Dear investors of ipohightech.club and High Tech Investment Fund!
The current state of the securities market cannot but worry you, as well as investors around the world. Such situations happen quite regularly, since the securities market, like no other, is sensitive to any, both positive and negative events taking place in the world.
We constantly analyze everything happening on the market and keep our finger on the pulse in order to use the current trend to our and our investors' advantage.
On a quarterly basis, we will inform you about the state of the securities market with an analysis of the market sectors that, in our opinion, are the most attractive for investment.
The report for the 1st quarter of 2022 will be presented to your attention in April 2022.
Now, taking into account the current situation, we present you a brief general analysis, as well as our opinion on the events taking place in the securities market.
Current market situation
Starting from November 24, 2021, when the NASDAQ index reached values of 16 200 points, a large-scale decline in the index began, which resulted in a practical repetition of the lows of May 2021, reaching a level of 13 090 on the index (about 20 percent).
What can be attributed to the main drivers of such movement in the indices?
1. Expectations of tightening US monetary policyОжидания ужесточения монетарной политики США
Since November 2021, the rhetoric of the US Federal Reserve System has undergone quite strong changes, having made the way, if not from a dovish then certainly a neutral position to pronounced hawkish statements. Reduction of repurchase programs, gradual (up to 5 times) increase in the discount rate in 2022 - these are just the main statements of Fed officials, which naturally made the market think and get nervous. By itself, the tightening of the Fed's announced policy carries a large set of risks for the open market, but this policy does not fit with the Biden administration's promises to distribute several more trillions of helicopter and other money to support the economy and of course his shaky rating on the eve of the expected primaries. At the same time, in the medium term, these tightening measures would make it possible to balance the markets, to remove from them non-market mechanisms that interfere with a fair assessment of companies that prevent market participants from adequately realizing the levels of risk.
2. Overbought securities
Indeed, a number of securities, even such large companies as Tesla, showed a clear overheating of even a relatively strong US market. The participants somewhat played around with the prospects, vying with each other to offer the market higher and higher price levels, completely breaking away from fundamental estimates and not paying attention to them.
A striking example of this market attitude was the shares of the Rivian Company (we decided to skip this placement), which in the process of their initial placement reached the level of 76.4 billion dollars, and on the first day of trading more than 90 billion dollars with a total volume of 12 billion dollars, which was one of the largest placements in 2021.
It is worth noting that this Company has not yet put any of its cars into mass production (by the way, there are only two of them), and plans to start production are constantly shifting. At the moment, Rivian shares have retreated about 60 percent from their highs.
3. Supply chains
The tense situation with the COVID-19 virus pandemic, forcing the governments of many countries to urgently and often very unexpectedly suspend the interaction of their states with the rest of the world, as well as extremely difficult relations between China and the United States, which, if not yet a full-fledged trade war, but certainly a heavily armed world, absolutely had an impact on world trade in the context of the movement of goods. Accustomed to extremely fast and precise deliveries of cross-border goods, consumers could hardly adapt to the new situation, which resulted in production shutdowns, consumer frustration, and even empty shelves. Of course, all this could not but affect both the current activities of companies, mainly the trade and retail sector, but also led to a reassessment by market participants of their prospects. Moreover, with the same pressure that they had in November when buying, they rushed to sell the shares they had accumulated in their portfolios, which began to cause fundamental discrepancies in the oversold value of some securities.
Our opinion
The amplitude of the current movement, although it has become quite strong, did not come as a surprise to us. We expected quite an emotional reaction in the markets, especially observing the dynamics of small and medium-cap stocks, which are always subject to fluctuations somewhat more than stocks with trillion-dollar valuations. The expectation of a possible increased amplitude for us was based on the ratio of large and small holders in these securities. We paid attention to the increase in the share of small holders and this increased the risk of the position, since small holders are incomparably more prone to panic moods, and also often use so-called shoulder lending in their operations, attracting third-party lending to increase the volume of their position. As a result, any sharp negative movement causes a powerful wave of panic sales, supported by margin calls due to excessive debt overburden of small participants who continue to destroy the market in the absence of purchases from medium and large market participants who prefer a restrained and unhurried position in purchases in such situations.
Based on the current situation, we have adopted a conservative and even defensive strategy in money management. The expected correction, the tails of which, in our opinion, the market will be able to see until March of this year, dictated the retention of no more than 30 - 35 percent of the funds in securities and all other cash in the cache in order to save the assets of Customers – which was, and is, an absolute priority for us in our work, but also to be able to purchase their customers much cheaper securities. In November - December 2021, as well as in January 2022, we sharply reduced our presence in the market of new placements, paying attention to the increased risks and high uncertainty in the shares of new companies, even taking into account their fundamental attractiveness. This approach made it possible to save Clients' money, since there were no positive stories of initial placements during the described period.
A good illustration of the current situation is the Renaissance Capital ETF Fund, which combines an extremely significant number of significant IPOs of shares.
Since its maximum value in March last year, which is above 77 points, the index has failed and amounted to only 40 points. Attention is also drawn to the current position of the MACD indicator, which has fallen into the negative zone for the first time during the chart period, and the rather impulsive movement of sales, which began in November last year. In our opinion, both the chart and its indicators indicate local oversold, which at least should go into a consolidation phase, and at most, form a zone for further upward movement.
At the moment, despite the negative changes in Client portfolios, the strategy of limiting the active position looks justified. Keeping small portfolios of Clients on the decline allowed us to sharply reduce losses, while at the same time remaining in the market, not being afraid to miss possible powerful upward corrective movements, and save up to 70 percent of funds for further investment in securities, but with a discount of 40-50 percent.
Where is the focus of our attention directed?
We continue to evaluate the high-tech segment of the market as the most attractive for us, because, while remaining, in fact, the locomotive of new ideas and breakthrough technologies, it is less susceptible to the negative impact of supplies, inflationary pressure or monetary restrictions. At the same time, we are aware of the fact of reducing the risks of COVID-19 and are starting to pay attention to the retail sales sector, which will be the main beneficiary of the withdrawal of this risk. The biotechnology market will be of less interest to us due to a longer cycle and a high risk of uncertainty associated with the demand for its products, given that the main focus at the moment is on combating the pandemic, and other areas may be underfunded. The financial sector continues to retain moderate attractiveness for us, having the potential for growth due to a more dynamic than expected rise in the Fed's key rate and, as a result, a partial flow of investors' funds to bank deposits.
We continue to monitor market fluctuations extremely closely, seeing their intensity as one of the main current risks. At the same time, the discount on the shares included in the circle of our interests allows us to say that the willingness to buy in the current price range is increasing, considering the prices quite attractive.