2019 Financial Frontiers Reflections & 2020 outlook

(5 November 2019)

2019 Reflection:

  1. 2019 has been an eventful year. The market was packed with rare phenomena such as the inverted yield curve, multiple aggressive Fed rate cuts, and arguably the most famous of them all, the ongoing Trade War.
  1. Now that 2019 is coming to a close. It is a good time for us to take a step back to pen down our reflections for the year.
  1. It would be no exaggeration to describe the changes that have unfolded between Q1 and Q2 as akin to heaven and hell. The market moved with velocity and volatility.
  1. As the saying goes: “In life, we win some, and we lose some”. In 2019, Financial Frontiers (FF) experienced its fair share of erroneous calls. In my opinion, what is lost is a nominal figure, there are always intangible value and lessons to take away. Despite the unsettling financial landscape, FF is blessed to remain debt-free and managed to harvest handsome returns out of the global turmoils.
  1. While some institutional players adopted the wait-and-see approach, FF made a wise decision to return to equities. FF loves to invest in new frontiers. No reason why boutique firms cannot compete with experienced institutional players.
  1. It is through these unorthodox but calculated methodologies that FF has remained competitive.
  1. Now, I would like to talk about recent market phenomena and how they will shape the firm’s ideology moving forward.
  1. First, I would like to share more insights about the Trade War, which is a hot topic. We view that the Trade War is no longer only just a trade dispute. It is a political chess piece by the colossus superpowers of the world. The Trade War is no longer a simple trade dispute because if it is purely numerical imbalances, China and the USA can always iron it out. However, this is not the case.
  1. We are living in a world with blurred boundaries and multiple overlaps. Simply, one can use the analogy of the ‘ripple effect’ to describe the chaos that is manifesting through the political turmoil across the globe.
  1. Thus, it is a confusing time where nobody knows what is right anymore. Schools and tertiary institutions have certainly never taught us about the trade war. I believe it is also beyond many politicians’ imagination that the scale of the situation would escalate to such an extent.
  1. Given the unsettling state of affairs, things have become very unpredictable. Many investors have chosen to look at short term solutions to protect their capital and margins.
  1. As a boutique firm, we accept the fact that this is the modern-day market consensus. FF adapted well to the chaos and utilized it to our advantage. We stayed calm and reanalyze every opportunity; there is no need to restrict our views to be myopic.
  1. Similar to the ongoing Trade Wars, Brexit is a mixed bag of social and political issues. While others view that as unnerving, we believe that FF can capitalize on such chaos as they ultimately generate opportunities.
  1. Unlike our western counterparts, Asian are hungry for success; they are entrepreneurial, hardworking, family-oriented, and strive to leave a legacy behind.
  1. That is why we believe, in the next 20 years, it is Asia’s time to shine. English used to be the language of choice for businesses. However, times have changed, and one needs to be bilingual in English and Mandarin. The use of Mandarin has become more prevalent in recent years, and it is time we equip ourselves with the ability to master the language.
  1. Next, I would like to talk about what we have seen in the first half of 2019 and what FF has learnt.
  1. In the first half of 2019, we have explored various private and public deals in the market.
  1. Singapore is an innovation hub in Asia. We were invited to research on several disruptors in the area of Artificial Intelligence (AI) and the Biotech. Some of these disruptors are able to leverage and work with the Agency for Science, Technology, and Research (A*Star).
  1. Although we did not invest in these companies as we were concerned about their scalability and marketability, we have learnt a lot in this process. We did extensive research before investee’s meeting. With that, we gained sufficient knowledge and ability to make meaningful technical conversations with those industry experts.
  1. We continue to leverage our expertise in the mining and natural resources industry. These resources are essential as they are finite and frequently serve as strategic national assets. These asset classes are viewed as a safe haven amid the ongoing economic uncertainty.
  1. The F&B industry remains an important sector for the firm. With the advancement of technology, human interaction is getting lesser; people could now talk instantly, see and even “touch” their friends and family from afar. However, we believe that there is a need for the community to come together. Jobs such as teaching, consulting, and servicing are irreplaceable. As opposed to conventional beliefs, we think such posts would increase despite the advancement in AI technology.
  1. We exposed ourselves to Blockchain and Cryptocurrency. For us, this is the future of the world. It is not merely a new type of investment, but will be the order of the world. Decentralization is inevitable and will change the traditional business model and system.
  1. We have also researched on travel and entertainment companies with different geographical exposure. One such project aims to monetize the well-known cartoon characters from Warner Brothers in the cruise sector.
  1. We are expanding our team, and we have added an economist to our family office. The arrival of this gentleman enabled us to have a birds-eye view of the investment world. We kept ourselves informed on what is happening in the macroeconomic environment. We did live coverages on issues such as the US-China Trade War deadline, Brexit, the ever-interesting Taiwan elections, the Fed rate cut meetings and various key countries’ budget analysis. These macroeconomic events act as our guiding star and help us to connect the dots to the changing world.
  1. Still, on the macroeconomic topic, our firm places a strong emphasis on empathy. One such event that we felt strongly about was the Boeing 737 Max tragedy. The deceit from Boeing’s deliberate concealment of the Maneuvering Characteristics Augmentation System (MCAS), a critical in-flight control system failure resulted in the pilots never had a fighting chance against the tragic crash. It would be no exaggeration to say Boeing created two flying coffins.
  1. Going back to investment basics makes us rock! Simplicity makes us sophisticated! We are at the frontier to identify undervalued companies. We locked in our position with tremendous arbitrage opportunities that fit our investment philosophy. We have conviction while the market is in hesitation.
  1. Finally, I would like to share my management philosophy. I have always taken the firm belief that FF is about data and its people. I have no intention to shame anyone with data but rather to pinpoint issues with an intuitive sense. It helps me to rationalize a lot of correlations and the underlying problems.
  1. Data allows the firm to measure individuals’ performance objectively. An individual should keep an open mind to embrace feedback and strive for better performance.
  1. With this approach, people will come to work with a positive and analytical mindset. With happy colleagues, FF’s productivity improves. This management philosophy allows me to bring FF to greater heights with a lean team.
  1. FF has been around for a decade and a half. My guiding principles are as follows:
    1. In times of crises, I am the Alpha Wolf, leading the pack through adversities;
    2. During the low season, I will take a back seat and ensure everyone enjoys the fruits of our labour and celebrate as a family.
  1. Perhaps, this is called the ‘Power of Moments’. It is only when the push comes to shove, one reveals his ability.
  1. And finally, what drives FF? I believe in teaching, sharing my knowledge with valid fundamental values in handling the ever-complex world with the younger generation. I hope to see them excel and contribute to society.

