Tag: Finance

Assessing 2025 predictions – CICC overseas

1/ US equity

S&P ended at 6,845.50, with ~18% total return in 2025, or doubling CICC’s return prediction.

我们测算，在乐观预期 10%盈利增长的驱动下，标普 500 或从当前的 5800 上涨 8~10%至 6200~6400 点左右。

– CICC Nov 2024

2/ US treasury

In 2025, US 10yr treasury is rarely below 4%; ended ~25bps higher than CICC prediction.

10 年美债利率合理中枢为 3.8-4%

– CICC Nov 2024

3/ US dollar

In 2025, US dollar index is rarely above 100 after Apr tariff announcement, lower than CICC prediction.

我们测算的中枢为 102-106

– CICC Nov 2024

4/ Copper & Oil

Oil declined in 2025, but copper is up 50%.

大宗中性偏多，等待催化剂。铜的需求更多与中国相关，油则更多受地缘和供给影响。从中美信用周期角度，在目前点位进一步看空意义不大，但向上动力和时间目前仍不明朗，需要等待催化剂。

– CICC Nov 2024

 

5/ Gold

Gold is extremely strong, ending 2025 with near $4,300 to over $4,400 per ounce, a lot higher than CICC prediction

黄金短期中性。黄金已经超出我们基于实际利率和美元的基本面模型测算可支撑的 2400-2600 美元/盎司。但地缘局势、央行购金和局部“去美元”需求带来了额外的风险溢价。我们测算，俄乌局势以来溢价中枢上行至 100-200
美元。长期依然可以作为不确定性对冲，但短期我们建议中性。

– CICC Nov 2024

The worst credit is issued at the best of times

I am recently reading Howard Marks’ The Most Important Thing and come across the section describing the credit cycle.

Why the worst credit is issued at the best of times?

Because bad news is scarce and when financial institutions compete for market share by lowering lending standards or required returns.

Typically when there is more capital available to companies or individuals, you have lower return on capital when they invest.

Then when something bad happens, the cost of capital can shoot up and become higher than the return of capital generated by the previous projects.

These projects can’t sustain in the new environment and thus are destroying capital.

———

This is also true in valuation and VC returns.

The worst VC deals are made during the best of times!

Remember the 2020-21 era? Not hard to destroy some capital if you invest in a SaaS company with 40x P/S during that time.

Read more on SaaS P/S here – The previous 40x P/S sector was SaaS

How do interest rates move during wars?

Interest rate should go up.

Several factors are moving the interest rates up during wars.

  • Governments are borrowing more to fund the war; thus rates are higher
  • Production is impacted thus inflation should be higher
  • Currency can be weaker, as people are moving money to safer places, plus the fear of gov printing money. The higher interest rate is needed to compensate for the FX risk

During WWI, UK interest rose.

Consol (Long-Term Bond) Yields in the United Kingdom moved up as the war progressed:

1913: 3.4275%

1914: 3.4823%

1915: 3.8580%

1916: 4.3165%

1917: 4.5823%

1918: 4.4287%

1919: 4.6372%

However, other factors also play an role. For example, as governments want to keep borrowing costs low, interest rates can be depressed.

During WWII, US effectively ran yield-curve control: the Fed supported Treasury prices to keep yields from rising too much. Fed “assisted the Treasury in this effort by implementing a form of yield curve targeting, capping interest rates at several points along the yield curve: from 3/8 percent on T-bills to 2½ percent on long-term bonds.”

 

 

Is it like internet bubble?

The dot-com bubble burst in March 2000, despite being called a bubble for quite some time. Indeed, the legend Tiger Management lost a lot shorting this intern bubble and handed money back to LPs in 2000.

What happened? What defining elements mark the peak?

Here are the three important events back then:

1/ March 20, 2000 – Barron’s Burning Up article

2/ March 21, 2000, Fed hiked another 25bp to 6%; hiked to 6.5% in May 2000

3/ Apr 3, 2000, “Conclusions of Law” released; Judge Jackson ruled Microsoft violated the Sherman Antitrust Act (Sections 1 & 2)

Where are we now?

For (1), actually there are many more warning before bubble burst, through 1998-1999. So if people say the FT illustration of $1tn OpenAI deal and The Information article of Oracle losing money on Nvidia chips will lead to the bubble burst, I don’t think so.

Fed – we are still in rate cutting cycle.

Gov regulations – not seeing any real destructive rules.

Party is still on.

Stay stunned.

Things are moving fast… within China’s financial system

Last year, Huarong, now China CITIC Financial Asset Management (2799.HK), bought into Bank of China H-share, becoming a over 3% shareholder. And it took one non-executive board seat of Bank of China right after.

Great Wall AMC, became a over 3% sharehoder of Minsheng Bank and got 1 non-executive board seat.

Xinda, via purchasing convertible bonds, became a over 3% sharehoder of Shanghai Pudong Development Bank.

