Enter the (Wood) Dragon
Seven “Dragon” years ago — that’s 1940 — the legendary Bruce Lee was born in San Francisco, California. Martial artist, actor and philosopher, the Metal Dragon baby combined his early Wing Chun, tai chi and boxing training to create his own school of Jeet Kune Do. With students including Chuck Norris, Sharon Tate and Kareem Abdul-Jabbar, he took Hong Kong films and Chinese martial arts to the world, and was the early influencer of what we call the MMA (mixed martial arts) phenomenon today. Time named Lee one of the 100 most important people of the 20th century. Alas, Lee’s star burned out prematurely. He died in 1973 while he was a mere 32 years old, not yet into his third Dragon year — a somewhat ominous nod to his given name in Chinese, “Xiao Long” or “Little Dragon”.
As I strolled through Bangkok’s Chatuchak Market over the recent Lunar New Year weekend, I was surprised to see images of Lee still adorning various souvenirs in the Muay Thai-crazy country. When I wandered through the souks (markets) of Marrakech in Morocco back in 1993, some street teenagers tried to grab my backpack. I resisted and they backed off — after they pointed at a mural of Lee on a wall behind me.
As I postulated in the previous Lunar New Year’s Chew On This, we needed a bit of Stephen Chow’s Kung
Fu Hustle to extract value from an otherwise flat Straits Times Index (STI). This year, with even more geopolitical uncertainties and talk of “irrational exuberance” building up in frothy US stocks, we might need Lee’s Fist of
Fury and learn to be flexible Like Water to maximise the opportunities proffered by the Year of the Wood Dragon we have just entered.
The Big Boss
The Chinese fengshui element of Wood is associated with the capacity to look forward, plan and make decisions, and hence implies growth and expansion. Wood energy is rising, expanding, and is the force of growth and flexibility, hence the colour associated with Wood is green and takes a rectangular shape. Combined with the majesty of the Dragon, many who study the metaphysical, see evolution, improvement and abundance — a perfect time for rejuvenated beginnings and foundation for long-term success.
Fuelled by the Magnificent Seven, the S&P 500 makes new highs constantly. Meta Microsoft, Nvidia, the three A’s of Apple, Alphabet and Amazon, and a stumbling Tesla, together make up more than a quarter of market capitalisation in the largest market in the world. A significant concentration by any measure.
Michael Cembalest, chairman of market and investment strategy at JP Morgan Asset Management, points out that the Magnificent Seven’s rally has been earnings-driven, rather than leaning on valuation multiples expansion typical of bubble euphoria. Of this group’s 28% profit return since 2019, 21 percentage points are attributed to sales growth, 6 percentage points to margin expansion, and just 1 percentage point to multiples expansion. This contrasts with the margin-less bubble that burst in April 2000 — where Pets.com was perhaps one of the most famous flash-in-thepan failures of that era.
Having said that, in the 1½ months thus far this year, Nvidia is already up 50%, on top of 239% in the whole of 2023. The problem with bubbles is that one never knows when they will end. Nvidia’s story is made even more interesting, given how it is not just making chips for AI but has already invested in a slew of other companies with AI-driven applications. In effect, Nvidia has turned its own halo into a Midas touch when companies such as voice assistant developer SoundHound and medical device maker Nano-X both popped more than 50% upon news of Nvidia’s investment. If such trends can hold, is Nvidia now at 100x earnings multiple still considered cheap?
As hedge fund Chameleon Global Capital Management described in a note last week, we are now in the “tulip stage” of growth where “literally anything can happen”. There is 100% overwhelming positive consensus. Is this the foundation of the long-term Dragon success of transformational AI? Or will The Kid grow into a dangerous Game of Death before middle age?
Time will tell, but JP Morgan’s recent analysis shows that US market concentration has reached the highest level since 1972, where the top 10 stocks have decoupled from the 11th to 50th by a greater degree than during the dot.com bubble. There is a coincidental correlation of large spikes preceding recessions, with market concentration making it impossible for active equity managers to produce alpha. Last year, only 23% of Russell 1000 managers in the US outperformed versus 66% in 2022. It is An Orphan’s Tragedy that stocks with real earnings and cash flows are left in the dust globally, with overcrowding and convergence of institutional and private wealth portfolios all-in. While the Wood Dragon signals expansion and rejuvenation, the US market characteristics do suggest a late bull that may not fit the elements for the year ahead.
A Walk in the Spring Rain
Little known and overlooked, Lee choreographed the fight scenes in this 1970 movie, A Walk in the Spring Rain. There are some who believe that fengshui applies to China or Eastern markets but not the West, and China markets are the most overlooked ones of recent years as it suffers from death by a thousand cuts, which in turn dragged Hong Kong down to the extent that the STI’s 50% outperformance since the pandemic makes the local index look seemingly well protected by a Circle
of Iron, albeit steady and extraordinary boring so far.
