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Highlights:

#1
Airo-BOCA composite closed January 2023 with +0.20% versus MSCI All Country World Index (ACWI) and S&P500 Index (SPX) with +7.50% and +6.18% respectively. The relentless short-dated call options volume had driven the equity rally for the month. This was unrelated to the markets’ fundamental.

#2
Macro hard data, namely, Richmond Fed. Manufacturing PMI, Kansas Fed. Services PMI, ISM Manufacturing PMI & ISM Manufacturing New Orders continued to languish & worsen with further growth contraction. In fact, most have forgotten that the negative growth in the ISM Manufacturing had only started since November 2022. In any case, both economic & market cycles’ reversal will take time to bottom-out.

#3
Very importantly, American Inc. reported a dismal 4QFY2022 earnings result with worsening management guidance for the upcoming quarters. Despite China’s re-opening story, Apple Inc. did not give any clear revenue guidance for forward earnings citing global economic uncertainty. For other big technology companies, Amazon, Alphabet and Microsoft all reported lower earnings and guided declining revenue/earnings in the coming quarter(s).

#4
From both macro & micro fundamental perspectives, it is obvious that January’s rally was not fundamentally driven. More critically, that rally had made the equity market even more expensive as negative earnings & outlook were duly inappropriately priced-in with a higher valuation now.

#5
Airo maintains our primary positionings that the broader downtrend in equity markets remain solidly intact. Our strategy will continue to seek out and capitalize on the current market’s mispricing in order to generate positive alpha for the portfolios.

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Dear Valued Investors,

Airo-BOCA composite closed January 2023 with +0.20% versus MSCI All Country World Index (ACWI) and S&P500 Index (SPX) with +7.50% and +6.18% respectively. The relentless short-dated call options volume had driven the equity rally for the month. In January, the so-called short-dated equity options i.e., those with 0-day, 1-day, and 1-week expiration had hit a new all-time high.

Why is this important? As call options were being bought, the options’ market makers needed to concurrently buy the underlying equity/indices to hedge their calls’ writing positions. In short, options market makers made money from options premiums only. The unintended consequences of this were that the market markers unintentionally drove up the equity market through their hedging-driven buying. This phenomenon alone is seen as the key driver for the equity rally that is unrelated to the market’s fundamentals in January 2023.

Table 1: Airo-BOCA YTD Performance – As of January 2023

Source: Interactive Brokers, Airo Malaysia, Bloomberg.

Chart 1: Short-dated equity options volume of < 1-week expiration hit all-time-high and is roughly 80% of total equity options market

Source: The Wall Street Journal

Instead, macro hard data, namely, Richmond Fed. Manufacturing PMI, Kansas Fed. Services PMI, ISM Manufacturing PMI & ISM Manufacturing New Orders continued to languish & worsen with further growth contraction. In fact, most have forgotten that the negative growth for e.g., in the ISM Manufacturing had only started since November 2022. In any case, both economic & market cycles’ reversal will take time to bottom-out.

Chart 2: Richmond Fed. Manufacturing PMI ~ Plunged to -11 from 1

Source: Bloomberg, Airo Malaysia

Chart 3: Kansas Fed. Services PMI ~ Plunged to -11 from 0

Source: Bloomberg, Airo Malaysia

Chart 4: ISM Manufacturing PMI ~ Deteriorated to 47.4 from 48.4

Source: Bloomberg, Airo Malaysia

Chart 5: ISM Manufacturing New Orders ~ Plunged to 42.5 from 45.1

Source: Bloomberg, Airo Malaysia

Very importantly, American Inc. reported a dismal 4QFY2022 earnings result with worsening management guidance for the upcoming quarters. Despite China’s re-opening story, Apple Inc. did not give any clear revenue guidance for forward earnings citing global economic uncertainty. For other big technology companies., Amazon guided 1Q revenue to decline -19% YoY; Alphabet is expected to book additional layoff charges to the north of $2 billion in the coming quarters; lastly, Microsoft reported the weakest quarterly YoY growth of -12% and guided its cloud revenue to decline -5% in the 1Q 2023.

From both macro & micro fundamental perspectives, it is obvious that January’s rally was not fundamentally driven. More critically, that rally had made the equity market even more expensive as negative earnings & outlook were duly inappropriately priced-in with a higher valuation now. At the current juncture, S&P500 is trading at 20x historical PE with a negative EPS growth of -2.4%. This implies that its valuation is expensive.

Chart 6: S&P500 ~ Valuation went up to 20x PE with a forward EPS growth of -2.4% i.e., it is expensive.

Airo maintains its primary stance & positionings that the broader downtrend in equity markets remains solidly intact given the negative macro & earnings outlook. Our strategy will continue to seek out and capitalize on the current market’s mispricing in order to generate positive alpha for the portfolios.

Feb 8th, 2023
William Yii
CIO, Airo Malaysia

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Disclaimer: Airo is a brand of BH Global Fintech Solutions Sdn Bhd (“BHFS”), licensed by the Securities Commission of Malaysia as a Digital Investment Management company. BHFS is authorised to carry out the business of fund management incorporating innovative technologies into automated discretionary portfolio management services offered to clients under a license issued pursuant to Schedule 2 of the Capital Markets Services Act 2007.

All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Historical returns, expected returns, and probability projections are provided for informational and illustrative purposes, and may not reflect actual future performance. BHFS assumes no responsibility for liability for your trading and investment results. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses. Past results of any trading system published by BHFS, are not indicative of future returns by that system, and are not indicative of future returns which will be realized by you.