June 20, 2021

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This Is A Time of Irrational Exuberance of Epic Proportion

Dear all,  it is almost 1 year since the last MCO in March 2020 that caught everyone by surprise. Most expected Covid-19 to be over by now entering 2021. Sadly, Malaysia once again entered MCO 2.0. This was coupled with the nationwide Emergency Proclamation. Whether we agree with the rationale behind these measures is not important anymore, the issue at hand that we have to face is the rising Covid-19 cases to record levels and alarming infection rate in the community. With things as it is, we are not yet on the path of recovery as what most pundits / "experts" have forecasted as early as Oct 2020. 
 
Pic from Forbes
 
I have written on this topic before and warned multiple times that investors should not count their chicken before it hatches. I said, recovery play can be considered for Banking, Telco, Utilities and select blue chip names. I repeatedly warned against Hospitality, Tourism, Retail. By nature, I am an optimist. I believe in the resolve and ingenuity of mankind to adapt & overcome adversity. However, it doesn't mean an announcement of vaccine translates into a "global rain shower that eradicates Covid-19 overnight." 3 months since the announcement of Pfizer, Modern, Astra Zaneca vaccines in November, it is proven fact that the numbers continue to sky rocket daily (globally and domestically). This is largely due to the 3 reasons below :
 
1. Slow execution / implementation of mass vaccination globally (logistical / manufacturing hurdles)
2. Slower receptiveness towards receiving vaccines 
3. Lax mindset, overconfidence or failure to abide by SOP in view of the vaccines newsflow
 
I am not a medical expert so I dont want to elaborate further beyond this. I believe most would agree the main reason our own country's Covid-19 cases spiked was due to the relaxation of CMCO allowing interstate travels followed by the Christmas & New Year holidays. Now imagine this for many countries around the world with larger population which are less law abiding. 
 
The stock market is a reflection of an important part of the economy but it does not represent all of the economy. We can see the rich gets richer and the poor gets poorer everyday with the record high unemployment rate, business shuttering yet market cap of billionaires reach new stratosphere. This wide disparity is particular obvious in the stock market. Many astute investors whom I know personally have even told me, 2020 was the best year for them in terms of ROI. What does this show us? 
 
It means this is a time of great irrationality largely driven by the liquidity flooded by central banks around the world (expanding M3, money supply in the economy) and expansionary fiscal policies for countries which can afford to do so. This is why, the stock market runs ahead with such expectations whether rational or not. Remember, this is a time where Tesla with no profits have become the world's 6th largest company by market cap making the founder the richest man in the world. It is also a time where Bitcoin broke US $40,000. This is a time of "irrational exuberance" of epic proportions.
 
Locally, I am seeing tech stocks which are actually manufacturers trading at 100x+ forward PER, stocks which signed MOU with nothing to show for rallying, stocks with extraordinary earnings being shorted ridiculously on weak justifications. Of course, everyone is entitled to their opinion. After all investing is subjective and the stock market is a platform for exchange of investment thesis. Right or wrong, we will know in due course.
 
With all things, irrationality will normalise. If you believe in Yin & Yang or Newton's 3rd law, you will understand there must be balance. I believe for 2021, there will be opportunities but investors have to be selective and ignore the noises. Risk management is still the way forward. A balanced portfolio not heavily skewed to any sectors with sufficient cash holdings in hand is good. Value + yield stocks would be the best combination.
 

Food for thought: 
 

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