Stocks Sector Rotation? Way forward…

Geez.. it has been a long time since I last seen STI index rallied. I almost forgot the feeling, and it felt good that some of my counters are turning green. After all, I have been staring at mostly red counters in my portfolio for most part of this year (2020).

STI up 3.67% as investors pivot towards pandemic-hit sectors on vaccine hopes (read here)

2020 is odd and tough in making predictions or even holding on to one’s own conviction. In a typical year, even with the corrections, adverse global news or the good/bad quarterly earnings, etc… I was able to probably still infer from past financial data of that particular company / stock, or eternal events and extrapolate into the future. The typical bottom up analysis.

When thinking about my stock portfolio, I don’t really put overall economy, politics…at the top of the list (eg. top down).

However as we all know, in 2020 we have the pandemic. I occasionally looked through the SGX company announcement website during my free time, but it is always the same piece of news among the different companies- COVID-19 disruption, write-offs…. uncertain times ahead, etc. It is like a blank state or a sudden black out. Or like many companies, big or small, all at once, went on extended medical leave. huh….

“I’ve always said if you spend 13 minutes a year on economics, you’ve wasted 10 minutes. I deal in facts, not forecasting the future.” Peter Lynch

From Feb 2020 to the Circuit Breaker (which started in April 2020) and the Work From Home (WFH) arrangement till now….it all felt kind of surreal. People call it the new normal. Well, feeling aside, my analytical mind is still trying to get around how to value any stocks, or to think of the future narratives for most stocks. With the new normal (not sure how long that will be, even with the news of the vaccine), it makes the use of probabilities and inference to past data kind of obsolete.

Nevertheless, I am sure many strong companies (even those in ‘old industry’/ value stocks) will come out of this someday.

To quote the Straits Time article: Ms Margaret Yang, a strategist at DailyFX, said that if the vaccine proves to be safe, effective and widely used, business activities are likely resume more quickly. Digital facilities, while still relevant, may lose their edge. “The rally in the energy, financial and industrial sectors, alongside a fall in technology shares, reflected this expectation,” she said.

I have been reading about articles highlighting the rotation from stocks which are beneficiaries of the pandemic (eg. Tech / Gloves maker), to value stocks or old economy stocks eg. Banks, Aviation, Property, Hospitality, Tourism related stocks.

Vaccine spells trouble for Big Tech but old economy stocks surge – Special Report (read here)

Thoughts on the Market Today (10 November 2020) (read here)

However, the likely difficult logistics of mass production and transportation of a vaccine, would mean that recovery of the economy will not be as fast.

To quote Howard Marks in his latest / Oct 2020 memo: And even with the disease controlled, economic stimulus is unlikely to reverse all the damage. The trauma has been deep, and the impact may not be easily shaken off. Large firms will continue to automate and streamline. Large numbers of smaller businesses – such as restaurants, bars and shops – will never re-open. Thus millions of people will not be rehired into the jobs they formerly held. For this reason, the expectations with regard to economic recovery have to be realistic. To me, as I’ve said, “V-shape” has too positive a connotation.

Given the state we are in, the perennial question still remains: How do I position my portfolio from here onwards?

And this inevitably led me to ponder the state of REITs and where we move from here. The below article by Investment Moats (dated July 2020) pops up in my mind.

So since I can’t really do a bottom up analysis (single stock), I look at it more from a macro view… broad sweep.

19 Charts That Explain the Global Listed Real Estate & REIT Markets (read here)

In the above article by Investment Moats, it listed down the various charts and diagrams sourced from UBS Global Research. You can find more articles here, in the UBS Asset Management site. I shall not go into details of the write-up, after all, a wealth of information can be found there.

Reading the UBS articles, we understand it is a challenging time to create a portfolio that resilient to the current trends and meet income needs over the long term. Still strategic allocations and diversifications are important. The low interest rates appear to remain on hold for the foreseeable future (given the global & deep extend of the pandemic).

“Where to next?” (Read here)

The article also mentioned that they foresee that growth will recover in 2021 and the virus is brought under control.

“Real Estate Outlook – Edition 3, 2020” (read here)

Of the 332 markets we monitor globally 30% reported a rise in yields in 2Q20, similar to the 31% which reported a rise in 1Q20. A handful of markets (10%) reported a fall in yields while 60% reported no change.

The effects is more pronounced sector wise as compared to geographical (eg. countries). Both in terms of yield and real estate values (price). Yield increased in office, retail and it is more mixed in industrial and logistic (mainly flat). I reckon this is probably due to the drop in asset prices in the office and retail sectors. As they mentioned that by the start of August 2020, REIT prices were down 20-25% YTD for the main countries. Sector wise, worst performer was hotels (down 55% in USD terms), retail (down 43%), office (down 2%) and residential (down 10%). Industrial bucked the trend (up 10%).

In their strategy viewpoint, they advised to focus on sector allocations, and yes and also the increasing usage of tech / digital space.

