Quarterly Letter, EIP
Quarterly Letter from Chairs, ESG Investing Program, Q1 2023
Strong Interest for EIP’s 3rd Batch Amidst Everchanging Market Conditions
Dear Sponsors, Board of Advisors, and Members,
We share with great pleasure that the ESG Investing Program has begun its recruitment for our 3rd batch of members and have received applications from a wide range of tertiary institutions across Singapore. We look forward to welcoming them in Q2!! The program’s increased traction can be attributed to the current members’ dedication and achievements in the ESG investing frontier, with several of our members joining to workforce as ESG analysts and sustainable finance professionals.
Overall Performance
Individual Team’s Reflections
Team Prism
The 1st quarter of 2023 started off on a strong foot with a rally in equities buoyed by anticipation of looser monetary policy by the FED and China’s reopening from COVID-19 restrictions. However, the rally cooled in February as CPI data and FED comments pointed towards further rate hikes. This was made worse by the failure of Silicon Valley Bank (SVB) and Signature Bank in mid-March which fuelled investor pessimism in the markets. But this pessimism soon turned into optimism as investors dialled back rate hike predictions following the banking turmoil, pushing the major U.S. indices back into the green.
In spite of the volatility, we followed through with our more aggressive playbook as outlined in the previous reflection and initiated a sizeable position in Alibaba (NYSE: BABA). Our conviction in this idea revolves around 1) unlocking of shareholder value upon IPO of its business units 2) steady growth of its cloud computing and e-commerce units, 3) anticipation of looser regulatory pressures on Chinese tech companies, and 4) compelling valuation at under 12x NTM P/E and a >50% upside when valued on a SOTP basis.
In addition, we kept our position in Alphabet (NASDAQ: GOOGL) and believe the major layoffs will help to improve margins and allow it to re-invest more heavily into its AI division as it rolls out Bard, a ChatGPT rival.
Looking forward, we remain cautiously bullish on the broad market as inflation fears abate while calls for a recession grow louder.
Team Allas
This quarter has been a better-performing quarter with regards to Team Allas’s fund. With the upswing of Meta’s share price due to the Year of Efficiency for 2023 that Zuckerberg has touted, our fund has performed significantly better although the future for Meta still remains relatively uncertain.
I am pleased that our team had chosen to hold the Meta shares instead of selling them off earlier which would have caused us to realise huge losses if we had done so. The conviction to hold especially tightened when Meta was performing poorly last December and had hit new lows of under $100 per share. We knew we wanted to strap in for the long haul instead of catering to knee-jerk reactions which would have been to sell during the period when Meta was surrounded with a constant influx of unfortunate news for an extended period of time. I think this nicely reflected the long-term holding strategy that both the club and our team espouses. However, a learning point is that we could have considered averaging down when Meta was at its low-point during the December-February period by buying in more.
We are presently still holding out on SoFi and monitoring the situation further, and will be looking to invest in a 2nd company.
Team Dream
Q1 was a tough quarter for Team Dream’s portfolio. Given our concentrated positions in Chinese names, the initial gains from the pre-Lunar New Year rally were quickly wiped out by resurgent Sino-US geopolitical tensions in the months since. Fortunately, our adherence to only investing in the businesses we understand also meant that our portfolio remained insulated against the follow-on effects of the US banking crisis that unfolded in the quarter. Three of our holdings (DQ, ADBE and AWK) continue to exhibit strong earnings through the business cycle, and we remain confident of their business performance amidst a challenging macro due to their strong cash generative abilities and sound balance sheets. While we stated our intention to trim a significant stake in GDS following the start of year rally due to developments that ran contrary to our investment thesis (overseas expansion as dual growth driver instead of concentrating on core Chinese market), our sell order ultimately did not fill by fine margins. We take this as a highly regrettable, but heavy lesson learnt. Alluding to the four types of investors in “The Art of Execution; How the world’s best investors get it wrong and still make millions”, the lack of decisive action in this case is akin to a “Rabbit”, one who watches as the investment continues to fall, instead of cutting losses early or at a pre-determined level when a timely review showed that the investment thesis is no longer valid. Moving ahead, we are excited to see what new names our PMs/ analysts will pitch with the conclusion of their research reports and will definitely be looking to add new holdings in the upcoming quarters.
Team Viridi Terrae
2023 started with a mix of optimism and pessimism. The Feds continue to increase interest rates as inflation continues to run high. China announced the reopening of borders as it strives to transit back to business as usual. The tech sector continues to witness retrenchments as companies face increasing pressure to streamline costs and prove profitability. Meanwhile, Generative AI steals the show as a fresh wave of investors and entrepreneurs attempt to ride on this boom.
Against this backdrop, the team remains cautiously optimistic. Amidst all the fluctuations and uncertainties in the market today, the team has identified the PV sector as an area that will continue to grow given our needs for greener energy source. As such, the team decided to invest in DAQO New Energy, a leading high-purity polysilicon manufacturer based in China.
Looking ahead, the team may double down on our DAQO stocks depending on its developments; the initial investment was more conservative. At the same time, we will also look out for other potential stocks, together with our new team members (welcome Girvin, Valerie and Clive!)
Overall Reflection
With the new year, there remains uncertainty as the inflation pressures are still high in the backdrop of a prolonged Russian-Ukraine war. These economic conditions were further exacerbated by shocks to the financial markets through the collapse of the Silicon Valley Bank, First Republic Bank and Credit Suisse. With reference to the Morgan Stanley S&P500 1Q23 Preliminary Earnings Analysis, the 1Q23 Y/Y % remains negative for most sectors indicating the tough macro climate.
While the actions of the Fed, Central Banks, and 11th-hour rescues (such as the takeover by UBS) have prevented a repetition of the 2008 financial crisis, we must remain decisive yet composed when navigating in such conditions. EIP will continue to make prudent investment decisions backed by strong fundamental and technical analysis.
Best regards,
C M R Sooria (Chairperson) / Sim Jia Yang (Co-Chairperson)