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The drugs do work

by Kevin Wong, Senior Portfolio Strategist

So much has changed over the last two weeks and the returns were remarkable if you were positioned during the market weakness that preceded the US elections. The passing of the US elections gave equity markets their first shot of adrenaline, followed almost immediately by positive news on the vaccine front. These two developments served to remove potential tail risks that could chip away at the potential recovery of earnings in 2021.

Removal of potential tail risks: One of the approaches taken by investors was to focus on a reduction in probability of market negative policies given a potentially divided government. While a divided government would not be ideal for a large fiscal package, the positive vaccine news may have assuaged investor’s fears of rising COVID infection numbers in the developed nations. Not all uncertainties have been removed however, as the next significant hurdle will be the Senate elections outcome in January. It will also be a while before the vaccine avails itself to the masses. Hence, it probably does not spell the end for volatility. Regardless, our eyes are still firmly on a recovery of earnings into 2021. We remain optimistic.

Playing the cyclical recovery: Our preferred region to play this cyclical recovery is Asia. Earnings do matter, and they have proven to be the long-term driver of returns. Dollar strength and trade tensions that have plagued the region are likely to find some relief. Improving COVID situations and the availability of a vaccine would also imply that earnings downgrades could stabilise.

Don’t kill the goose that lays the golden egg: While earnings have exceeding expectations, it is still a negative quarter for earnings growth. Digging deeper, it is still Technology, Communication Services, Ecommerce, and Healthcare, that have once again done the heavy lifting in the recent quarter. Most investors are wary of the positioning in these sectors as well as the rise in long end rates, but our eyes are on the longer-term prize. Many of these companies are investing to ensure an expansion of their overall addressable markets. Hence, we perceive any weakness to be an opportunity to invest in these structural growers. Interestingly, an increasing percentage of these players are emerging in Asia.

Our Strategy: As the saying goes, “it is better to travel than to arrive”. In this context, the period of volatility was short and equity markets are back at year highs. But we were fortunate to have taken advantage of the volatility to add to equity allocations before the elections and vaccine news. At this moment, we are prepared to ride out any volatility and would add further to equity allocations as we look ahead into 2021. We have increased our weights to Asia while maintaining a barbell approach to investing in cyclicals and growth (with a larger tilt towards “structural growers”). Finally, the vaccine news has resulted in a sharp sell-off in Gold prices. This is an interesting opportunity if there are no changes to the Fed policy and potential USD weakness.



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