Bottom fishing in “Armageddon” where Chinese equity markets continue to crash seems a good idea — especially when there is volume expansion, which is typically a sign of seller capitulation. However, there have been multiple such instances including where the authorities go beyond “jawboning” and talking up the markets with the China Securities Regulatory Commission — whose boss was dismissed before the Lunar New Year — pledging to prevent “abnormal fluctuations” and crack down on illegal “malicious short selling”. They have as typically told fund managers not to sell, and send state investors including the China Investment Corp to buy. All these are to limited avail as in previous occasions over the last two years.
I believe concerns over Chinese real estate are overblown, and policyholders have held in reserve plans for nationalising and creating social housing. There is also enough domestic capital to set up a massive stimulus or domestic stabilisation fund, with Beijing’s priority still on “Common Prosperity” and fighting corruption.
Nonetheless, I see down-room for rebasing the results from speculative bubbles of old. Cembalest of JP Morgan points out that when we talk of how cheap Chinese equities are today, it is a relative measure simply because we reference where they once were. Incredibly, on forward P/E measures, while China H-shares trade at just five times earnings, just about beating Pakistan and Russia, the MSCI China and FTSE China indices are at around 10 times — more expensive than Asia Pacific as well as European financials and energy indices, the Hang Seng Index, and even the S&P telecoms and airline indices. With Spain, the FTSE 100 and S&P banks and energy stocks at 10x–11x P/E, bottom-fishers may still have to be prepared for The Thunderstorm that could continue.
Even so, institutional investors have been investing “in China”, albeit through proxies. After last year’s collapse, European luxury stocks (which derive some 26% of their earnings from China) have risen 9.3% yearto-date, with LVMH up 9.2% and Hermes 11.8%.
Similarly for local investors, should one choose to Enter the Dragon or average down, as the precipitous sell-off of local stocks with a Chinese nexus, such as CapitaLand China Trust with almost 10% yield and trading at 60% book value, deserves some attention. There is also the overlooked gem Straco Corp whose China leisure business is booming. Or Wilmar International, which lost over 10% because of an alleged fraud case involving a former employee of its Chinese listed subsidiary. In its defence, the stratospheric valuations post-IPO of this China-listed unit Yihai Kerry Arawana Holdings stock were never priced into the parent company’s price, so why should it be a drag?
The Way of the Dragon
Singapore exports grew 16.8% in January, supporting an impressive postLunar New Year rally of the STI that broke through technical resistances, thereby setting the stage for another run to the upper end of its trading range in the last few years, or around 3,330 points. This all happened just when no one was looking. Some attribute this to anticipation for Deputy Prime Minister Lawrence Wong’s Budget 2024 unveiled on Feb 16, which gave a balanced boost to businesses as well as its Forward Singapore theme of enabling every Singaporean to achieve his or her full potential.
The $40,000 tax rebate for corporates will benefit a host of SMEs, the bedrock of employment in Singapore, which could pass it on in bonuses or capital expenditure, on top of tiding through a generally tougher climate. I know of at least one individual who was out “shopping” while listening to DPM Wong’s speech — and got his confirmation to make his big purchase. As a balanced foundation for long-term success with incentives for green transition and meaningful SkillsFuture topups, after having gone through covid restructuring, perhaps the Dragon year is for The Orphan market of Singapore to find its level.
To be sure, our STI index is trading at 12.7 times forward P/E, much better than the UK, China and Hong Kong. Perhaps carried by the banks, the Lunar New Year rally was fuelled to some extent by the record ten billion in profits reported by DBS Group Holdings, plus higher dividends and a bonus issue. Ironically, CEO Piyush Gupta took a 30% variable pay cut for record earnings, whereas Goldman Sachs’ David Solomon took home 24% more even as profits hit a fouryear low. Therein lies the risk of retail business which Goldman cut and where DBS in the court of public opinion had to demonstrate solidarity for the tech outages impacting Joe public last year.
Still, amid the index yo-yo range of 3,050 to 3,350 in post-Covid years, our star performers last year and picks in 2024, Keppel and Sembcorp Industries, broke new post-pandemic highs. Singapore Airlines, as postulated, continues to be a great way to fly. All made decent returns of more than 10% yearto-date. Another STI component, Venture Corp, too has rebounded to around $14, and ComfortDelGro’s steady international expansion is matched by a stable and accreting stock price that was finally pushed above $1.40. Will laggards like Sats and Singapore Telecommunications follow, or regional plays like Jardine Matheson Holdings, Jardine C&C and Thai Beverage where consumer spending is still holding up?
This might or might not be the year, where our own Dragon, Prime Minister Lee Hsien Loong, hands over the reins. But with the economy positioned through the Budget for longterm collective success, we hope for the STI to break out in the lead-up to Singapore’s 60th birthday next year. If so, instead of shopping in the malls, I will be shifting through the many local orphan stocks especially in the highly-undervalued small-caps market, perhaps ploughing into recent IPOs including the Singapore Institute of Advanced Medicine Holdings, and making some donations with the individual handouts! #ForwardSG
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore