Charles-Edouard Bilbault
Global Equities Portfolio Manager
"Blockchain solves this"
Macroeconomic and banking environments went through tough turbulences in March. It supported market doves and yield curve inversion to pause and partially revert after FDIC express bailout program. This could set the ground for Central Banks to pivot globally towards rate hikes peaking faster than initially expected, with Fed Funds Futures now implying rate cuts starting June. Further signs of credit crunch, recession and fall of inflation could indeed weigh on Fed decisions to quickly pivot and announce, if needed, more accommodative measures. Additional market liquidity and lower cost of capital should in turn benefit risk assets, support valuation profiles of growth equities and SMIDs positive repricing.
In the wake of the current banking crisis, blockchain technologies can be viewed as mission critical pieces of infrastructure for the whole financial industry. Two key blockchain technical features – transparency and programmability – contribute to mechanically reduce counterparty risk and increase solvability visibility as they mechanically decrease information asymmetry between lenders and borrowers, at a very low cost. Blockchains and smart contracts could indeed, if applied to traditional finance, likely add efficiency and contribute to safer risk management, which explains why large financial institutions like Nasdaq, Fidelity, BlackRock, Goldman Sachs, Société Générale, BNY Mellon, Hong Kong Stock Exchange etc. use blockchains to update their systems and are strong proponents of assets tokenization. To some extent, the current banking crisis echoes with the genesis of blockchain history, built in the midst of the 2007-2009 financial crisis. Lately, investors have been increasingly looking for safe heavens outside of the conventional financial system, which partially explains why digital assets performed that well during this turbulent period and increased their correlation with gold. This translated at the end of March into positive inflows from institutional investors into the space despite massive negative news flows hammering the industry for the past couple of months. Inflows from Germany and the US were the most pronounced.
The digital asset space continued to be at the heart of regulator’s activity globally. The strong contrast between current US stance and the rest of the world is starting to translate into US corporates considering to accelerate their geographical diversification towards other jurisdictions. In Europe, the Markets in Crypto-Assets (MiCA) regulation will be submitted this month to the European Parliament. Once enacted, MiCA will be cornerstone in the development of the industry in Europe. Hong Kong Securities and Finance Commission announced their widening digital assets access to retail investors starting next June. It will support the accelerated growth of this industry and attract foreign investments. That being said, digital assets enterprises continued to grow in the US, with, for instance, regulated giant Fidelity announcing on March 17th the launch of Fidelity Crypto, enabling clients to trade digital assets seamlessly along with stocks. Furthermore, regulatory clarity will fuel wider adoption and open the industry to a much broader base of users. During this transition period, the regulatory uncertainty currently hanging over the digital industry in the US should indeed continue to offer interesting buying opportunities in the sector for cash rich players keen on external growth expansion. Looking ahead, organic growth should also be supported by the massive inflows of highly qualified tech workers that recently increased labor market supply for the sector.
In this context, the portfolio continued to selectively increase its exposure to Chinese equities in March. We seized the opportunity of temporary market retracing as we anticipate constructive earnings recovery in the coming quarters. We also closed our position on A.P. Møller - Mærsk as the freight and logistics leader announced the closure of their Tradelens venture, following the nomination of new leadership and consequent project reshuffling. The exposure to the logistics thematic was maintained though the purchase of Hong Kong listed company JD Logistics. This latter uses blockchain technology to offer high value added logistics services to Chinese e-commerce players and should benefit from Chinese reopening economic recovery. We also actively arbitrated our Digital Assets / Fintech bucket and marginally sold Coinbase in favor of Galaxy Digital on valuation discrepancies. Profits taken on Coinbase echo to opportunistic buys we performed during strong market deeps during the first quarter. Equity holding at the end of March was 95.8%.
On the adoption front, March was namely marked by the 4th edition of the Paris Blockchain Week, held this year on March 22nd and 23rd at the Carrousel du Louvre. This international event welcomed more than 10,000 visitors and renown leaders from both blockchain and “traditional” industries like Nasdaq, LVMH, Kering, Coca-Cola, Pernod Ricard, eBay, Amazon or Google. Coinbase’s subsidiary Circle announced their plan to settle their European Headquarters in Paris, praising the clarity of the French regulatory framework and the upcoming European regulation MiCA.
Industry news to watch
Announcements by established companies of blockchain based innovations continued to pertain to various sectors of the economy and enterprise use-cases. Among many others:
- Gucci reaffirms their metaverse strategy with a new partnership with Web3 company Yuga Labs, namely known for their NFT collection Bored Ape Yacht Club[1]. Gucci’s announcement resonates with other luxury and fashion brands NFT projects, like LVMH, Dolce & Gabana or Nike to name a few. In this project, Gucci will use blockchain based NFTs to bridge real fashion with digital tokens. This echoed with Tiffany and their Cryptopunks unique pendants, exclusively reserved to Cryptopunk NFT holders – the jeweller generated US$12.5m in 20 minutes.
- Sony filed a patent on an interoperable NFT framework for digital assets transfer between game platforms[2]. The gaming industry is accelerating their involvement in Web3, as blockchain protocols developments now allow fast and low power usage micro-transactions.
- Starbucks sold another batch of their NFT Stamps collection, revealed on March 10th[3]. The 2000 lot was sold entirely in 18 minutes for US$100 each. The NFT Stamps collection is an extension of Starbucks Rewards and an opportunity to further gamify their loyalty program.
