Bringing Investment Volatility to Glory with the Nasdaq-100 Index® – Nasdaq | Jewelry Dukan

This article was first published in Bangkok Post on September 6, 2022.

The first half of 2022 has proven to be one of the most challenging environments for investors in decades. Inflationary pressures emerged in 2021 as the world began to reopen after mass vaccination against Covid-19. Still, inflationary pressures have only increased, forcing the Federal Reserve into an extremely restrictive position.

With three rate hikes already completed, the Fed is likely to go ahead. There is a chance it will bring about a soft landing, with inflation and interest rates peaking before significant economic damage is done. However, there is also the possibility that inflation will remain stubbornly high and the Fed will continue to raise rates at a faster pace, making a broader recession more 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 a combination of rising inflation vs steadily above average inflation vs moderate inflation; rising interest rates vs. stagnant interest rates vs. another rate cut; a flagging but still expanding economy versus a truly recessionary environment.

DR NDX01 An innovative solution for US equity investments in Thailand

The Nasdaq-100 Index® consists of 100 stocks listed on the NASDAQ exchange, including large-cap technology companies such as Apple, Amazon, Microsoft, etc. While technology companies dominate the index, it also includes top companies from other sectors such as Tesla, Starbucks , PepsiCo, etc. In addition, it would be an ideal choice for index investors who want to capture the high-tech trends. “Never bet against America,” said Warren Buffett, one of the top value investors who also enjoys investing in indices, in his annual letter dated February 27, 2021. This quote was backed up by the historical returns of major US indices. Interestingly, the Nasdaq 100 Index® has outperformed the S&P 500 Index over the past decade due to the presence of many high-growth companies. Its performance was around 400%, nearly double the S&P 500’s 205% return. (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 encouraged by the performance. In a way, this aligns with stock market declines in the fourth quarter of 2018, when the Nasdaq-100 Index® fell 23% from its bottom on Dec. 24. This drop occurred at the end of a three-year Fed hike cycle consisting of nine steps of 25 basis points each. The Fed would pause in the 2.25-2.50% range and actually return to a gradual easing cycle from August 2019. The buying opportunity for investors was excellent, assuming the Fed would not trigger an economic recession in an environment of subdued inflation and below full employment employment. The difference today, however, is that there is more or less full employment; Labor shortages persist in many parts of the economy; the price of labor has increased significantly; and non-wage inflation threatens to become entrenched. Therefore, from May 6, 2022 (first day of trading) to August 25, 2022, the NASDAQ-100 ETF DR increased by 6.03%.

DR NDX01

The Fed’s interest rate has already risen by 150 basis points year-to-date, while the market’s discounting mechanism seems to recognize that the Fed needs to rise by around 300 basis points. If inflation eases, the economy can avoid a recession and the market will recover as it did in early 2019. However, if inflation stays well above 2%, the Fed may need to hike 450 basis points to a total of up to 600 basis points. As a result, high-growth companies with earnings stretching well into the future face the largest downward revisions to their cash values.

Given the prospect of prolonged higher interest rates, investors would be wise to assess their equity portfolio’s sensitivity to the increased cost of capital. Using a variety of metrics, the Nasdaq-100 Index® appears to face minimal risk that higher funding costs will eat away at its gains and thus depress valuations. This is largely a function of exceptionally strong, long-term fundamental trends that have built up the operational leverage, pricing power and liquidity buffers of many of the Index’s largest constituents.

As the pandemic slowly but surely disappears in the rear-view mirror, among the advances it continues to fast-forward is the adoption of technologies that go beyond such tricky issues as lockdowns.

DR NDX01

Although investing in the Nasdaq-100 Index® is a great opportunity, many Thai investors may find it difficult to invest globally in products backed by the index 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 certain rules to encourage Thai investors to invest globally, resulting in greater access to 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 tracking the DCVFMVN30 ETF, which tracks the VN 30 Index on the Ho Chi Minh Stock Exchange.

The short concept of DR is that the issuer holds the foreign securities as stock and issues the DR on the Stock Exchange of Thailand (SET). This offers Thai investors the opportunity to invest in the foreign securities conveniently on the SET without a lunch break (10:00 – 16:30) during the SET’s operating day. DR is also a cost-effective product for long-term investment as there is no management fee charged by the DR issuer. Investors pay a one-time management fee out of the underlying securities.

Nasdaq rewrite tomorrow

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, on which the ChinaAMC NASDAQ 100 ETF (3086. HK) is listed on the Hong Kong Stock Exchange as its underlying securities. Therefore, since DR is not a currency-hedged product, it will be affected by the movement of THB and the currency of the ETF’s underlying asset. However, due to the Fed’s tightening cycle, the USD tends to appreciate further against the THB in the next 3-6 months. Hence, NDX01 is also expected to experience the currency gain.

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 either conduct a DCA via streaming or BLS DCA/VA services. Both DCA and VA (Value Averaging) would help instill discipline in saving. While past performance is no guarantee of future results, given the long-term trend towards digitization, we hope that history will repeat itself this time, especially with the NDX01.

To learn more about BLS DRs, 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.

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