Riding Investment Volatility to Glory with the Nasdaq-100 Index®

This article was first published in bangkok daily on 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 following mass vaccination against Covid-19. However, inflationary pressures have only increased, forcing the Federal Reserve to adopt an extremely aggressive position.

With three rate hikes already completed, the Fed is expected to continue. There is a chance he could engineer a soft landing, with inflation and interest rates peaking before substantial economic damage is done. However, there is also the possibility that inflation will remain stubbornly high and the Federal Reserve will raise rates faster and faster, in which case a widespread recession is likely.

The Nasdaq-100® (NDX) has borne the brunt of this new era of macroeconomic uncertainty. Meanwhile, the key questions now are how the index might respond to some combination of rising inflation versus consistently above-average inflation versus moderate inflation; rate increase vs. rate stagnation vs. renewed rate reduction; a weakened but still expanding economy in the face of a truly recessive environment.

DR NDX01 An Innovative Solution for US Stock Investing in Thailand

The Nasdaq-100 Index® is made up of 100 stocks listed on the NASDAQ stock exchange, including large-cap technology companies like Apple, Amazon, Microsoft, etc. While technology companies dominate the index, it also includes leading companies from other sectors. like Tesla, Starbucks, PepsiCo, etc. Also, it would be an ideal choice for index investors who want to capture high-tech trends. ‘Never bet against America’ is what Warren Buffett, one of the most successful value investors who also likes to invest in indices, said in his annual letter of February 27, 2021. This quote was proven by historical returns. of the major US indices. Interestingly, the Nasdaq-100® Index has outperformed the S&P 500 Index over the last ten years given the presence of many high-growth companies. Its return was 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 be encouraged by the performance. In a way, this is somewhat in line with the stock market declines seen in the fourth quarter of 2018, when the Nasdaq-100 Index® fell 23% at its lowest point on December 24. That drop came at the end of a three-year Fed hike cycle consisting of nine increases of 25 basis points each. The Fed would continue to pause in the 2.25-2.50% range and would indeed return to a gradual easing cycle starting in August 2019. The buying opportunity for investors was excellent, assuming that the Fed would not induce an economic recession. in an environment of contained inflation and below full employment. The difference today, however, is that full employment exists more or less; labor shortages persist in many parts of the economy; the price of labor has increased substantially; and non-wage inflation risks taking hold. Therefore, the NASDAQ-100 ETF DR was up 6.03% from May 6, 2022 (first trading day) to August 25, 2022.

DR NDX01

The fed funds rate has already risen 150bps YTD, while the market discount mechanism apparently recognizes that the Fed will need to raise it by around 300bps. If inflation moderates, the economy may avoid recession and the market will recover as it did in early 2019. But if inflation remains well above 2%, the Fed may need to raise it by 450 to 600 bps total. As such, high-growth companies with most of their earnings in the future face the largest downward revisions to their current values.

With the prospect of higher interest rates for longer, investors are advised to try to determine the sensitivity of their stock portfolio to a high cost of capital. Using a variety of metrics, the Nasdaq-100 Index® appears to be minimally exposed to the risk of higher funding costs hurting its earnings and thus depressing valuations. This is largely a function of exceptionally strong and long-lasting fundamental trends that have built up the operating leverage, pricing power and cash buffers of many of the larger index constituents.

With the pandemic slowly but surely receding in the rearview mirror, among the advances that continue to move rapidly forward is the adoption of technologies that transcend issues as complicated as lockdowns.

DR NDX01

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, for the past 3-4 years, the Bank of Thailand has continuously relaxed certain rules to encourage Thai investors to invest globally, resulting in more accessible foreign investment in Thailand. In 2018, foreign investment in Thailand became more convenient when Bualuang Securities (BLS) issued Thailand’s first Depository Receipt (DR), an E1VFVN3001 that tracks the DCVFMVN30 ETF that tracks the VN 30 index on the Honduran Stock Exchange. Chi Minh.

The brief concept of DR is that the issuer holds the foreign securities as an inventory and issues the DR on the Stock Exchange of Thailand (SET). This gives Thai investors the opportunity to invest in foreign securities conveniently on SET without a lunch break (10:00 am to 4:30 pm) during SET’s trading day. DR is also a profitable product for long-term investment because the DR issuer does not charge the management fee. Investors pay a one-time management fee on the underlying securities.

Nasdaq rewrites tomorrow

Aiming to open the door to Thai investors, BLS has issued 6 DRs since 2018 (5 in 2022), and the one tracked by the Nasdaq-100 Index® is NDX01, which has ChinaAMC NASDAQ 100 ETF (3086.HK) on the list. Hong Kong Stock Exchange as its underlying securities. As DR is not a currency hedged product, it is affected by the movement of the THB and the currency of the ETF’s underlying asset. However, due to the Fed’s rate hike cycle, the USD tends to continue to appreciate against the THB over the next 3-6 months. Therefore, NDX01 is expected to experience the currency gain as well.

Since DR is an innovative solution and suitable for long-term investments, DCA (Dollar-Cost Averaging) would also be an efficient principle. Thai investors can conduct a DCA through Streaming or BLS DCA/VA services. Both DCA and VA (Average Value) would help create discipline in saving. Although past performance is no guarantee of future results, given the long-term digitization trend, we expect history to repeat itself this time, particularly with the NDX01.

For more information on BLS DRs, 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.

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