Tong’s portfolio: We started positioning into cyclical stocks in the last few months
US markets have rebounded smartly from the selloff in the last two weeks of October. Stocks started recouping lost ground in the few days ahead of the US elections and picked up pace as early results indicated that Republicans and Democrats would retain control of the Senate and House respectively, and after the presidential election was called for Democrat Joe Biden.
Analysts pointed to the “gridlock” as the catalyst, where a divided government will translate into lower odds, and therefore risks, of any material policy changes such as a rollback of the 2018 corporate tax cuts.
However, we suspect that if stocks had faltered, analysts would still have used the same divided government as a reason — in this case, the diminished chances of positive policy catalysts and a massive stimulus package to boost the US economy.
In other words, more often than not, it is narratives that follow markets, underscoring how it is nearly impossible to predict market movements.
Stock gains accelerated after Pfizer announced an interim analysis that its Covid- 19 vaccine, currently in the midst of a large-scale final stage trial, recorded a high 90% efficacy.
This positive development triggered a rotation into cyclical stocks, businesses that would gain the most when the world can finally return to some semblance of normality.
As we have written, we are bullish on stocks. While there remain questions on safety, manufacturing and distribution logistics, we have no doubt that one or more vaccines will be available in the very near future.
The Global Portfolio has been positioned for this eventuality over the past few months, with the additions of cyclical stocks such as Bank of America Corp, Rio Tinto and Singapore Airlines. All three stocks chalked up strong gains last week.
At the same time, we saw some selling- down in stay- at- home and tech stocks that were the main beneficiaries of the pandemic. Nevertheless, we remain convinced that the digital transformation, hastened by the pandemic, will not reverse when the outbreak ends. This is a secular trend that will persist for many years to come.
Shares in Qualcomm surged to a fresh record high last week. The company reported quarterly earnings results that were a big beat against market consensus — and, more importantly, guided for higher-than-expected revenue growth in the current quarter.
Qualcomm is a key beneficiary of the ramped- up 5G rollout globally. It is a leading supplier of modem chips in high-end smartphones, including in the just-launched iPhone 12, having settled years of legal wrangling with Apple.
In addition, a material portion of its profits comes from licensing fees for its suite of intellectual property, of which there is now clear visibility after it inked settlement agreements with Apple and Huawei Technologies Co over the past year.
Looking further ahead, Qualcomm is broadening its products to include radio frequency components for smartphones, and it is starting to see rising demand for chipsets from the automotive and Internet
We remain convinced that the digital transformation, hastened by the pandemic, will not reverse when the outbreak ends. This is a secular trend that will persist for many years to come.
of Things segments, which is expected to be a multi- year growth story.
Meanwhile, Microsoft Corp also beat market expectations in its latest results for the quarter ended September. Its shares have far outperformed the Standard & Poor’s 500 index over the past five years as the company’s strategic moves, including the key pivot to cloud, paid dividends.
It is the second- largest cloud provider in the world, after Amazon Web Services. The cloud segment, driven by Microsoft Azure’s robust double-digit growth, is now the company’s biggest source of revenue.
Last week, Microsoft launched its latest generation of gaming console, the Xbox Series X and S. But perhaps more important is the shift in its focus from one- off product sales to a subscription model — yet another secular trend — that began with the launch of Game Pass in 2017. With the latest iteration, its gaming subscription service now encompasses an on- demand, multiplayer catalogue of games and cloud- enabled streaming services ( imagine a Netflix for gaming).
This is in lockstep with the same business model transition for its Office software business since 2011, which has resulted in more stable revenue and improving margins with greater scalability.
Microsoft has a strong moat in its ecosystem of products and services. For instance, the company’s video conferencing platform, Teams, is adding users rapidly — now at more than 115 million daily active users, up from 75 million in April — and proving a strong competitor to alternatives such as Zoom and Slack by offering integration with widely used Microsoft products and cloud services.
The Global Portfolio rose 1.1% for the week ended Nov 12, lifting total portfolio returns to 38.2% since inception. This portfolio continues to outperform the benchmark MSCI World Net Return index, which is up 26.8% over the same period.
The biggest gainer for the week was Bank of America, whose shares surged 15.5%. Other top gainers include Qualcomm (+14.5%), Singapore Airlines (+14%) and Rio Tinto (+9.3%).
On the other hand, Alibaba Group Holding was the biggest loser by far, falling 10.2% on the back of unfolding regulatory changes in the technology space in China. We had written way back in March 2018 (“Are disruptors about to be disrupted by regulators?”) on how increasing government scrutiny and regulatory challenges are the biggest threat to the Big Tech juggernaut.
Tech companies reap the benefits of network effects, limited supply constraints for those with digital- focused businesses and long-term marginal cost that approaches zero in, by and large, a regulatory vacuum — an oversight that is now being rectified.
Elsewhere, Adobe fell 4% while ServiceNow and Home Depot were down 2% and 1.8% respectively last week.
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