Birkoa Newsletter 6 (market updates)
Dear Birkoa LPs:
The past week and half have been interesting from a markets-standpoint and therefore wanted to provide an update.
Long story short, beginning of last week, there was a barrage of bad news coming out of China that had led to some heavy losses for our Chinese holdings. These news were re: fears of further lockdowns due to resurgent COVID cases in China (since seemingly receded), Alibaba adjudged a fine from the Chinese government and a hack on one of Alibaba's cloud clusters. The market reaction was vehement and completely uncalled for. At my end, given the massive dip-buying opportunity, I ended up liquidating our flatline positions in Gold and Silver to make more liquidity available to increase our positioning in a couple of Chinese tech stocks. As expected, while not fully recovered yet, these temporary skirmishes seem to have been in the rear view mirror of the markets this week thus far, and we have recouped all of the losses suffered last week overall for the fund.
As you can see below, the Chinese tech stocks are all following a similar, near-identical pattern since early-2021. This basically suggests that there is nothing fundamentally wrong with these companies except for facing the brunt of China's political actions during that timeframe. With reopening nearer and the worst of COVID behind, these business are likely to climb back to prices they once were at in the upcoming months and years. Furthermore, China tech is also the analysts's choice from a purely macroeconomic point of view, given the larger monetary space that their Central Bank has over that of the U.S. or Europe, for instance. I think that while being cautiously optimistic, if we continue to have the ability to stomach volatility in these stocks, eventually these stocks would get back to their highs. It is with that belief that I decided to swap non-performing Gold and Silver with additional stakes in China tech, to add to what already constituted significant dip-buying in weeks prior. This is one of the few examples of opportunistic trading that I will undergo, since 95% of our strategy is to buy and wait for things to happen. Gold and Silver have only suffered additional losses since this trade whereas Chinese equities have done better.
Fig 1: Chinese tech stocks have all followed a similar pattern since their peaks in a similar timeframe.
The systemic issues for crude oil, as explained in prior newsletters, still remain. Therefore, in the absence of anything changing on the ground, I continue to remain bullish on crude oil. Next week's Q2 earnings reports by energy companies (expected to be blockbuster and record-breaking for some) could provide a jolt and I'm looking forward to that.
Crypto's impressive movement up the past week and half shows that its bottom was likely out, and while I don't have a date on when this "crypto winter" would be over meaning whether crypto would roar or remain saturated the next few months, I think (and most crypto insiders like Sam Bankman-Fried agree) that it has indeed bottomed out. Given our LP Agreement which dictated that I couldn't put more than 30% of fresh capital into cryptocurrencies, I was a bit upset for not being able to buy the dip until about a month ago I was made aware of a Fidelity ETF that tracked the crypto space peripherally (payments, blockchain, trading, liquidity, etc). That positioning which was seemingly as its bottom seems to have provided me with an opportunity to capitalize on this temporary crypto dip, and it has already shown dividends while having a long ways to go.
While there's still some cautious optimism at play, during the midst of this volatile sell-off in Chinese markets last week, I decided to do a simple analysis of where I think the portfolio would be at once individual price targets are hit. Towards that, I wrote a simple Python script (see image below if interested but not necessary) with set price targets per position (divided among Chinese equities, commodities - crude oil & Palladium, crypto). The price targets were set to the following:
Chinese Equities - their peak values prior to the pullback in early 2021, anywhere between 1.5-3.5x of their values today.
Oil - Price targets set to where we were during June 2022's peak, which is about $15-20/barrel lower than where the price target of oil is expected to be at $140/barrel.
Palladium - Price target set to breakeven price, in order to be very conservative in my analysis.
Cryptocurrencies - just their breakeven prices for Bitcoin and Ether, in order to be conservative in our analysis. As for the investment in the ETF pertaining to crypto that I recently made an investment in so as to find a way to benefit off of the "artificial" lows of crypto, I'm putting a price target of about 75% of that mutual fund's peak (had purchased it at what seems like it's bottom about a month ago and up double digits on it already).
Fig 2: Python script to run different scenarios of portfolio behavior with various combinations of current target prices
The results are as follows -
If we hit the expected price targets for all, the portfolio would be up 228%.
50% of price targets for Chinese stocks and price targets for the rest, then +110%.
25% of price targets for Chinese stocks and price targets for the rest, then +51%.
50% of price targets for Chinese stocks, 50% for Bitcoin and Ether, and price targets for the rest, then +96%.
50% of price targets for Chinese stocks, 75% for Oil & Palladium, and price targets for the rest, then +98%.
50% of price targets for Chinese stocks, 75% for Palladium, 50% for Bitcoin and Ether, and price targets for the rest, then +94%.
50% of price targets for Chinese stocks, 75% for Oil & Palladium, 50% for Bitcoin and Ether, and price targets for the rest, then +84%.
Thus, so long as we stomach the temporary pullbacks and volatility, the upside potential is pretty high, even with conservative numbers. Speaking of me personally, I'm not concerned about the price targets being hit; my only annoyance is at the volatility for different elements of the portfolio due to exogenous factors, and thus far it being unable to be uncorrelated to the U.S. markets as much as I'd have liked. But that might be a temporary thing as well, as last Friday we saw Bitcoin trade at its lowest correlation to NASDAQ/tech equities of 2022. The correlation is coming down, and as I suspect, Bitcoin and Ether would act as macroeconomic assets rather than tech, and that will strengthen over time.
I will keep you apprised of the performance and the underlying dynamics in the weeks ahead. Have a nice weekend! If there are any questions, please do not hesitate.\
Sincerely,
Pranjit Kalita
Chief Investment Officer