Birkoa Newsletter 28 (end of January 2023)
Dear Birkoa LPs:
Happy to conclude the first month where all of you were in the positive Inception To Date, albeit slightly disappointed since last Friday all of you would've been in double digit positive prior to Monday's giveback. This week we ultimately ended right around when you received your statements, and that's understandable as there may have been some cooling off coming from Chinese markets lately following a roaring bull market commencement. It's probably going to keep continuing in the weeks and months ahead, ultimately accomplishing the things for our portfolio that I hope it would.
In this newsletter, I'll give an overview of each element of our portfolio and my views on how I expect to keep progressing in the months to come.
Commodities - I recently got out of our metals positions since they are now seemingly saturated and the upside potential is not that high. Even if there was one, other elements of the portfolio could go up higher still which is why I decided to free up some liquidity to buy into the next dip in some of our positions (see below). Oil and Uranium are the only positions still intact and although oil has flirted with $82/barrel, it's not yet broken free of the mid-70s handle just yet. Chinese activity and demand is picking up while the supply side issues remain, and I expect oil to slowly keep marching towards $100 in this year, which is why I still hold it. Energy companies we own via ETFs are continuing with their record runs and have posted yet another strong quarter of earnings, which is enabling us to be net positive in our oil positions. In Uranium, we're flat and I expect this to be more beneficial as the fallout from Russia in Europe continues. We were very negative not too long ago on Uranium but there's been somewhat of a resurgence in Uranium lately.
Chinese Equities - Continuing to roar - it roared more last week and then gave some of it back this week, which is normal. The property sector has been hovering around the same range for the past month, and a breakout could be imminent given the government's continued support. Chinese tech is being piled onto by investors worldwide and it seems like the beginning of a bull market in China, whereas in the West, markets will probably be stagnant (another reason for net positive inflows into China!). This is exactly like what I had been suggesting during all those down months. Whereas slight pullbacks are irritating, they're expected. My guess is that's what's going on, which means the probability for upside potential is pretty high even now.
Cloud Computing Sector - We're doing well on these, with the past month having been on a tear. I still don't believe U.S. big tech is the place to be yet, since interest rate risks are continuing to be high, and in the absence of that, these cloud computing and SaaS names that we own, will provide a Quality factor protection to our portfolio. Their enterprise clients are somewhat less immune to economic recession risks unlike direct-to-consumer products like Apple. On Friday there was a little bit of a pullback, and I utilized that opportunity to increase our positions in this field by 10-20%. I think we'll continue to see them roar as our portfolio comes out of the sole dependency on Chinese equities, which suggests just how much more room we have to go up.
Semiconductors and Chips - First of all, all the geopolitical and macroeconomic reasons due to which I even bought this sector (U.S. centric) are all coming true - U.S. banning exports to China, U.S. onshoring, Japan and the Netherlands cooperating with the U.S. to ban chip making equipments to China, etc. The U.S. will continue to be a major beneficiary of this geopolitical tech conflict, which means our holdings of U.S. chips + ASML (Dutch photolithography machine supplier to all chip manufacturers) will do well. We're already doing well in this sector and we're not even halfway there compared to where I think we'll end up given the intensity of this conflict. Also, like #3, this past Friday, I took advantage of the pullback in the space to load up more. Continued upside potential.
European Equities - We own one German car manufacturer, which might benefit from a European recession since it's majorly within the luxury market. I bought this back in September as a means to an exposure to the European markets following the increased recession talk that was affecting the luxury segment just as much as the consumer retail segment. As of now, it's negative for us although it has recovered from its bottoms by double digits. It's meant to be a 3-year hold and in that time, expect it to be up significantly.
Crypto - Still not in crypto tokens yet because I'm not sure about interest rates terminal point. Right now the sector is hot, which means we're missing out on the tokens but I trust that these will pull back eventually and remain stagnant for another year or so. In the meantime, our equities holdings in the space, which is basically 90% correlated to the price of the tokens themselves, are up significantly and we're continuing to benefit tremendously. Our exposure to crypto via our blockchain ETF alone is over 12% of the entire fund so let's make the most of it first and with the fund doing well, I don't necessarily have to go out further on the risk curve.
As always, whenever we hit a peak and then give some of it back, that's typically followed by a tendency to reclaim the higher peak. I suspect that's what's going on, and I remain confident of charting newer highs in the months ahead. With one more quarter to go for the end of our first year, I fully expect to make 25% average returns for the first year. Ultimately, I'm in the business of providing 25-30% average annualized returns over 30 years, and if it overshoots, wonderful! But first year as of right now I'm on track.
Sincerely,
Pranjit K. Kalita
Chief Investment Officer, Birkoa Capital Management, LLC