These shouldn’t be taken lightly, as banks are heavily regulated in China. So there were political decisions made.

USDJPY

Just using interest rate parity.

Before the interest hike cycle, in early 2022, 1 dollar = 115 yen.

To make it simple, assuming USD interest rate is 5% and JPY is 0%.

If you exchanged 115 Yen [$1 worth of JPY] for USD and held USD for for 3 years, you should get $1.05^3.

If you hold Yen for 3 years, you shall have 115 Yen. So 115 Yen = 1.05^3 USD

1 USD = 99 Yen…

Real life is not like that.

In the real world, people exchange JPY for USD to earn higher yield, which created demand in the short-term.

That portion of USD can be deployed in the equity market, buying S&P 500 for example.

In this case, if you borrow Yen, you pay very little cost of capital (near zero), and you earned S&P 500 return.

Meanwhile, as everyone wants to do this kind of trade, and due to this imbalanced demand in the short term, USD will appreciate against JPY << this means you earn extra return when exchanging USD back to JPY (1USD = ~160JPY a few weeks ago, vs the 115 exchange rate 3 years ago).

In sum, you get S&P 500 return, you get USD appreciation return (~40% in 3 years), and you pay only JPY interest rate.

This is crazy.

Why would this happen? against the interest rate parity?

The other side of the trade seems to be those who are bearing the low rate of return on JPY… The savers in Japan I shall say.

this is also happening again in China?

The victims are obvious.. savers who are only paid 2-3% in China.

Current State of EV Market(cap)

EV is booming, in market cap and in sales.

1/ Three big markets, EU, China and US, account for more than 90% of global xEV volume; while xEV is just a bit more than 5% of global unit volume.

Global BEV+PHEV unit volume is expected to be 3.24 million in 2020, or a bit more than 5% of the overall ~60 million vehicle market globally.

Nearly 1.4 million BEVs and PHEVs were registered in Europe during 2020, 137 % more than in 2019

China alone contributed more than 1.3 million in unit volume.

US grew slow (~4%), with a bit more than 0.3 million units sold.

2/ Globally, industry valued at 8x 2022 revenue

Currently, EV companies globally have a market cap of ~$958 billion; Tesla accounts for ~2/3 of that.

Expected 2022 revenues of those EV companies sum up to $122 billion (Tesla accounts for half), while TTM revenues are ~$57 billion.

Overall EV/ ’22 Sales = 7.9x

If normalized margin is 20%, then the valuation indicates ~40x P/E.. where E is normalized 2022 level.

Source: this google sheet compiled by FT.

Increasing Yield & Multiples

US stock market is in a tough week as 10-year yield rises.

It’s interesting to review the CAPM formula and its relation with multiple.

Assumptions:

    • Market risk premium (MRP) = 6%
    • Before covid, risk-free rate = 10-year yield = ~2%
    • 10-year yield basically goes to 0.5% in 2020 and approaches now to 1.5%
    • Discount = Risk-free rate + MRP, assuming beta is 1
    • Earnings terminal growth rate = 3%
    • Earnings multiple = 1/(Discount – Terminal growth rate)
Risk-free rate Discount Multiple
2% 8% 20.0x
0.5% 6.5% 28.6x
1% 7% 25.0x
1.5% 7.5% 22.2x

When market was performing like it’s 1% but realized that it’s actually 1.5%, the correction is ~9%.

When market was performing like it’s 0.5% but realized that it’s actually 1.5%, the correction is ~22.5%.

JOYY After Sale of YY

JOYY (NASDAQ: YY) just announced on Feb 8 that “The sale by JOYY Inc. (“JOYY” or the “Company”) of its YY Live business to Baidu, Inc. is substantially completed”.

Without the China business, YY = BIGO, which has BIGO Live and Likee.

More importantly, investors are only valuing the BIGO Live business, while Likee is like a “bonus”.

To be more specific,

1/ BIGO is undervalued

JOYY has ~81 million ADS -> $9.7 billion market cap at $120 per ADS.
It also has some $3.5 billion cash/short investment and $1 billion convertible bond (conversion price 95.5 and capped at 127.87).

The sale price of YY China business is $3.6 billion.

JOYY still has 68.4 million Huya shares, which is worth ~$1.6 billion at $24 per share.

Therefore the enterprise value for BIGO is around $2.4 billion.

BIGO Live is a live streaming business with RMB 3.4 billion revenue in Q3 2020, so around $2.1 billion annually.

That is 1.1x sales multiple! Usually live streaming virtual gifts could be valued at 2-3x revenue.

Room to double!

2/ Market is not even valuing Likee, which is a legit business with 104 million MAUs in Q3.

Likee is popular. Some may even compare it with TikTok. The recent decrease is due to the ban in India but the rest of the growth will be fine.

3/ JOYY will become an true international company, and is poised to operate in a more flexible global manner, which should benefit its ex-China strategy.