Birkoa Newsletter 36 (end of June '23)
Dear Birkoa LPs and prospective LPs:
I wanted to write today to update you with what has happened in the intervening time and how it has helped our portfolio. Our fund had a very good June with diversification across asset categories working to provide both outperformance and cushion to efficiently raise its risk-adjusted returns. Despite being on a good trajectory overall, there are pockets that are attractive which new capital could benefit tremendously off of, and I will devote some space today towards that.
I will keep this relatively to the point but will break it down by category, and from now on, will include a salient points section at the beginning, prior to expanding further. Depending on your time constraints, you may digest the salient points quicker prior to reading into the details per your convenience.
There are 3 sections overall today (Each section has a section marker for ease of navigation.) -
salient points,
monetary policy and where it's headed, and -
detailed expansion of Sections 1 & 2 as it relates to our current positions.
SECTION 1:
Before I go into details at a later section, here are the salient points for this newsletter along with some lessons learned from the past year of investing -
Continued strength in the regional banking sector, a sector which we have profited greatly off of.
Immense move up within our blockchain/crypto holdings, and increasing exposure to the field via direct investment in Coinbase, which I think will end up benefiting the most from the displacements within the sector.
Was able to get back in on oil and energy at $68/barrell which I think is a great entry point, since the global demand destruction thesis is largely overrated. Oil could go up to lower triple digits and even if it doesn't shouldn't be too much lower than the entry price.
Took positions in AI names within the U.S. (not the big tech ones, but very specific companies within cloud, analytics, software) and those have been profitable already. Also, a decent chunk of limit orders in areas like databases, healthcare + biotech etc., still haven't been hit. These new positions will further boost our returns in the medium-to-long range and could be attractive targets for new capital.
China showed some surge early this month but that has largely fizzled out. The rally was in expectation of a big monetary stimulus, and while some areas of our holdings from that country have benefitted (like property), others still have more to go (technology).
Our semiconductor positions are working out quite well, and we have expanded to Japan as well on top of American semiconductors and Eruope's ASML. Plus, took a position in Softbank both as an AI play (being the world's biggest VC they must be investing at the ground level of AI startups of tomorrow) and semis play (ARM, the UK chipmaker, is expected to go public soon thereby probably joining the AI boom and Softbank is their largest shareholder). I was able to buy local dips in U.S. semiconductors like AMD and NVIDIA and I expect that these AI names will continue to defy gravity as the world gets swallowed up by Generative AI.
New capital would continue to benefit tremendously from both our continued and would-be positionings within AI; same thing with China, which can catch fire anytime. With monetary policy only easing from here on out, we're at the early stages of a bull market in these assets I think, so this is a moment of attractive buy-in for the fund as a whole.
Almost all of the reasons I started this hedge fund strategy for - inflation, commodities supercycle, U.S.-China tech war, Chinese monetary easing space, are slowly showing themselves to be coming true as more time has passed. I expect more of the markets to move per my strategy's intentions in the coming months which is why I feel more confident about continued good performance.
Some of the market dislocating functions from the past year - like Dollar's unnatural strength, crypto crash, Chinese restrictive lockdowns and scaring away of foreign investors with their restrictive internal politics, etc., which had startled the portfolio right out of the gate last year, are relegating to the background leading our assets to function more as intended. This means quicker time between macro movements and seeing the direct underlying effects within our portfolio.
During the past year, I have made some mistakes which have made me a better investor today. I'm making more of an effort to not be too impulsive in taking positions by making more use of limit orders, and letting the market come to me instead of being worried of letting things get away from me. This more judicious approach would only continue to lead to better performance and you can have confidence that I will continue to not repeat avoidable mistakes in the future.
SECTION 2:
Let's look at where we are monetary-policy wise -
The U.S. is about to at least halt its tightening cycle, and expected to begin cutting rates by early 2024. Therefore, our AI as well as bank holdings will possibly be freer to break free as we get closer to the end of the tightening cycle.
China has signaled it is about to begin monetary easing to boost up its economy, owing to the fact that it's at a different stage cyclically and inflation-wise than the U.S. China can ease while the U.S. cannot because inflation is a non-issue there. China has already begun providing stimulus to spur up its property sector, and is expected to unveil a larger fiscal stimulus package soon. This is the preeminent reason why I've been building up positions in China since last year.
Japan is our new positioning over the past month, both as an AI and semiconductor play. Their monetary policy is expected to remain easy for the foreseeable future as signaled by their new Bank Of Japan (BOJ) Governor, mostly because they want inflation to run high in their deflated economy coming out of over 3 decades of no growth. Now that they're finally seeing inflation for the first time since 1989, they're not about to let it go and have therefore signaled to the markets a continuation of their ultra-loose monetary policy stance. Even though the value of the Yen has fallen substantially as a result of their ultra-loose monetary policy especially against the Dollar, the BOJ owns so much of the U.S. debt that the nominal value of that debt is only going to rise up as the Fed begins to cut rates by next year, which they can sell anytime to prop up their currency. This is the reason why the BOJ is fine letting inflation go up and the Yen devalue; monetary inflations are always stimulative for equities. This is why Japan is attractive, plus their semiconductor industry is heavily deputized by close ties with the U.S. since it's part of the U.S.-European supply chain.
Inflation is much stickier in Europe than in the U.S., as a result of which the European Central Bank (ECB) isn't close to ending its tightening cycle. Which is why Europe isn't very attractive to me, and I had liquidated all prior European positions (except ASML) months ago.