To quote: This includes an overweight allocation to the industrial and logistics sector, and a broadly neutral allocation to offices and underweight to retail. There is uncertainty over the office market and the extent to which a permanent rise in homeworking will reduce office footprints once the pandemic has passed.

Two key themes look set to be dominant. The first is an increasing reliance on and pervasiveness of tech and the digital space; the second is an increased value and importance placed on ESG factors by investors, governments and society at large. (eg. decarbonisation)”

While reading Howard Marks Oct 2020 memo, we understand that this recession is not the typical financial down cycle. Typically, downturns stem primarily from economic weakness, and they are repaired with economic tools. 

To quote: “But this episode is different. It was caused by an exogenous, non-economic development, the pandemic. The recession – rather than being the cause – was the result: a closure of business induced intentionally in order to minimize inter-personal contact and halt the spread of the disease.”

From another angle, when we were early in the outbreak, the news would relate the on-coming recession to the 2003 SARS induced recession. However, even compared to that, the pandemic recession now is different. There is now a more wide-spread adoption of tech (prior and after the outbreak), and work from home arrangement is now possible on a wide scale. The scale of the lock-downs is also bigger and longer.

So in a way, I can see structural / fundamental changes in the way we live and work, and that degree differs within different industry sectors. Post pandemic, I see some sectors and companies permanently adopting this ‘new normal’. Nevertheless, I would still adopt a more balanced stand and foresee more of a hybrid arrangement moving forward (as humans are basically social creatures, and some tasks just require people to be physically present).

I do agree that post pandemic, the ‘old industry’ companies / stocks will rebound. And from another angle there is a trend of adoption of tech by these companies, with a number of them fighting back (Eg. GMC hummer). In addition, the change will not be overnight.

Ford CEO says automaker weighing making own batteries for EVs (read here)

Volkswagen boosts investment in electric and autonomous car technology to US$86 billon (read here)

Nevertheless, for me, it is good to have a bit of the big tech stocks. At this stage patience is key (for me at least).

Tech sell-off continues after Covid vaccine breakthrough (read here)

Big Regulation Coming For Big Tech (read here)

Big tech stocks (both in US and China) are also not without their risks (eg. with potential new regulations to break them up).

Is Big Tech a bubble? (read here)

To quote the above article: “Going forward it is possible that value versus growth becomes more cyclical, where they alternate outperformance for a number of years each time. If this is indeed what the future holds, value investors, among whom I count myself, need to adjust and not stubbornly hold onto the ‘value investing is the best long-term strategy’ mantra, but rather be flexible enough to shift portfolio allocations between the two styles.

One of the key macro-economic variables that has supported technology since 2008 has been the sluggish economic growth coupled with very low inflation and zero interest rates. In this kind of environment, the present value of discounted future cashflows of a company that is able to grow earnings above inflation (a very easy hurdle to overcome, given that 30-year inflation expectations are just one per cent per annum) becomes extremely valuable, easily justifying the current P/Es of around 35x that many tech companies trade at, though it may be a stretch to make this fit Tesla’s 990x P/E.”

What Happens When Investors See People Dumber Than They Are Getting Rich (read here)

To quote the above article: “You could make a compelling case right now that the U.S. stock market is insanely overvalued and set up to offer investors subpar returns from current levels for some time into the future.

The analytical side of my brain completely understands this argument. Admittedly, it’s an argument many intelligent people have been making for some time now and the market hasn’t agreed….

But the behavioral side of my brain wouldn’t be surprised if the stock market continued to charge higher despite above average valuations and strong returns since 2009.

It’s possible the stock market could see a sustained downturn if the pandemic continues to get out of control, a vaccine is further away than expected or the economy experiences another setback.

I’ve lost my ability to be surprised in 2020 so this certainly isn’t out of the realm of possibilities.”

I am always wary when there is a big jump in the stock prices. From a yield point of view which kind of make me sees things inversely, the higher price inevitably result in lower yields moving forward. The recent surge in the STI is one case. From Howard Marks’ memos and even Ben Carlson’s posts (see article above), the possibility of subpar returns from herein onwards is very real.

This argument is still valid even with the announcement of a vaccine and with the outcome of the US Presidential election.

With the stock markets we would never know what is the near term outcome. And currently my personal feeling is that, if there is a need to invest, and if my primary objective is for income, be more towards industrial and logistic sector, with a dash of quality tech stocks that would further strengthen post pandemic (and those that were already doing well prior to the pandemic).

However, it is not wise for me to go too crazy into stocks now or massively sell off one sector to go into the next. Also, I might be better off building up my war chest (but would not advocate not doing the regular DCA investing though).

Well, nevertheless, if you have been holding on to a bunch of stocks (could be a bunch of Singapore listed old economy stocks or others) and has been seeing it under-perform since the early part of the year since the start of the pandemic. And with the recent spike in prices, with the announcement of the vaccine and US Presidential election outcome, etc ….and am finally starting to see ‘greens’ after a long while… This song is dedicated to you (one of the Chinese oldies). “P

Signing out!

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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room HDB flat. Check out my Facebook Page:
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