Tong’s portfolio: Still connectivity, cloud, 5G plus cyclical & commodities
Globally, stocks traded broadly lower in September, a month that has historically been volatile and bad for stocks. Psychological expectations can sometimes be self- fulfilling. Investors are also jittery, as Covid- 19 cases around the world are experiencing a resurgence and could lead to a slowdown in reopening or, worse, a rollback and another sweeping lockdown. In addition, there are some uncertainties over future policies in the run- up to the US presidential election on Nov 3.
We remain positive on the outlook for stocks. It is not unhealthy for some profit- taking to take place after the fantastic run since the lows in March. The Global Portfolio is fully invested and our investment thesis is intact.
Technology stocks have performed particularly well. The Nasdaq index is well ahead of both the Dow Jones Industrial Average and Standard & Poor’s 500, up 24.5% year to date.
The pandemic has boosted sales for many “stay- at- home” companies such as Netflix and, over the longer term, will accelerate secular trends such as migration to cloud, e- commerce, digital and contactless payments, telehealth and distance learning — where stable, high- speed internet connections are ever more important.
As such, we see increased and accelerated spending on infrastructure and digitalisation to be priorities in fiscal stimulus packages around the world. We expect 5G wireless network rollouts to quickly pick up pace, after the delay caused by the pandemic.
Taiwan Semiconductor Manufacturing Co (TSMC) will be a major beneficiary. The company is the world’s largest pureplay foundry and counts Apple, NVIDIA Corp, Qualcomm, Advanced Micro Devices, Broadcom and Intel Corp as some of its biggest customers.
TSMC cemented its position as the leading chip manufacturer after Intel announced that its 7nm chips were delayed by a year and may outsource some of its requirements during this period.
More than one-third of TSMC’s chip sales are currently using the 7nm manufacturing process. The company has just started volume production with the more advanced 5nm process node, for which Apple has reportedly bought out the entire production capacity for its in- house- designed chips to be used in the latest iPhone, iPad, MacBook and iMac processors. TSMC is already working to bring the 3nm node, which packs even more ( smaller) transistors into each square millimetre, to market in 2022.
We expect TSMC to report multi- year double- digit sales growth, due to the global rollout of 5G networks and devices as well as robust demand from the high-performance computing segment — high-end chips used for data centres, artificial intelligence, gaming and cryptocurrency mining.
We can expect more 5G smartphone launches, which will be the next big replacement cycle, in the market later in the year, including the iPhone 12. Chips for smartphones currently account for 47% of TSMC’s revenue.
Looking further ahead, the successful rollout of 5G networks would also boost demand from the Internet of Things and automotive segments, which now contribute to around 12% of sales. For instance, Dutch company NXP Semiconductors is developing its next- generation automotive platform using TSMC’s 5nm technology, which provides faster speed and is more energy- efficient.
Telefonaktiebolaget LM Ericsson (Ericsson) will be another big beneficiary of the transition to 5G. The Swedish-based multinational is one of the three leading suppliers of telecommunications equipment and services to fixed and mobile telcos. The company is currently supporting 61 live 5G networks in 32 countries, and counting.
Ericsson appears to be gaining ground against key rivals Nokia Oyj and Huawei ( outside of China), if its recent contract wins — including in Germany, France, Japan and Singapore — are any guide. Huawei, in particular, is facing significant headwinds from rising geopolitical tensions between the US and China, which have resulted in pushback in Europe and parts of Asia.
Ericsson remains a player in China, which has the most widespread 5G network and highest number of smart cities in the world today, deploying infrastructure and services for the three main Chinese mobile telcos.
We discussed in detail our outlook and investment strategy for the next six to 12 months in a series of related articles in August. We continue to hold positive expectations for cyclical stocks and, while the prices of gold have come off recent highs, we think the precious metal remains a good haven asset to hold as part of a diversified portfolio. Rio Tinto is the most recent addition to the Global Portfolio, in line with our strategic outlook.
We expect strong demand for iron ore and copper on the back of massive infrastructure spending as part of government fiscal stimulus packages in response to the pandemic. Coupled with expectations for US dollar weakness, commodity prices should remain in an uptrend, and especially if there are signs of inflation.
Rio is the world’s second- largest metals and mining MNC after BHP Group. The bulk of its earnings are derived from iron ore ( about 87% of earnings before interest, depreciation and amortisation) with the balance coming from copper, diamond, aluminium and others.
Its iron ore is predominantly mined in the Pilbara region of Western Australia. The company also owns the Simandou project in Guinea, which has among the world’s largest untapped iron ore deposits. More than half of its iron ore production is exported to China. Iron ore prices have been in a broad multi- year uptrend since hitting their lows at end- 2015.
Rio has a strong balance sheet — gearing of less than 8% — and track record for robust free cash flow generation, which is expected to translate into consistent dividend payments. Dividends have risen annually since 2016. Its forward yield may be as high as 9%.
In a separate development, the FTSE Russell announced that it would add Chinese government bonds to the flagship World Government Bond Index in October 2021, in line with what we wrote a couple of weeks ago.
China is attracting investing dollars away from other emerging markets as it continues to relax restrictions on foreign access to its rapidly growing capital markets. Reports indicate that more than US$ 100 billion ($ 136.2 billion) will flow into China on its debut in the widely followed index. China’s bond market is the world’s second largest and remains very underowned by foreign investors, especially passive funds.
The Global Portfolio ended 4.9% higher for the week ended Oct 1, ahead of the MSCI World Net Return index’s 2.8% gain. Last week’s gains boosted total portfolio returns to 33.7% since inception. This portfolio is outperforming the benchmark index, which is up 18.6% over the same period.
All stocks in the Global Portfolio closed in positive territory for the week, save for Rio, which is unchanged. Builders FirstSource was the top gainer, up 10.2%. Most of the other notable gainers were tech stocks, including Alibaba Group Holding (7.2%), Qualcomm ( 6.4%), ServiceNow ( 5.3%), Microsoft Corp (4.9%) and TSMC (4%).