Sunday, January 29, 2023

Feature: Recognizing market forces and trends

The market enthusiasm last seen in the second half of 2020 was not repeated this year. Nevertheless, 2021 has still been a good year for full-time investor Rondi Yunanda Yong, who managed to generate lucrative returns by executing a special position trade and holding growth stocks like Tesla Inc.

Yong believes 2022 will be challenging as interest rates are expected to rise and value investors will have to adjust to the environment to achieve better performance.

“Value investors stick to certain metrics like cash flow and earnings before investing money in a company. But it’s not going to be enough. You need to understand market forces, such as the ongoing renewable energy trend, among others,” he says.

Before starting a family office and moving out on his own to become an angel investor, Yong was a trader at the equity proprietary trading desk of CIMB Bank BHD for more than two years. The experience enabled the 33-year-old to find an opportunity in the market this year when Tan Shree Syed Mokhtar Albukhari proposed to privatize MMC Corp Bhd through a selective capital reduction scheme.

According to news reports, through his investment vehicle Seaport Terminal (Johor) Sdn Bhd, the tycoon raised an offer for 1.47 billion shares, or 48.28% stake, that he did not own in MMC. He offered investors RM2 per share, which increased the price of the company’s shares from RM1.20 to about RM1.80 during that period.

Yong thought that despite the uptick in the share price, the difference between the proposed price and the company’s final traded price, known as the spread, was large.

“The 10% spread (20 sen against RM2) was thick. In Hong Kong, the difference is usually 1% to 3%. This could be because the Malaysian market is less efficient, or investors were worried that a privatization deal would not work. “

Yong studied the deal and found that it usually takes about six months to plan for such a privatization. A total return of 10% in half a year would translate into an annual return of 20%, while the risk of the deal not happening was relatively low, in his view.

“MMC has been undervalued for a long time and Syed Mokhtar has several plans for the company if it is to be taken private. The whole proposal made sense to me,” he says.

Yong calls this opportunity a phenomenon called arbitrage, a trading strategy he commonly deployed when he was a proprietary trader dabbling in regional markets.

So, Yong threw some money to acquire shares of MMC. However, to his surprise, the company’s share price fell to around RM1.60 a month before the Extraordinary General Meeting (EGM) was held. This was a significant event as its shareholders would vote for the privatization proposal.

Now that the spread had risen to around 20%, the trade became even more attractive to Yong. “risk-reward” [of the trade] I started feeling good. I got convinced and sold some of my stake in my Malaysian bond fund to buy more shares in MMC.”

Yong says the drop in the share price was due to some investors’ “cold feet” that the privatization plan would not work. Yong was also nervous but he stuck to his guns.

After all, he dealt with wild swings in the markets when he was a proprietary trader at CIMB. “Fortunately, such a phenomenon was not new to me when I was a trader trading in the Taiwanese market. There were also cases where one day people panicked and sold everything. The next day, after they had calmed down, Prices narrowed down and came back to their previous levels. I’ve seen this before. You have to stick to your call if you can’t sleep for a few nights.

“It is similar in case of MMC. I didn’t see why the privatization deal wouldn’t happen,” he says.

In fact, the privatization proposal was passed in September and Yong is now waiting to buy his shares at the agreed price.

As a growth investor who doesn’t shy away from companies with high valuations and great potential for future earnings, Yong also made decent returns from holding on to Tesla shares. He actually calls himself a “Tesla Bull”.

“I’ve Missed The Likes Of Amazon And Google, And I Told Myself I’m Not Going To Miss” [investing in] Tesla this round,” he says.

He sees Tesla as a “generational stock” that could change the future of the world through electric vehicles and lithium-ion batteries. This bodes well for the Environmental, Social and Governance (ESG) trend which is gaining huge traction in recent years.

Ability to identify trends and market forces

Despite his good performance over the past two years, Yong says he has learned lessons from the markets, which also ties in with his experience as a proprietary trader with CIMB.

For one, investors need to be more aware of trends and market forces. Nowadays, sectors in the new economy value the same amount of income generated by a company at a higher price than in traditional sectors, he notes.

The views expressed by Datuk Seri Cheh Cheng He, co-chairman and co-chief investment officer of Hong Kong-based asset management firm Value Partners Group Ltd, resonate with Yong in particular.

According to Cheah, two common factors that cause stock prices to rise are earnings growth and dividends. A company that increases its earnings by 10% may see its share price increase by about 10%. If the company distributes a dividend of 5%, its share price is likely to increase by 5%.

“Then, there’s the third factor, which Cheah called price-earnings (PE) re-rating or de-rating, which refers to how much investors are willing to pay for the company’s shares. [at what PE multiples],

“For example, Cheh said he had invested in a Shanghai-based company in the renewable energy sector. The investment community gave it a valuation of 30 to 38 times earnings. When he went out of business, the company’s turnover was equal to his earnings. happened at about 76 times, which has doubled [and is much higher than companies with similar earnings in other traditional sectors],

“One Dollar Earnings Received by Renewable Energy Company [that the market likes] Much more valuable than other traditional fields nowadays.”

The ability to recognize and understand such trends and follow them will be something investors need to think about moving forward.

Yong says he learned this when he was a proprietary trader from 2015 to 2017. Sitting in front of a screen from 7 a.m. to 8 p.m. on most days, Yong deployed various arbitrage strategies to trade derivatives and equities. During other times, he would arbitrate futures contracts for the Taiwan Index versus the index.

As complicated as it may sound, Yong learned that there are market forces that may not be visible to some investors. “For example, on this particular day, there is an index rebalancing (where new companies will be added to the index list while existing ones will be excluded) and there are investors who apply a risk arbitrage strategy by putting RM50 on the index. Millions. This will affect the constituent stocks of the index and their trading volumes can swing like crazy. However, the street man must be wondering, what is happening? The ability to understand the market forces will be the key that will guide your performance to others separates,” he says.

He added that going forward, investors will have to find more ease in investing in companies in the right sectors with higher PE multiples. Still, he acknowledges that 2022 will be more challenging than the past few years as inflation continues to rise. As interest rates rise, market players will be less optimistic on growth stocks like Tesla, and less generous in associating them with higher valuations.

Is Yong planning to become more conservative next year? “No. I still have a bias towards growth companies and will not change my portfolio,” he says.

Commenting on the equity portion of his personal portfolio, Yong allocates 50% of his funds in growth stocks, 30% in value stocks with solid cash flow and steady earnings, and 20% in cash, reserved for special position trades. He believes that his exposure to value stocks is sufficient for next year’s market.

After enjoying good returns for two years, Yong is also ready to take losses next year if the market turns against him. “Will next year be good for me? I do not know. But we should not be afraid to make losses in specific years. When I started managing the family fund after leaving CIMB in 2018, I was running out of money.

“Investors should not judge their performance on short term basis but on long term basis. More importantly, it is about how you get over loss and what lessons have you learned from mistakes,” he says.

Yong is also an angel investor of Stockbit Group, an Indonesian money tech platform with over one million users. The start-up raised US$95 million (RM401 million) in May from various investors to further develop its mutual fund investment app, Bibit.

Nation World News Desk
Nation World News Desk
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