Bringing Investment Volatility to Glory with the Nasdaq-100® Index
This article was first published in Bangkok Post September 6, 2022.
The first half of 2022 has proven to be one of the most challenging environments for investors to navigate in decades. Inflationary pressures emerged in 2021 as the world began to reopen after mass vaccination against Covid-19. Nevertheless, inflationary pressures have only increased, forcing the Federal Reserve into an extremely hawkish position.
With three rate hikes already complete, the Fed is likely to continue. There is a chance that he could stage a soft landing, with inflation and interest rates spike before substantial economic damage is done. Yet, it’s also possible that inflation will remain stubbornly high and the Fed will hike rates further and faster, in which case a broad-based recession is likely.
The Nasdaq-100® (NDX) has borne the brunt of this new era of macroeconomic uncertainty. In the meantime, the key questions now are how the index might react to some combination of rising inflation, consistently above-average inflation and subdued inflation; rate hike vs. rate cap vs. further rate cut; a weakened but still expanding economy against a truly recessionary environment.
The Nasdaq-100® Index is made up of 100 stocks listed on the NASDAQ stock exchange, including large-cap technology companies such as Apple, Amazon, Microsoft, and more. While technology companies dominate the index, it also includes top companies from other sectors. like Tesla, Starbucks, PepsiCo, etc. Moreover, it would be an ideal choice for index investors who want to catch high-tech trends. “Never bet against America” is what Warren Buffett, one of the most successful value investors who also loves index investing, said in his annual letter dated February 27, 2021. This quote has been proven by the historical returns of the major US indices. Interestingly, the Nasdaq-100® Index has outperformed the S&P 500 Index for the past ten years given the presence of many high growth companies. Its performance has been around 400%, almost double the 205% return of the S&P 500. (as of 08/15/2022)
With the Nasdaq-100® Index down 16.3% as of August 15, 2022, there is little reason for investors to feel buoyed by the performance. In a way, this somewhat matches the stock market declines seen in the fourth quarter of 2018, when the Nasdaq-100® index was down 23% at its low on Dec. 24. The decline came at the end of a three-year Fed hike cycle consisting of nine hikes of 25 basis points each. The Fed would continue to pause in the 2.25-2.50% range and effectively return to a gradual easing cycle beginning in August 2019. The buying opportunity for investors was superb, in the assumption that the Fed would not induce an economic recession. in an environment of moderate inflation and sub-full employment. The difference today, however, is that full employment more or less exists; labor shortages persist in many sectors of the economy; the price of labor has risen substantially; and non-wage inflation is likely to take root. So the NASDAQ-100 ETF DR actually rose 6.03% from May 6, 2022 (first day of trading) to August 25, 2022.
The fed funds rate has already increased by 150 basis points since the start of the year, while the market discount mechanism seems to recognize that the Fed will have to increase by around 300 basis points. If inflation slows, the economy could avoid recession and the market would rebound like it did in early 2019. But if inflation stays well above 2%, the Fed may need to raise 450 to 600 basis points in total. As such, high-growth companies with most earnings in the long term face the largest downward revisions to their current values.
With the prospect of higher interest rates for longer, investors are well advised to seek to determine the sensitivity of their equity portfolio to a high cost of capital. Using a variety of metrics, the Nasdaq-100® Index appears minimally exposed to the risk of rising funding costs eating away at earnings and thus driving down valuations. This is largely due to exceptionally strong and long-lasting fundamental trends that have bolstered the operating leverage, pricing power and liquidity cushions of many of the index’s major constituents.
As the pandemic slowly but surely recedes in the rearview mirror, among the advances it continues to rapidly advance in its wake is the adoption of technologies that transcend such delicate issues as lockdowns.
Although investing in the Nasdaq-100® Index is a great opportunity, many Thai investors may find it difficult to invest in index-backed products globally due to the complexity of the investment process. and the minimum investment required. However, over the past 3-4 years, the Bank of Thailand has continuously relaxed some rules to encourage Thai investors to invest globally, which has made foreign investment in Thailand more accessible. In 2018, foreign investment in Thailand became more convenient as Bualuang Securities (BLS) issued Thailand’s first Certificate of Deposit (DR), an E1VFVN3001 which tracks the DCVFMVN30 ETF which tracks the VN 30 index on the Stock Exchange of Ho Chi Minh.
The brief concept of DR is that the issuer holds the foreign securities as inventory and issues the DR on the Stock Exchange of Thailand (SET). This provides Thai investors with an opportunity to easily invest in foreign securities on SET without a lunch break (10:00 a.m. – 4:30 p.m.) during SET’s operating day. DR is also a profitable product for long-term investment because the DR issuer does not receive management fees. Investors pay a one-time management fee on the underlying securities.
Aiming to open the door to Thai investors, BLS has issued 6 DRs since 2018 (5 in 2022), and the one tracking the Nasdaq-100® index is NDX01, which has ChinaAMC NASDAQ 100 ETF (3086.HK) listed on the Hong Kong Stock Exchange as underlying securities. Since the DR is not a hedged product against currency risk, it is therefore affected by the evolution of the THB and the currency of the ETF’s underlying asset. However, due to the Fed rate hike cycle, the USD tends to continue to appreciate against the THB over the next 3-6 months. Therefore, NDX01 should also experience the currency gain.
Since DR is an innovative solution and suitable for long-term investment, DCA (Dollar-Cost A Average) would also be an effective principle. Thai investors can either do a DCA via Streaming or BLS’s DCA/VA services. DCA and VA (Value A Average) would help create discipline in savings. While past performance is no guarantee of future results, given the long-term digitization trend, we hope history will repeat itself this time around, especially with the NDX01.
To learn more about DRs by BLS, please visit: bualuang.co.th/dr
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.