, we scaled our positions down and held a significant portion in cash to hold USD. In hindsight, it allowed us to be less affected by the currency drawdowns as well when the USD strengthened significantly amongst the rest of the world’s currencies – Chinese Yuan and HKD.

Risk Off

Companies’ valuations are getting more attractive every day as the markets continue to sell off, but we must remain disciplined and not waver. It is very important to practice risk management in such volatile times, where anything and everything can happen.
Managing our downside will allow us to live to fight another day, and protect our capital to ensure that we have more capital to deploy when the market recovers. After all, it gets harder and harder the more we lose. A loss of 50% will require a 100% gain, whereas a loss of 20% would only need a 25% gain. We will be patient in seeking out rare opportunities in the markets, but will not hesitate to hold on to more cash if no such opportunities arise. It may be difficult to remain calm amongst such volatility where indices rise without reason, but being disciplined will allow us to emerge stronger from this crisis. We believe that only when more positive indicators are present, the markets will still have some room to correct. Only then, will we be quick to deploy our funds. We will be patient.



Tho Jinliang | Investment Analyst
VI Fund Management Pte Ltd

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