Birkoa Newsletter 32 (end of March '23)
Dear Birkoa LPs:
You will see a pretty large upswing in your monthly statement from March. Following our portfolio's meteoric rise from November-January, mostly driven by Chinese resurgence, the month of February was a bit of a cooling off period for China. It is certainly understandable and expected, albeit annoying.
Beginning of the month of March, we were continuing on that downtrend when I decided to kind of take matters into my own hands since I saw an opportunity that could be highly lucrative for us. The result was a quick jolt and double digit returns for March, and what I think is a surer footing towards recapturing our earlier peak back in January. This is what I wanted to talk to you about in this newsletter.
Furthermore, we're seeing the world's geopolitics on both semiconductors and energy markets, a big part of my strategy as I've explained to you in prior communications, moving precisely per my expectations. These elements which eventually shift markets and economies obviously move at a slower pace than the price of a stock, but given the discernable, quantifiable & irreversible developments happening within the field of semiconductors, price of oil, price of commodities, we are in very firm footing gearing up for the foreseeable future. Remember, the rest of the world is only awakening to this changed world order that my strategy has been preparing and positioning for a very long time. While others will continue to be caught by surprise at this changing world order and readjust, we will lift off considerably going forward.
In other words, we're at the 1st quarter of a very very interesting sequence of events for the components of our portfolio. One new thing I'm seeing is the ability of at least 1-2 out of 5 sectors we presently own to hold their own uncorrelated to the others while the others fall. This means that the "artificial" correlations we were seeing most of last year, and perhaps during the month of February, are easing, and our strategy is increasingly being able to shine through in its intended purpose.
Let's look at the current sectors of our portfolio -
Regional Banks - This is a big change since my last communication dated March 5. On Monday March 13th, as regional banks in the U.S. were falling fast, in some cases 75-85% in pre-market trading from the prior Friday, seeing the opportunity for asymmetric upside, I decided to get into this field. Since then, on the total investment, the sector is up somewhere between 25-30%. The only problem is it was up another 10-15% owing to choppy pullback. The idea for this trade was based on the belief that the financial sector stress caused by the failure of Silicon Valley Bank and Signature Bank will force the Federal Reserve to limit its interest rates hikes (which it did), and that in turn, would alleviate the very concern for bank run on remaining regional banks that manage to survive this crisis. While we're mostly through, we're still not 100% done yet which is why one of our holdings within this area is down significantly, but should it survive, it and the rest of the holdings could each yield 2-3x. For example: we're already 4.5x in one of our holdings within this sector, and up double digits in another, all in merely 3 weeks. So the asymmetric upside potential is real and worth holding on to.
I will keep it succinct here but will continue to talk about this in upcoming newsletters.China - Economic and political news coming out of China has led to a resurgence in the past week of Chinese equities, which are now considerably off their local bottoms achieved in February. Furthermore, Alibaba's news last week of breaking up into 6 units has renewed shareholder enthusiasm of reviving unlocked potential, which has only buoyed the tech sector in China. We're not even in the 25th percentile mark of where this sector will be and now with the rest of the world catching up to it, we will see tremendous upside.
Semiconductors - Smash hit. Nothing else to say. Whether it's U.S.-China geopolitical tensions that've accelerated on both sides, or the splurge and hype of generative AI boom brought on by chatGPT, semis led by NVIDIA are the place to be. Remember when I initially bought it back in September 2022, they were selling off faster than big tech and like China, no one would touch it with a 10 ft. pole. Now they've become the darlings of investors everywhere. Amazing to be vindicated again, and given the picking up of semiconductor-related geopolitical tensions on both sides, we're going to see more government support-led growth in the field. This is a significant aspect of the portfolio that shows Birkoa's "out-of-the-box" positioning and ability to buy things for cheap when they're out of favor 1-2 cycles beforehand so as to enjoy upper double or even triple digit returns.
Blockchain and Crypto - Nothing wrong with the field. Continuing to make forward progress. Actually, during last month's bank failures, cryptocurrencies and blockchain related companies did extremely well as it was part of their inception story - when centralized banking systems fail, that's when the decentralized finance vision takes hold. I guess investors piled on to the sector due to this reason almost as a storeholder of wealth, which benefitted us tremendously.
Cloud computing and SaaS - Our cloud computing and SaaS holdings are doing quite well consistent with the reason they were bought - recession-hedge owing to their lack of interest rate sensitivity. As a matter of fact, Salesforce actually has been knocking it out of the ballpark with impressive Q4'22 performance and job-cutting announcements, which investors like. Baidu too has been performing extremely well on the Chinese front. 2 of our prior holdings - Atlassian and Snowflake - we got out of temporarily in order to make room for regional banks. Turned out to be a brilliant play since those 2 are relatively flat while we've gotten a major thrust up with their replacements. At the same time, our current holdings within the field are the top performers within the sector, so although we will move back into those names in the future, there's still time before they catch on to Salesforce.
Yesterday's surprise OPEC+ oil cut has jolted the price of oil past $80/barrel. I think the case for $100-110 oil is intact and oil will experience multiple highs as we head into a stagflationary environment. The geopolitics behind that surprise cut with the Saudis aligning themselves against the U.S. and with Russia and China is precisely what I've been meaning by prior pronouncements of a China-U.S bipolar trade war. We're just at the very beginning of it, and oil is benefitting from this split. Along with a host of other reasons like Chinese positive demand shock coming out of Covid Zero, Russian price cap, etc., oil will remain high throughout the next few years. It's nice to see the macro side of it come true, which is yet another significant way in which the strategy has been proven correct.
I think given the thrust we've already experienced, the relatively lower correlations among our portfolio components, and the asymmetric upside in regional banks + China coupled with steady progress in semis and software, it's not unreasonable to expect to build on the progress from last month. I'm expecting 30-40% returns overall on the horizon as soon as the banking sector can remove its albatross around its neck. I've experienced jolts to our portfolio before, and I can sense it's been looking to further break free. I think knowing this, in general, this is the perfect time for any fresh capital to get involved into the fund as well, in case any one of you is looking to protect and grow more of your capital from the unstable markets seen since this past year. As some of you have experienced, sometimes putting money into the fund when things are in motion is much more expediently rewarding than waiting for everything to stabilize. I believe although we're doing well overall, that there's still a jolt upcoming that I as the fund manager can feel because a lot of the macro has already come true as explained above.
Sincerely,
Pranjit Kalita
CIO