2020 Outlook:

  1. Technology stocks in the areas of the Internet of Things (IoT) and the Fifth generation of wireless technologies (5G) and Virtual Reality (VR) continue to interest us. In FF, we set our foresight and identify catalysts in the next five years.
  1. Fiat currency has been used as a medium of exchange for centuries only because we have much advance and scare technology to authenticate than counterfeit it. With the vast amount of 5G base stations to be built everywhere in the countries and IoT enable one’s fittings and refrigerator to collect our health status and customize a delivery order for us, data will become much centralized.
  1. Enabling by 5G and cloud services, VR could bring us to every corner of the world instantly, in a world with overwhelming information, we have become exposed and easy to be misled and manipulated by a cyberattack. Hence, we feel a missing link and an urgent need to look into cybersecurity software that ensures the safety of technology advancement.
  1. Retail business is not performing well as we see the market constantly seeking liquidity and financing. Ecommerce and delivery services were significantly competing for the traditional brick and mortar businesses. On the contrary, we believe packaging materials and smart logistics hubs would be the way going forward.
  1. Food and beverages remain essential and innovative. We will focus on companies that provide higher rental yield, premium services, and those investing in technology (automation) and biotech (e.g., cultured meat) sectors.
  1. Commodities, livestock, and natural resources remain an important sector for us. We want to continue to take advantage of rising prices in this sector due to the imbalance of demand and supply curve.
  1. We are optimistic about the firm’s performance; however, we stay vigilant to handle the idiosyncrasies of the market. With the ending of 2019, let’s relax and take a break before we brace ourselves for the uncertainties in 2020.