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  • Belvedere Group

March 2023 Market Commentary

Updated: Oct 4, 2023

The collapse of Silicon Valley Bank has thrown the global financial sector into panic, which led to its eventual fold-up and that of Signature Bank. Hence, this caused...

Developed Markets Executive Summary

  • The collapse of Silicon Valley Bank has thrown the global financial sector into panic, which led to its eventual fold-up and that of Signature Bank. Hence, this caused a contagion effect on other banking stocks. Though we believe that while much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector already on edge. This contagion went as far as the other side of the pond to Europe, leading to the downfall of Swiss giant, Credit Suisse, which was rescued by its domestic rival, UBS. We are expecting banks to provide updates on loan growth expectations, which will help us forecast economic conditions for the near to medium term.

  • The latest figures released by the Finance Ministry showed that Japanese companies increased their spending on factories and equipment for the seventh quarter in a row through to Q4 2022. Japanese firms raised their capital expenditure in the fourth quarter of 2022 by 7.7% year-on-year, lower than the 9.8% recorded in the third quarter of 2022. We believe that the relaxation of lockdown measures in China would help spur demand from Asia, which we expect would be positive for Japan in the near term. Hence, we recommend holding Asian stocks with strong fundamentals even though the macro dominated the micro last year as apex bank policies are combating multi-decade-high inflation, led by that of the US.

Markets Summary Developed markets saw an impressive positive net return, as reflected in the MSCI World Index performance of 7.73% QTD, outperforming the MSCI Emerging Markets net return of 3.96% over the first quarter of 2023. Developed markets outperformed emerging markets by 6bps MTD, with returns of 3.09% and 3.03% respectively. The S&P 500, on an MTD and QTD returned 3.67% and 7.50% respectively. Looking back home, the FTSE 100 returned 0.40% MTD. As the S&P 500 soared 7.50% in the first quarter, the positive performance was majorly driven by mega-cap tech-oriented companies. Almost 82% of the market’s performance was contributed by the return of the seven stocks listed below. In aggregate, these stocks accounted for only 22% of the index weight. Only about 1/3 of the S&P 500 stocks outperformed the broader index in Q1, while about 30% of Russell 1000 Growth constituents outperformed the index. Seven Mega-Cap Stocks that Contributed more than 80% to the S&P 500’S Q1 2023 Performance:

It is important to note that the outperformance by the mega-cap stocks was driven less by fundamentals improving compared to a wider set of stocks, but more by the greater multiple expansion than the market, which was the case for all seven stocks. An example was META and NVDA, which had an increase in NTM EPS estimates over Q1, which supported their stellar equity performance. Whilst the Russell 1000 Growth index returned 14% in Q1, this was entirely driven by multiple expansions, without an increase in NTM EPS estimates. As you will visualize below, the S&P 500 index recorded a minor decline in NTM EPS estimates. Q1 2023 Market Top Contributors exhibited A lot of Multiple Expansion, Not Much Fundamental Improvement:

Looking ahead, the S&P 500 estimates for the upcoming earning season have been trending downwards since the middle of last year. The last peak recorded by the S&P 500 was last May and the EPS estimate for March has declined by 15%, which is in turn expected to decline by 6% year-over-year. The consumer discretionary sector and materials sectors have experienced the highest negative EPS revisions since last May. While we expect discretionary earnings to grow year-over-year in Q1, it is still a mystery tackling the phenomenon of how long the consumer will feel “healthy”.

Silicon Valley Bank Collapse The foundation of the SVB collapse some weeks ago can be traced back to the bank’s allocation of funds during the coronavirus pandemic. In 2021, United States venture capital-backed companies raised a record $330 billion, which was double the amount seen in 2020. During that period, interest rates were held at record lows by the Federal Reserve, within the range of 0% - 0.25% in response to the growth slowdown caused by the pandemic. In one year, SVB received billions of dollars from its clients in form of deposits and this prompted the bank to invest in long-dated instruments with yields of around 1.5%, much higher than the Fed’s benchmark rate at the time. However, the aggressive rate hike by the apex bank saw these long-dated instruments become less profitable and riskier relative to government fixed-income instruments which are priced in tandem with the benchmark rate in the country. Consequentially, this saw SVB fall into a financial trap with their expectations of rates remaining low at pre-pandemic levels all dashed by the Fed’s hawkish response with rates to their present range of 4.5%-5.0%. Hence, as interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings. SVB had the option of either holding this MBS at 1.5% to maturity or selling it off as treasury bills now offered more attractive rates. It then decided to sell and incurred about $1.8 billion loss, resulting in a panic amongst VC firms on the safety of the deposits of their start-ups in the bank leading to an increased request for withdrawals which triggered SVB's failure to meet its withdrawal obligations. SVB is the largest bank to collapse since Washington Mutual during the 2008 financial crisis. The early signs of SVB's fall started on Wednesday, March 8 when the company announced its urgent need to raise more than $2 billion to cover up its balance sheet. This caused major venture capitalists’ firms such as Union Square Ventures and Coatue Management to begin withdrawing their deposits from SVB. Consequently, this resulted in SVB’s failure two days later to process customer withdrawals, leading to a bank run. SVB Balance Sheet Summary (end of 2022):

Thereafter, more hedge funds and venture capital investors realized SVB could be on the path of an inevitable fold-up. This caused depositors with SVB to withdraw funds, causing a liquidity tightening and prompting California regulators and the FDIC to step in and shut down the bank. The regulator then appointed the FDIC as the receiver, which led to the creation of a new “bridge bank” called the Deposit Insurance National Bank of Santa Clara (DINB) to protect and guarantee depositors access to their insured deposits with the now defunct Silicon Valley Bank. However, uninsured deposits which are amounts exceeding the FDIC’S $250,000 limit, were not covered by the DINB. The week after the collapse of SVB saw the announcement by HSBC Holdings Plc that its subsidiary, HSBC UK Bank Plc acquired the UK subsidiary arm of Silicon Valley Bank for a fee of £1. This deal included taking responsibility for the assets and liabilities of this subsidiary arm of SVB including its loans and customer deposits of £5.5 billion and £6.7 billion respectively. However, the assets and liabilities of the parent companies of SVB UK were excluded from the transaction. In addition, First Citizens Bancshares recently announced its purchase of around $72 billion of SVB assets at a discount of $16.5 billion. The SVB’s collapse has caused shockwaves through global banks and influenced the eventual downfall of Swiss giant Credit Suisse and its emergency rescue by domestic rival UBS. Additionally, this financial shock was further heightened by the latest interest rate hike by the Federal Reserve and the increased credit default swap (CDS) rating of Deutsche Bank to its highest since 2019 and the contagion effect of a panic sell-off it caused to other banking stocks in Europe like Commerzbank, UBS, Barclays, BNB Paribas, amongst others. Deutsche Bank declined over 8% on the back of this announcement but saw a rebound in the subsequent trading sessions attributed to the assurances from the ECB of its readiness to avert another bank collapse, confidence in Deutsche Bank’s business models, liquidity positions, strong solvency, and profitability, puts the bank in a better position relative to Credit Suisse. The four largest US banks lost a combined $52 billion after the SVB collapse with other banking stocks such as the now defunct Signature Bank, First Republic, and Silver Gate Capital also dropping by double-digits. However, we encourage our clients to exercise diligence in executing new allocations amidst this market volatility and remain invested in the market as we attribute specific flaws of SVB and Credit Suisse to their MBS exposure. Deutsche Bank Price Chart YTD:

Additionally, we recommend that our clients closely monitor the impact of interest rate decisions by global central banks. Furthermore, we believe the latest market panic caused by the CDS rating of Deutsche Bank is overblown at least compared to that of its European rival Credit Suisse. First, Deutsche Bank reported $1.98 billion in net profit for 2022, while Credit Suisse had a fourth-quarter loss of $1.4 billion. Also, Deutsche Bank’s liquidity coverage ratio was 142% at the end of 2022, implying that the bank had enough liquid assets to cover a sudden outflow of cash for 30 days. However, we believe that this financial panic would continue to be present momentarily even as the Federal Reserve faces the tough decision of either prioritizing financial system stability or its fight against inflation. Hence, we suggest caution to our client amidst the uncertainty and a looming economic recession, as we channel the path of caution and advocate for a defensive investment strategy.

Japan Corporate Spending Rises in Q4 2022 to Spur Confidence in Economy The latest figures released by the Finance Ministry showed that Japanese companies increased their spending on factories and equipment for the seventh quarter in a row through to Q4 2022. This comes as positive news to the economy as it offered some relief to policymakers hanging on the private sector to accelerate the country's recovery from the pandemic. According to the data, Japanese firms raised their capital expenditure in the fourth quarter of 2022 by 7.7% year-on-year, lower than the 9.8% recorded in the third quarter of 2022. Thus, we forecast these impressive CAPEX numbers to continue to strengthen as the Japanese economy continues its rebound from the pandemic. Furthermore, the relaxation of lockdown measures in China would also help spur demand from Asia, which we expect would be positive for Japan in the near term.

Hence, we recommend our clients examine their risk tolerance to benefit from the value opportunities presented in Asia as the banking stocks collapse resulting from the SVB crisis has not been a headwind to Asia compared to the United States and Europe. However, we expect the incoming Bank of Japan Governor Ueda Kazuo to face difficult challenges in stabilizing the economy and regaining confidence in making the market attractive in the near term. The country's outgoing Governor Kuroda Haruhiko has undertaken unprecedented monetary easing policies that have proven to be ineffective. For years the BOJ failed to achieve its price stability target of 2%. Hence, we recommend caution for our client into taking new positions in the Japanese market in the face of looming uncertainty.

Emerging Markets Executive Summary

  • Foxconn, an iPhone manufacturer plans to invest about $700 million to build a plant in India that will manufacture components for the iPhone, electric vehicle business, and assemble Apple mobile devices on a 300-acre site. Given the rising tensions between Washington and Beijing, Foxconn's investment in India highlights its rapid industrial shift away from China. It also emphasizes Apple's decision to review its China-dependent supply chain after covid-related problems at Foxconn's facility hindered output and adversely affected Christmas sales last year.

  • On reports that UAE is considering leaving OPEC, oil prices turned positive after falling by $2 a barrel on Friday 3rd of March 2023. The report on the United Arab Emirates’ internal discussions to leave OPEC caused a 2.8% drop in Brent crude in the morning, which later recovered and closed at $85.83 per barrel on Friday, March 3rd, 2023.

Market Summary The Emerging market index delivered a positive performance as it returned 3.03% for the month of March 2023, making its second quarterly gain consecutively. Investors’ interest in Tencent Holdings Ltd, Alibaba Group, Taiwan Semiconductor, Samsung Electronics, and Meituan Class B were the primary drivers of the index performance as they returned 8.89% and contributed 1.63% to the overall index.

On March 31, 2023, Tencent Holdings Ltd filed a dual currency application with the Hong Kong Stock Exchange to let investors trade its shares in the yuan in addition to the Hong Kong dollar. Before that, on March 22, 2023, the video game company released its 2022 fourth quarter and annual results. It posted a net profit of 106.27 billion yuan (USD 15.44 billion) for the quarter that ended December 2022 which was 12% higher than a year earlier and declared a final dividend of 2.40 Hong Kong dollars a share for 2022 which was HK$1.60 a share in 2021 after it recorded a gain from the disposal of its Meituan stake. Nonetheless, Tencent is also a Chinese stock that still faces delisting threats in the U.S. As a result, we expect Tencent's stock to be volatile within a tight range for an extended period without trending one way this year until those headwinds have completely subsided and Chinese stocks seem more interesting to investors.

Alibaba Group Holding Limited returned 16.06% MTD, amidst its plan to split itself up. One-month return of Taiwan Semiconductor Manufacturing Company Limited (TSMC) was 4.95%. If investors had purchased $2,000 of TSMC stock at the beginning of 2014, it would be worth about $13,500 today. Over the past five years, TSMC's share price has more than doubled, and its total shareholder returns have grown by 138%. However, the company is currently facing a punitive double taxation issue discouraging its expansion in the U.S.

