We are pleased to report strong outperformance of both the funds in 2020 which is consistent with Insync’s 10 year plus history.
This quarter witnessed a typical rotation into neglected industry sectors (e.g. banks, energy & cyclicals) on the news of COVID-19 vaccines. This held back our quarterly numbers. Despite the impact on markets by neglected stocks’ meteoric rise, our funds remained largely flat. Neglected sectors outperformance is primarily due to exuberant expectations of much higher growth (from vaccines) and inflation views for the near term. Over reaction to events like this is typical and temporary.
There are major headwinds to a sustained and significant increase in inflation beyond the sub 2% range it has occupied for most of the last decade. Also, many neglected sectors are encountering significant disruption risks, which we believe many investors have lost sight of. Thus, they present significant additional investor risk in attempting to catch the ‘reflation’ trade.
Megatrends have proved resilient to the Covid-19 fallout. In fact, the crisis has accelerated many existing long-term trends:
move to e-commerce.
uptake of contactless payments
expansion of cloud-based services
collision of biological science technology
transition from carbon energy to electric.
These are all fundamental – and permanent – shifts that were stimulated by the coronavirus crisis. Such resilience has not come as a surprise to us. Megatrends are generally not determined by short-term or periodic shocks, even if these are significant in nature, such as Covid-19.
Preparing for the future entails more than just tactically adjusting to short term market developments (e.g. V or K-shaped recovery in 2021). It requires a vision of how the longer-term future is unfolding and building an investment portfolio through clear-cut positioning choices. This is what Insync is doing with your money by investing in 30 stocks across 16 global Megatrends.
Positioning Choices. “It’s all about the long-term so we don’t have to trade.”
The benefit of Insync’s focus on long-term Megatrends holding a low turnover stock portfolio of their most profitable beneficiaries, is reflected in the fact that only a small fraction of stocks account for the majority of market returns since 1926.
Our low 20% stock turnover average for 10 years means the average company holding period is 5 years.
This contrasts with many of our peers and delivers a significantly higher probability of achieving our investment outcomes than resorting to much riskier ‘trading’ of our peers. This is reflected by the falling industry average holding period of less than 1 year.
Secular Headwinds To Inflation & Growth
Part of the rotation into cyclicals, the ‘reflation’ trade, has been driven by a greater consensus around a pick-up in growth and inflation. Insync’s believes that it is premature to worry that the low-inflation regime of past decades will end anytime soon. However, the eventual excessive rise of inflation is a tail risk that needs monitoring. Whilst a pick-up in growth and inflation is normal when coming out of a recession, this does not mean we are now necessarily moving into a high inflation environment. There are structural factors that need to be overcome first.
Inflation /reflation trades - It’s about supply and also demand. After a decade of proven industry forecasting futility, our sense is that the Fed will wait to see a major outbreak of inflation before raising rates. Other central banks will likely take the same approach.
The reasoning is because there are significant headwinds to much higher inflation the market is not accounting for;
1. The output gap; measures unused labor and industrial capacity.
Its large and negative everywhere but China. A positive output gap occurs when actual output is more than full-capacity output.
A negative output gap occurs when actual output is less than what an economy could produce at full capacity. A negative gap means that there is spare capacity, or slack, in the economy due to weak demand.
2. Rapid growth in money supply has not resulted in rapidly rising inflation.
Rapid growth in money supply can lead to high levels of inflation because there is too much money available to buy the same amount of goods and services produced in the economy.
3. This is because the velocity of money has fallen significantly. Velocity of money measures the rate at which money is exchanged in an economy; being the number of times that money moves from one entity to another.
If for some reason money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply, even leading to deflation, not inflation.
Unless central banks can find a way to encourage banks to lend more aggressively, the velocity of money will remain a headwind to the ‘reflation’ trade.
Insync remains focused on the long-term goal, not the short-term ‘reflation’ trade. This means sometimes we will under-perform. We refrain from boosting the short-term result by trading. This is important for our investors as only a small fraction of stocks is likely to account for the majority of market returns going forward, should it follow the historical pattern dating back to 1926.
The 1st Industrial Revolution was about coal, water, and steam, bringing with it the steam engine and innovations that enabled the large-scale manufacturing of goods and products. Its impact on civilisation was immense.
The 4th Industrial Revolution is no different. The World Economic Forum phrased it as one of “cyber-physical systems” – that is, the merging of the capabilities of both human and machine. This is the era of artificial intelligence, genome editing, biometrics, renewable energy, 3D printing, autonomous vehicles, ushering in the age of smart cities, smart energy and the Internet of Things. The advent of 5th-generation (5G) wireless technology is at its core.
5G powers 100x the devices at 100x the speed at just 1/10th the energy.
5G’s speed, data volume and low lag time allows millions of connected devices to continuously communicate with each other and adjust their responses in real time. This explodes the boundaries of what can be achieved in almost any industry. Devices using 5G is forecast to grow to US$668 billion globally in 2026 from US$5.5 billion this year.
At an immediate household level, 5G significantly improves things such as downloading a full-length HD movie to your phone in just seconds; or really cool things such as greater realism in VR, AR and extended reality (XR). Lighter devices providing a more immersive entertainment experience is another example.
Profound impacts of 5G are in advancing societies by improving safety and sustainability. Examples include:
Smarter electricity grids for greatly reduced carbon emissions
Connected vehicles sharing data to prevent road collisions.
Faster, more efficient deployment of emergency services to accidents
Connected sensors detecting and warning of natural disasters much earlier.
Emergency responses by Drones becoming a key tool to accelerate and support res