Darren Sissons' Top Picks: Accenture, Johnson & Johnson and Power Corp
It has definitely been an odd twelve months. Half the world remains at home unemployed or working from home and yet across the globe residential real estate and stock markets are at all time highs. Vaccines typically take 30 days per single dose to be effective, or longer for the two dose variant, and yet recovery trades are now the flavour of the day. Time for caution or more risk?
Thematically, two major trades will dominate 2021 namely the short trade and the recovery trade. 2020 saw unbridled enthusiasm for some very modest if not sketchy business models. Alan Greenspan, the former chair of the Federal Reserve, more eloquently noted my view on many of the COVID market darlings via the phrase irrational exuberance, which largely refers to assets being overvalued. These momentum darlings ran very hard last year, which subsequently pushed indexes to record levels. However, many of these same companies upon crossing into a new tax year have now become short targets for hedge funds, institutional and retail investors as they look to arbitrage away the valuation anomaly. For investors with exposure to COVID-stars taxation, downside mitigation and locking in profits will increasingly become important considerations.
Second, the recovery trade. The U.S. and the U.K., due largely to their vaccine hording are accelerating through their vaccination programs. Naturally these nations will offer recovery trades in abundance. Other nations will join the party in due course. Obvious recovery trades will be cyclicals, commodities, service companies, travel and portions of the real estate sector. Perhaps less obvious are the 2020 unloved categories including utilities, staples and telcos. The dividend yields on many of the unloved are well below one standard deviation from their historical mean valuation ranges. Recall high school math class on long term averages: sooner or later a mean revision occurs. The larger and longer the deviation from the long term mean the bigger the reversal, which will drive both a positive catalyst for the 2020 unloved names and a downward drag for the COVID darlings.
Two other considerations impacting 2021 also need to be weighed by investors. First, interest rates. The strong upward surge last week caught many by surprise. The resulting bond market sell-off was painful and real estate buyers /investors now face higher borrowing costs, which likely caps pricing upside for sellers and perhaps brings some sanity to overheated residential real estate markets. Our base case is interest rates are likely range bound at sub three per cent levels near term but we do note the mountain of COVID-related money printing by governments around the globe is problematic. The need to service that debt will weigh heavily on monetary and fiscal policy post vaccination. The second consideration is the Biden Administration and its four-year agenda. We have already seen one act of aggression in the Middle East, the continued hording of COVID vaccine for domestic use and the cancelation of the Keystone pipeline. While clearly different than the Trump Administration the continuing focus on America first is clear. Until we see further details via the 100-day plan investors should be cautious of U.S. policy moves enacted by the new administration.