Brazil and India have handled the inflation surge well and their central banks have been quite effective in curbing inflation compared to their Western counterparts. Both these countries are close to being done with tightening and are about to ease, and I'm looking very carefully to find an entry point into both these markets in the near future. Brazil’s commodities-heavy economy is especially expected to benefit significantly from the commodities super cycle we’re in the middle of at present.
SECTION 3:
The following section contains the expanded version of the salient points above -
Regional banks have become stronger since my letter dated May 24th where I wrote my prognostications stating so following Pacific West's successful sale of its real estate lending unit in order to shore up liquidity. Now, all except one of our regional banks are in double digits and closer to hitting their respective take profits. While they are never a straight line and in the 3rd week of June these banks as a sector pulled off a little bit, we're still net positive significantly on the sector. Expecting further room to run, which is why I will stick to them.
We're still about 50-75% off from hitting individual price targets in our bank holdings, which means I'll continue holding them. My prior short newsletter this week indicates that the liquidity conditions in those banks have substantially improved, and following the Fed's green light on stress testing results this Wednesday, they have shown further strength.Crypto + Blockchain has been seeing some interesting dips every once in a while within our blockchain holdings and other public equities we own. I still haven't owned any of the real tokens and instead found that the blockchain ETF I own is highly correlated to the price of crypto, biased on the upside. During downswings, it's relatively less so in magnitude. Over the past month, I have been steadily buying into the dips and have separately brought Coinbase shares during its dips when the SEC launched a couple of bogus investigations mid-June. Since that time, one court judgement has gone in Coinbase's favor, and the stock has recovered over 50% since its local dip 2 weeks ago. This is how we've done quite well in our crypto + blockchain positions, and it is fair to say that we've more than recovered in absolute terms all of our crypto losses suffered during last year's crypto downturn. With Binance under investigation for comingling funds and FTX out of the picture, plus Coinbase expanding abroad, it is entirely feasible that Coinbase would become a monopoly which means we have miles more to go.
Commodities like oil haven't done much, but good news - I was able to get back into them for cheap around $68/barrel (after initially booking profits back in March to finance getting into the regional banks), and given the geopolitical string of events panning out with Saudi Arabia committed to maintaining a higher price of oil, I'm happy with the entry point. It probably only has room to go higher, with supply chain and demand-side factors both pointing to bullishness. In reality, the correct price price of oil is around $100/barrel, and that's assuming Chinese demand is lower than anticipated. Right now too much pessimism of a U.S. recession is built in, generally those fears turn out to be false in terms of oil demand even during recessions.
I have slowly been building a position in mining companies - lithium, copper, nickel - all that'll benefit from the EV revolution being subsidized both in the U.S. and China. We're still at the early stages of a commodities supercycle, and these metals will benefit for a host of reasons ranging from cyclical to EV subsidies.
I went back in on our WTI & Brent crude contracts, as well as energy sector ETF plus oil services ETF (Schlumberger, Halliburton, Baker Hughes, etc.). The latter ETFs are working themselves out quite well and expected to see continued positive cash flows as companies.I have been steadily building positions in the U.S. AI space by buying into the occasional dips in fields ranging from cloud computing + software to healthcare/biotech and B2B companies. I haven't yet bought any of the big tech names and these offbeat positions of mine have already proven to be profitable in past month. They will of course ebb and flow, but I believe there's a long way to go in these, and several of our orders are yet to be executed (awaiting the next dip to get filled). Over time, I expect continued large profits in them, both considering the pace as well as range of generative AI developments and the fact that the Federal Reserve is approaching the end of its tightening cycle.
Expect to see continued upswing in the sector and support to the portfolio, while any pullback would trigger attractive entries into those AI names still not in our portfolio just yet. Which is why I stated that any fresh capital could benefit from this situation we’re teeing ourselves for.China has bounced back from its late-May dips on the PBOC's (their central bank) continued fiscal and monetary support. Furthermore, their economy is recovering within the services sector which will be bullish for our e-commerce holdings. Also, the AI premium hasn't been built in to Chinese tech names unlike their American counterparts, so once the markets are clearer about the government's plan to ease (they've already begun easing but more expected in greater quantities), a combination of a growing economy and AI aided by monetary intervention at the opposite end of the spectrum than the Western central banks would likely lead to a sustained bull market finally. This is the hedge I've been talking about since last year, and finally we might be closer to it than during previous times. I have also increased my exposure into some EV names and doubled down on the property sector that will benefit tremendously from central bank easing.
Plus, the AI premium in China, which could kick in anytime, could provide a big boost up which is why it's essential to stay the course. I was able to buy the dips to increase our exposure to Chinese property sector especially and got into the EV space there, an area that is expected to be fiscally stimulated. China therefore is an immensely attractively priced aspect of our portfolio which would be immensely conducive for any fresh capital to be deployed to.Semiconductors have been on a tear of late both as a result of the U.S.-subsidies and the AI boom, and I've been adding to our positions within the sector. I've done so via the following means -
(a) increasing exposure to U.S. semiconductors like NVIDIA and AMD during their dips(for eg: NVIDIA since I bought it in one of its dips mid-June is already up 20% in less than 2 weeks. Of course I think sky's the limit here.)
(b) buying up Japanese semiconductor giants that benefit from U.S.-China semiconductor wars and direct subsidies/help from the U.S.
(c) exposure to Softbank in the Japanese market (beneficial both from an AI investment standpoint plus semis since it's the largest shareholder in ARM - the UK semiconductor which will soon IPO)
As always, please feel free to reply to this email if you have any questions.
Sincerely,
Pranjit Kalita
CIO