The broader index recorded a one-year net return of -10.70%, a five-year annualized return of -0.91, and a 10-year annualized return of 2.00% as of March 2023. In contrast, the MSCI Index returned a one-year net return of -7.02%, and a five-year and 10-year annualized return of 8.01% and 8.85% respectively. In terms of sector composition, the communication services, information technology, and utilities were dominant MTD with returns of 7.20%, 4.89%, and 4.20% respectively. Indian stocks recorded their best gains since 11 November on Friday 31st of March 2023. The BSE Sensex surged 1.78% while the Nifty jumped 1.63%. Improving sentiments in the developed markets, especially the US, was reflected in the domestic equity markets. However, the market has experienced fluctuations for the month of March 2023 due to controversies regarding Adani Group-listed stocks. Adani Enterprise Limited

Adani Enterprise Ltd, the flagship company of Adani group dipped almost 8% on Tuesday, March 28, 2023, as the worst performer on the Nifty index after a report was released by The Ken (An Indian Business News firm) which raised questions doubting the group’s claim to have repaid its share-backed debt worth $2.15 billion. All the Adani Group-listed stocks plunged this day with more than half dipping by 5%. However, Adani Enterprises and Adani Ports topped the gainers’ list by 8% on Wednesday, March 29, 2023, after Adani Group released a statement that clarified that it has fully repaid the debt and all corresponding shares linked to these facilities have been cleared. In the last five years, the MSCI World Semiconductors and Semiconductor Equipment Index has had net returns of 16.22% per year, compared to the MSCI World which has returned 6.88% annually. We expect the semiconductor stocks in the emerging market to outperform the performance of the broader index as there has been a significant return from the MSCI ACWI IMI Semiconductors and Semiconductors eqp ESG over the years, as displayed in the chart below.

In the post-great recession period, semiconductors have outperformed the general market in nine years according to Seeking Alpha. This leads us to believe that Investors should look at maintaining a long position in these stocks as most are at cheap valuations with a relatively low P/E ratio. A good example is Taiwan Semiconductor Manufacturing which has a P/E of 14.3 as of April 2023 (TTM). P/E ratio history for TSMC from 2001 to 2022:

Foxconn, a major Apple supplier will invest $700 million in a new factory in India

A Taiwanese multinational electronics contract manufacturer (Foxconn) trading as Hon Hai Technology Group in China and Taiwan intends to invest about $700 million in a plant in India to make iPhone parts, and parts for its electric vehicle business and assemble Apple handsets on a 300-acre site. This announcement puts China on the verge of losing its status as the world’s largest producer of consumer electronics. India officials claim Apple wants to relocate 25% of its manufacturing to India amid concerns for China. Earlier in November 2022, production was stalled due to COVID-19 lockdown regulations and workers’ protests over the delay of pay bonuses. As a result, Apple and other US companies have been relying on their Chinese suppliers to look into alternative countries like India and Vietnam. This would be an opportunity for India to close the tech gap with China as investors worry about China’s crackdown on prominent entrepreneurs. According to Bloomberg analysts, the new factory near Bengaluru could “boost the country’s share of iPhone assembly to 10-15 % from a sub-5% currently.” Because China possesses an eco-system that cannot be replicated in the short term, we expect Foxconn to face a weaker infrastructure, an inefficient transport system, and lower domestic consumption, but on the bright side, labour costs are lower than in China. This firm has been involved in a series of investments to diversify its production. This might affect investors trying to take a short position as the firm is likely to face sanctions or strict policy in its new location. However, we expect these investments to boost the top line in the long run and advise investors to consider this investment if it fits their investment objective. UAE considering leaving OPEC boosted oil prices The report on the UAE’s internal discussion to exit OPEC has resulted in an immediate 2.8% decline in Brent crude in the morning which later recouped its losses and closed at $85.83 per barrel on Friday 3rd of March 2023. This development underscores OPEC’s crucial role in the global oil market.

What does the potential withdrawal from OPEC mean? The potential departure of the UAE from this alliance has significant implications for the oil market and the other OPEC member countries. Market volatility has resulted from the mere speculation of this move. This situation highlights the intricate balance of power and interests within OPEC and the global oil industry, emphasizing the need for continuous monitoring of geopolitical factors that impact oil prices. UAE being the third-largest producer of the OPEC, its withdrawal would indicate further disunity within the alliance after the recent exits of Ecuador and Qatar which would be disastrous at a time oil prices remain stuck between limited global spare capacity and potential demand increased from China re-opening.


The commentary you find on this page is for information only; it is not intended as research or a recommendation suitable to your individual circumstance. Please seek financial advice from a professional before acting on investment decisions.

As is the very nature of investing, there are inherent risks, and the value of your investments will both rise and fall over time. Please do not assume that past performance will repeat itself and you must be comfortable in the knowledge that you may receive less than you originally invested.


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