The first half of 2022 has proven to be one of the most challenging environments for investors to navigate in decades. Inflationary pressures arose in 2021 as the world started reopening following mass vaccination against Covid-19. Nevertheless, inflationary pressures have only increased, forcing the Federal Reserve into an extremely hawkish position.
With three rate hikes already complete, the Fed is expected to continue. There is a chance it can engineer a soft landing, with inflation and interest rates peaking before substantial economic damage is done. Yet there is also a chance that inflation remains stubbornly high, and the Fed raises rates farther and faster, in which case a broad-based recession is likely.
The Nasdaq-100® (NDX) has borne the brunt of this new era of macroeconomic uncertainty. Meanwhile, the key questions now are how the index might respond to some combination of rising inflation vs. steadily higher-than-average inflation vs. moderating inflation; rising rates vs. rates plateauing vs. renewed rate cutting; a weakening but still expanding economy vs. a truly recessionary environment.
The Nasdaq-100 Index® is composed of 100 stocks listed on the NASDAQ stock exchange, including large-cap tech companies such as Apple, Amazon, Microsoft, etc. While technology companies are dominating the index, it also includes top companies from other sectors like Tesla, Starbucks, PepsiCo, etc. In addition, it would be an ideal choice for index investors who want to capture the high-tech trends. ‘Never bet against America’ is what Warren Buffett, one of the most successful value investors who also likes index investing, said in his annual letter on 27th Feb 2021. This quote was proved by the historical returns of U.S. major indices. Interestingly, the Nasdaq-100 index® has outperformed S&P 500 Index over the past ten years given its presence of many high growth companies. Its performance was around 400%, almost double the S&P 500’s 205% return. (as of 15/08/2022)
With the Nasdaq-100 Index® down 16.3% as of 15 August 2022, there are few reasons for investors to feel encouraged about performance. In a way, this is somewhat in-line with the equity market declines seen in the fourth quarter of 2018, when the Nasdaq-100 Index® was down 23% at the nadir on December 24. That decline occurred at the tail end of a three-year-long Fed hiking cycle consisting of nine increments of 25 basis points each. The Fed would go on to pause in the range of 2.25-2.50%, and actually reverted to a gradual cycle of easing beginning in August 2019. The buying opportunity for investors was superb, under the assumption that the Fed would not induce an economic recession in an environment of subdued inflation and below-full employment. The difference today, however, is that full employment more or less exists; labor shortages persist in many parts of the economy; the price of labor has increased substantially; and inflation outside of wages is in danger of becoming entrenched. Hence, the NASDAQ-100 ETF DR was actually up 6.03% from 6 May 2022 (first trading day) to 25 August 2022.
The Fed Funds rate has already gone up by 150 bps YTD while the market’s discounting mechanism is seemingly acknowledging that the Fed will have to hike by around 300 bps. If inflation moderates, the economy may avoid recession, and the market will rebound as it did in early 2019. But if inflation stays well above 2%, the Fed may need to hike by 450 to as much as 600 bps in total. As such, high-growth companies with most of their earnings well into the future face the biggest downward revisions in their present values.
With the prospect of higher interest rates for longer, investors are well-advised to seek to determine their equity portfolio’s sensitivity to an elevated cost of capital. Using a variety of metrics, the Nasdaq-100 Index® appears minimally exposed to the risk of increased financing costs eating into its earnings and thus depressing valuations. This is largely a function of exceptionally strong, long-running fundamental trends that have built up the operating leverage, pricing power, and cash cushions of many of the index’s largest constituents.
With the pandemic slowly but surely receding in the rear-view mirror, among the advances it continues to fast-forward in its wake is the adoption of technologies that transcend such tricky problems as lockdowns.
Although investing in Nasdaq-100 Index® is a great opportunity, many Thai investors might struggle to invest in products backed by the index globally due to the complexity of the investment process and minimum investment required. However, over the past 3-4 years, the Bank of Thailand has continuously relaxed certain rules to encourage Thai investors to invest globally, resulting in more accessible of foreign investment in Thailand. In 2018, the foreign investment in Thailand became more convenient as Bualuang Securities (BLS) issued the Thailand’s first Depository Receipt (DR), an E1VFVN3001 that tracks the DCVFMVN30 ETF which tracks the VN 30 index on Ho Chi Minh Stock Exchange.
The brief concept of DR is that the issuer holds the foreign securities as an inventory and issues the DR on the Stock Exchange of Thailand (SET). This provides the opportunity for Thai investors to invest in the foreign securities conveniently on SET with no lunch break (10.00 a.m. – 4.30 p.m.) during the SET’s operating day. DR is also a cost-efficient product for the long-term investment because DR issuer does not collect the management fee. Investors pay one-time management fee from the underlying securities.
Aiming to open the door for Thai investors, BLS has issued 6 DRs since 2018 (5 in 2022), and the one that tracks the Nasdaq-100 Index® is NDX01, which has ChinaAMC NASDAQ 100 ETF (3086.HK) listed on the Hong Kong Stock Exchange as its underlying securities. As DR is not a currency-hedged product, it is thus affected by the movement of THB and the ETF’s underlying asset currency. Owing to the rates hike cycle of the Fed, however, USD tends to continue appreciating against THB over the next 3-6 months. Therefore, NDX01 is expected to experience the currency gain too.
Given that DR is an innovative solution and suitable for long-term investment, DCA (Dollar-Cost Averaging) would also be an efficient principle. Thai investors can either do a DCA via Streaming or BLS’s DCA/VA services. Both DCA and VA (Value Averaging) would help create discipline in saving. Although past performance is no guarantee of future results, given the long-term digitalization trend, we hope that the history will repeat itself this time, particularly with the NDX01.
To know more about the DRs by BLS, please visit: bualuang.co.th/dr
